Memo
TO: Mike Wildgen, City Manager
C: Debbie Van Saun, Assistant City Manager
Dave Corliss, Assistant City Manager
FROM: Health Care Committee
Lori Carnahan, Frank Reeb, Marlo Cohen, Tammy Bennett, Terese Gorman, Russell Brickell, Peggy Thomas, Michael Tubbs, Scott Wagner, Kim Brice, Karen Risner
DATE: 5/14/2004
RE: 2005 Health Care Plan, Wellness Program Budget Proposal
In order to maintain the current level of benefits and covered services provided by our health care plan and remain in keeping with health care committee budgeting guidelines, the total funding required in 2005 will need to be $6,678,516. The City would need to fund the health care plan $5,387,408 (an 8% increase or an additional $408,558 over last year), with an additional $7,532 for each new position approved for 2005. Employees will continue to have their health care coverage fully funded by the City. In the event that a salary adjustment is approved for 2005, employees enrolled in a family membership would need to contribute $90 per pay period to the health care plan to offset the cost of carrying their dependents. Retiree contributions will increase proportionately with total plan costs at approximately 11.1%.
However, the committee also recommends that if our August contract renewal comes in below our expectations for a second year in a row, the savings be passed on to City employees by reducing the proposed increase in contributions.
Alternatively, if no salary adjustment is approved for 2005, the health care committee recommends the City fund $5,491,408 and employee contributions remain at $80 per pay period. Retiree contributions will still increase proportionately with plan costs.
In order to sustain our lower than average increases to health care expenses, it is imperative that participants in the plan regularly review and make adjustments to their personal lifestyles in order to reduce their health risks. The health care committee recommends funding an additional $37,750 to implement a cash incentive program for employees that participate in Personal Wellness Profiles in 2005.
Summary of 2005 Health Care Plan Recommendations
- Maintain current plan design rather than shift to a consumer driven health care model.
- Increase revenues, through City funding and/or employee/retiree contributions, to maintain current plan design rather than reducing plan cost by cost shifting to plan participants through plan design changes.
- Increase City funding for employee, dependent, and retiree coverage, and retained earnings 8% to $5,387,408.
- Continue to fund City contributions for employees, dependents, and retained earnings equitably on a per budgeted position basis at the rate of $6,970 per employee.
- Continue to fund City contributions for retirees and new positions approved for the 2005 budget on a per contract basis, at the rate of $1,269 per retiree and $7,532 per new position.
- Increase employee contributions toward dependent coverage 12.5% to $90 per pay period ($195/month) to maintain a 33% contribution rate.
- Increase retiree contributions 11.1% to $229 per month for individual contracts and $692 for family contracts to maintain an 80% contribution rate.
- Fund Request for Proposals from pharmacy benefit managers to carve out prescription drug coverage.
- Fund $37,500 to implement a cash incentive for employees to participate in Personal Wellness Profiles.
- CHAMP will maintain current programs for 2005 totaling $16,200.
Detailed Discussion of Recommendations for 2005:
- The Health Care Committee does not recommend adopting a consumer driven health care plan (CDHP). CDHPs have the potential to reduce the rate of increase to total plan costs through cost shifting; however, rewards are offered for lifestyle improvements and wise health care utilization. We can incorporate such strategies without changing our current health care plan.
§ Working together with the wellness committee, we can improve employee communications to promote health and wellness education and smart health care consumerism, encouraging behavior that will help reduce total plan costs. In addition, BCBSKS is moving toward providing on-line employee information/educational tools similar to those offered by many CDHP plans. These tools are likely to be in place by 2005.
§ The committee supports positively reinforcing potentially cost-reducing behaviors. For example, many CDHPs offer a higher level of benefit for preventative services and small cash incentives for completion of a health risk appraisal. These strategies can be utilized by our current health care plan.
§ Cost shifting to plan participants is another tactic CDHPs use to guide behavior. The Health Care Committee cautions against excessive cost shifting from the standpoint that doing so will (a) lessen our ability to be competitive with peer employers (see #2 below) and (b) make our plan unaffordable for the City’s lower compensated employees, which constitute the bulk of our workforce. For a detailed discussion on CDHPs for City employees, refer to the Health Care Committee memo dated April 15, 2004.
2. We recommend increasing City funding and/or employee/retiree contributions, in order to maintain our current plan design. Our health care plan provides a rich benefit in terms of deductibles, coinsurance, and out of pocket maximums, making it market competitive, and the City of Lawrence a more attractive employer. However, should the City Commission and City management feel that recommended 2005 annual funding is unattainable, alternative funding scenarios for consideration are attached (see page 11).
