Memorandum 14-159 Employee Health Insurance

Memorandum 14-159

TO:              Mayor Wythe and Homer City Council

FROM:       Walt Wrede

DATE:         October 13, 2014

SUBJECT:   Special Report on Employee Health Insurance

INTRODUCTION

Several times over the past few months I informed the Council that it was my intention to review the employee health insurance benefit and be prepared to make a recommendation on how to proceed next year as part of the regular budget approval process this fall. Jeff Paxton, the City’s benefits consultant has been working closely with Andrea Browning, John Li and myself on this project. Jeff has spent the past few months analyzing the performance of the self-insurance fund, projecting costs in 2015 and 2016 if the City stayed self- insured, soliciting proposals from private insurance companies, and comparing those proposals with the self- insurance plan in terms of both cost and benefits.

Jeff received the final proposal in early September. He analyzed the proposals in detail, compared them with the self- insured plan and put together a report that he shared with Andrea, John, and I the week of September 22. Jeff then travelled to Alaska and we met with the Employee Committee for two hours on Tuesday, September 30. Jeff went over the complete report and the Committee reviewed all of the information there including performance and cost projections for the self-insured plan and the quotes we received from the private sector. The staff and the Committee were in agreement about the course of action to recommend to the Council on the big questions: 1) should the City continue to stay self-insured and 2) if the City moves to a private, fully insured plan, which proposal is best in terms of coverage and cost.

ANALYSIS

Self- Insured Plan

Jeff’s analysis indicates that the measures taken last year are having the desired effect. The City was insuring less people and utilization patterns were beginning to change. In other words, the trend looked good. But, in reality, all we were doing was restraining growth in the cost of insurance. Health care costs are continuing to rise at alarming rates. Although utilization was down generally, expensive procedures and hospital visits were driving costs higher. In short, the City’s overall costs and level of risk was becoming unacceptably high. The pool and the City’s financial resources are simply too small to handle this risk.

Jeff projected that total health insurance costs in 2015 would be $2,109,542. This takes into account industry trends and utilization trends and assumes increases in the cost of stop loss insurance and the plan third party administrator (Meritain). This is about an 18% increase over projected total costs in 2014. If we assume that the Council is unable to increase its contribution from the past two years ($1,500 per employee, per month) and keeps the contribution at the same level, the Council contribution would be $1,854,000. Keep in mind that this is a projected cost. The cost could be higher and the City assumes all of the risk. The remainder of the cost (the difference between the Council contribution and the projected total cost) would be absorbed by the employees. This amounts to about $255,542. If the Employees assume all of the increase in projected costs, the payroll deductions would increase significantly over last year.

Private Sector Proposals

The request for Proposals /Quotes asked that the companies provide two plan choices for employees similar to what we have now. Four proposals were received and reviewed. They were:

Aetna (State of Alaska Political Subdivision Group Health Plan)
Moda Health
Premera Blue Cross
United Health Care

All of the proposals were reviewed in detail. They all had strengths and weaknesses in terms of their cost and the coverage provided. In the end, Premera Blue Cross was deemed to be the best proposal by Jeff, the staff, and the Employee Committee. There were a number of reasons for this.  First was cost. Premera’s quote for medical and vision was $1,382,692. The dental plan was another $112,806 for a total quote of $1,495.498. If compared to projected costs in 2015 with the self- insured plan, (2,109,542), this represents about a 30% percent savings in total costs.

Second, The coverage plan was improved over what we have now, especially with the Core Plan and if employees use in-network providers. For example, in the Core Plan, the coverage is improved in the areas of co-insurance, out of pocket max, office visits, deductibles, emergency visits, and prescription benefits. The plan also contains a hearing benefit and very extensive in-network coverage including facilities in Seattle and the Pacific Northwest. 

DISCUSSION

The self- insured employee health insurance plan has served the City and its employees well for several decades. Making a change from self- insured to fully insured is a big step and should not be taken lightly. Once the City takes this leap, it is very unlikely that it will ever go back. However, I believe that the time is right to make this move. The City employee pool is too small for self- insurance. The health insurance financial and regulatory environment has changed rapidly over the last few years and so has the employee demographic. The self -insurance plan is too expensive, the financial risks for the City are too high and the administrative burden too great. Health insurance costs are now driving overall budget decisions and they threaten existing programs and reserve accounts. The self- insured plan is not sustainable without additional reductions in benefits and increased payroll deductions. The magnitude of the reductions required would essentially result in catastrophic health care coverage.

The City is fortunate to have obtained very attractive and competitive bids from private sector insurance carriers. The changes that were made last year have paid off in a big way. These changes have “right sized” and repositioned the City in a way that made these bids possible. For example, last year, before the changes were instituted, Premera submitted a bid of over $4 Million. The changes that were made last year were very painful for everyone involved. Employees had to absorb large increases in payroll deductions and a significant reduction in coverage. The whole process took a personal toll on Andrea Petersen and we owe her our graditude. She took a real bullet for the City and its employees. In the end, these steps were necessary and had to be done.

The Council and the Administration had a common goal. We had to get employee health insurance costs under control before they jeopardized programs and services and drained reserve accounts. We also needed to come into compliance with the Affordable Care Act and at the same time, provide a good insurance benefit for employees.  The proposal from Premera allows us to achieve those goals. My recommendation to Council is to accept the Premera proposal and split the savings between the Council and the employees. Specifically, I would:

Reduce employee payroll deductions by another 28% on average. This is on top of the 20 percent reduction Council approved several months ago. The one exception would be single employees choosing the Buy Up Plan.
Reduce the Council health insurance contribution in the 2015 Budget from $1,500 per employee, per month, to $1,100 per employee per month. This will save the General Fund alone approximately $364,000.  

In short, under this proposal, we have a significant budgetary savings for the Council, a significant reduction in payroll deductions for employees, and better health insurance coverage overall.

At the meeting I will provide copies of the Premera coverage vs. the existing coverage and copies of the proposed payroll deductions vs. the existing deductions. Please let me know if there is other information you would like to see and how you would like to proceed with the final decision making process.

RECOMMENDATION:

Move from self- insured to the private sector.
Accept the proposal from Premera ( A resolution will appear on the next agenda)
Discuss, amend if necessary, and approve the allocation of the budgetary savings.