- Provided a salary adjustment is approved for 2005, increase City funding for employee, dependent, and retiree coverage 8% to $5,387,408 from $4,978,850 in 2004.
- City funding for employee, dependent and retiree coverage has been determined by the guidelines approved and adopted with the 2004 budget cycle. The City will fully fund employee coverage, 67% of dependent coverage, and 20% of retiree coverage. Without a salary adjustment, it is recommended that employee contributions will not increase, so City funding will need to increase 10% to $5,491,408 to make up the difference.
- Health care (under any plan design) remains a double digit inflationary item. Unless major plan design changes are made, which would likely negatively impact employee morale and turnover, annual funding increases are inevitable for the foreseeable future. To ensure the solvency of our health care plan, retained earnings must always be funded at a level high enough to cover all potential claims (including catastrophic scenarios) and administrative fees up to the stop loss insurance attachment point. In 2003, actual claims paid under our health care plan were nearly 20% less than projected. At a time when the average increase to regional BCBSKS plans was 27%, the City’s plan expenses increased only 0.5% over 2002. As a result, ending retained earnings were increased. This presents two options to consider when building the 2005 budget: spend down the retained earnings or take advantage of the surplus and budget for a two-year solvent plan. Ideally, budgeting for a two year solvent plan will reduce dramatic fluctuations in annual health care funding increases. Consistent increases in funding year after year are easier to plan for than, for example, a 3% increase one year then 18% the next. In past years, the plan has not even been solvent for the current and following plan year if one or the other reached a worst case scenario. Ending retained earnings for 2004 are projected to be $2,290,761 or 35.6% of 2005 projected costs. Recommended funding for 2005 will allow retained earnings in 2005 to be at a level so that the plan remains solvent through 2006. The committee recommends funding so that 2006 ending retained earnings will be 25%.
- Continue to fund City contributions for employees, dependents, and retained earnings equitably on a per budgeted position basis at the rate of $6,970 per employee. This calculation is obtained by dividing total City funding (excluding retiree funding) by the total number of budgeted positions. This equitably distributes the cost of health care across the various funds.
- Continue to fund City contributions for retirees and new positions approved for the 2005 budget on a per contract basis, at the rate of $1,269 per retiree and $7,532 per new position. The retiree figure is calculated by dividing City funding for retirees by the number of retirees participating in the plan (i.e. retiree contracts) and is added in its entirety to the general fund. The figure for new positions is calculated by dividing total City funding (excluding retiree funding) by the number of employees participating in the health care plan (i.e. employee contracts).
- Increase employee contributions toward dependent coverage 12.5% to $90 per pay period ($195/month) from $80 per pay period ($173.33/month) in 2004 to establish a 33% contribution rate. Ideally, the contribution rate should be 35%. Given a 2% salary adjustment, employees paid at the lowest grade and step would experience a $0.18 per hour wage increase. The proposed contribution rate would use $0.125 of that increase, resulting in a 0.5% salary adjustment.
- Increase retiree contributions 11.1% to an estimated $229 per month for individual contracts (from $206 in 2004) and $692 for family contracts (from $621 in 2004). Retiree contributions are fixed at 80% of the premium equivalent and therefore increase proportionately with total plan cost.
- Fund request for proposals from pharmacy benefit managers to carve out prescription drug coverage. A request for proposals for prescription drug coverage will be completed during 2004 for possible implementation in 2005. Any savings to the plan resulting from a change in the prescription drug program will be reflected in the 2006 budget recommendations.
- Additional funding of $37,500 to the City’s Wellness Budget is needed in order in order to implement a cash incentive program for employees who participate in annual Personal Wellness Profiles (PWP). Reducing individual health risks by making small and incremental improvements to one’s lifestyle is widely felt to be the most effective way of reducing the rate of increase to health care plan costs. Managing obesity, smoking, alcohol consumption, and diet greatly reduce health risks and, therefore, plan costs. Health care consultants and CDHP plan providers alike recommend that employees be rewarded for participation in lifestyle assessments, such as the PWP, that encourage health risk awareness. In fact, this concept is integral to the success of CDHPs, as well as our own health care plan. We currently offer the PWP, but staff participation is low. Professionals in the field indicate cash incentives are the only effective method of increasing participation. We are recommending that $50 per budgeted position be allotted toward the cost of this program.
- In addition to #9, the wellness committee (CHAMP) will continue to offer current programming in 2005. This includes the cost for flu shots ($6,000), Personal Wellness Profiles ($3,000), P&R fitness-related class discounts fund transfer ($4,000), and event expenses ($3,200) totaling $16,200.
Review of 2003 Health Care Plan:
- Actual claims paid were $3,657,181 (81.3% of BCBSKS projections). Total payments (including claims paid by stop loss insurance) were $3,726,338.
- Actual claims paid decreased 2.2% from $3,738,243 in 2002. This compares to a 9.8% increase in claims from 2001 to 2002 and 21.4% increase from 2000 to 2001.
- Total plan costs were $4,264,894.
- Total plan costs increased 0.5% from $4,244,452 in 2002. This compares to a 10.1% increase in costs from 2001 to 2002 and 19.8% increase from 2000 to 2001.
- $2,509,747 (35.8%) in billed claims were written off due to contractual discounts. This is compared to $2,404,754 (33.9%) in 2002, $2,151,753 (34.2%) in 2001, and $1,275,719 (27.3%) in 2000.
Projections for 2004 and 2005:
· At the end of the first quarter 2004, claims costs are running at 90% of BCBSKS projections. Total plan costs are up 9% from 2003. Historically, we have experienced significantly higher than projected claims in the year following a low claims year. In the current year, we anticipate our claims could reasonably be expected to reach or surpass 115% of BCBSKS projections.
· Current national industry projections indicate we will experience a 12% increase in health care costs in 2005. Blue Cross and Blue Shield of Kansas (BCBSKS) projects a 9% increase in hospital and major medical expenses, but this projection is not specific to our group. Therefore, we have prepared our budget assuming 2005 claims will increase just 11% over those projected for 2004. Compare our projected inflation rate to the City of Wichita’s at 20% and the City of Overland Park’s at 14%.
· The health care committee projects that total health care plan costs in 2005 will be approximately $6,436,803 to cover our current employees and retirees (761). This represents an increase of 11.1% from 2004. Broken down that represents $5,648,990 in claims, $253,075 in claims administration fees and $534,738 in fixed administrative fees.
· The committee projects 2004 year end retained earnings to be $2,290,761. This is 35.6% of 2005 projected plan costs. Recommended funding will allow for 2006 year ending retained earnings to be 25% for projected expenditures. In the case of worst case scenarios the plan would remain solvent through 2005.
· The average annual cost per contract is projected to increase 11.0% to $8,458 in 2005 from $7,613 in 2004. Historically, the per contract amounts were: 2003, $6,596; 2002, $5,640; 2001, $5,052; and 2000, $4,684. The average cost per contract has increased 80.5% in five years.
2004 Health Care Committee Activity Items and Goals:
- Research and determine feasibility for a Consumer Directed Health Care Plan for the City’s health care program. This was completed between October 2003 and March 2004 (see April 15, 2004 memo detailing the committee’s findings).
- Write, distribute, and review Requests for Proposals for prescription drug benefits (May–July 2004).
- Review and revise, if necessary, the mental health and preventative benefits under the plan (September 2003-February 2004 and June 2004).
- Review the Blue Cross Blue Shield 2003 Utilization Report (April 2004).
- Review Medical Savings Accounts (January 2004).
- Continue to monitor health care trends, identify any potential options to reduce the rate of increase to the health care program without reducing employee benefits under the plan.
- Monitor implementation of 2004 HIPAA Privacy Policy; begin development of 2006 compliance with HIPAA Security Rule.
- If necessary, tailor the 2005 health care plan to budgeted funds (August 2004).
- Begin working on 2006 Health Care Plan (October-December 2004)
If you have any questions, please call Frank Reeb or Lori Carnahan. As always, the committee would be happy to have you join us at our next meeting to discuss any of the items contained in this document along with any other concerns you may have regarding the City health care plan.
Attachments:
Attachment A-Health Care Committee Ongoing Goals and Objectives
Attachment B-Summary of Health Care Coverage
Attachment C-2005 Health Care Plan Funding Alternatives
Attachment D-2005 Health Care Plan Projections
Attachment E-Health Care Plan Spreadsheet (2004 First Quarter)
Attachment F-Per Fund Formula for 2005 Health Care Plan Funding
Attachment A
Health Care Committee Ongoing Goals and Objectives
The City of Lawrence Health Care Committee was formed in 1998 to develop guidelines regarding annual funding and plan design. Since 1998, on an annual basis, the Health Care Committee has devoted time to review, revise, and refine those guidelines according to City Commission directives and input from City management and employees.
The City of Lawrence Health Care Committee is chaired by the Personnel Manager, Administrative Services, and consists of City employees from each department. The objectives of the Health Care Committee are:
- To submit annual budget recommendations to the City Commission regarding funding for the health care plan;
- To review, evaluate, and determine plan design;
- To identify, review, and address utilization trends;
- To monitor current national health care trends;
- Through partnership with the Wellness Committee (CHAMP), provide health education and wellness interventions to employees and their immediate family members so that they might fulfill their responsibilities as covered plan participants.
Statement of Plan Participant Responsibilities
While it is the right of plan participants to use the Plan to the fullest, and to take advantage of everything it offers, it is also their responsibility to maximize healthy habits, to become knowledgeable about his or her health plan coverage, and to consume health care services in a responsible manner in order to reduce his or her lifetime cost for health care coverage.
Annual Funding Guidelines
Annual budget recommendations will be submitted to City management in May for the next plan year using the most current national industry cost trend projections available at the time.
City funding means annual funding. Employee contributions mean payroll deductions for health care premiums.
The City will fund health care on a per budgeted position basis.
Recommended levels of 25% of projected costs will be maintained in retained earnings for at least one year beyond the year for which the budget is being prepared. Retained earnings fund the cost of catastrophic claims, which is defined by the claims administrator as 120% of projected expenses. Interest earned on retained earnings will be used to offset the budget request to fund retained earnings.
The City will fully fund the monthly premium equivalent of a single membership for employee coverage. The City will fund an equal dollar amount toward the monthly premium equivalent for a family membership.
The cost to cover eligible dependents under the health care plan is the difference between the monthly premium equivalent for a family membership and the monthly premium equivalent for a single membership.
To keep revenues proportional between City funding and employee contributions, the City will contribute 55-75% of the funding necessary to generate revenue toward the cost of dependent coverage; the employee will contribute 25-45%. Ideally, revenues will be split 65/35 between the City and employees toward the cost of dependent coverage.
Eligible employees receiving a retirement or disability benefit through KPERS will pay 80% of the monthly premium equivalent for their health care membership. The City will fund the remaining 20%.
COBRA participants will pay 102% of the monthly premium equivalent for their health care membership.
The Health Care Committee will work to moderate increases in City funding and employee contributions in order to smooth out the peaks and valleys of actual health care consumption. When increases in health care utilization have depleted retained earnings for future years below recommended levels, changes regarding retained earnings funding parameters will be implemented. When decreases in health care utilization are maintained for multiple years, the health care committee will recommend plan design enhancements.
Plan Design Guidelines
The largest component of the City of Lawrence employee benefit package is the health care plan. It serves as a recruitment and retention tool. To attract potential employees, and keep current ones, the health care plan must be market competitive in terms of employee cost (i.e. insurance premiums, deductibles, coinsurance, and out of pocket maximums) and the level of benefit provided (scope of covered services).
Covered services under the health care plan should satisfy the needs of the majority of employees, which can be identified by annually collecting aggregate data through:
- Wellness tools;
- Health care plan utilization reports;
- Disability and worker’s compensation claims; and
- Periodic employee surveys.
Ideally, the plan design should enable plan expenses to be at or below national industry cost trends. This will be accomplished in part by:
- Maintaining a plan design that enables and encourages plan participants to make wise consumer choices;
- Maintaining a plan design that enables and encourages plan participants to utilize preventative services;
- Educating plan participants on how to be wise consumers of health care services; and
- Through the Wellness Committee, offering intervention programs employees can use to individually examine and improve their overall lifestyle.
Final decisions on plan design will be made in September for the upcoming plan year.
Attachment B
Summary of Health Care Coverage
Current (2004) Proposed (2005)
Premiums
Individual $0 $0
Family $80/pay period $90/ pay period ($173.33/mo) ($195.00/mo)
Comprehensive Major Medical Health Coverage
Deductible
Individual $ 300 $ 300
Family $ 600 $ 600
Co-Payment after Deductible
20% 20%
To a Maximum of
Individual $ 300 $ 300
Family $ 600 $ 600
Out of Pocket Maximum
Individual $ 600 $ 600
Family $1200 $1200
Prescription Drug Program
Deductible
Individual $ 100 $ 100
Family $ 200 $ 200
Co-Payment after Deductible
20% 20%
To a Maximum of
Individual $ 400 $ 400
Family $ 800 $ 800
Out of Pocket Maximum
Individual $ 500 $ 500
Family $1000 $1000
Plan Highlights (No changes)
· Additional coinsurance for use of out of network providers:
20% of the allowable charge up at a maximum of $2000 per person per year or $4000 per family per year for use of a provider outside the Blue Choice or Blue Plan Preferred Provider networks.
· Dependent Coverage to age 21 (full-time students to age 24)
· Unlimited Lifetime Maximum
· Accidents subject to deductible and coinsurance
· Dental:
Basic, preventive and diagnostic services No Deductible 20% Coinsurance
Major Restorative Services No Deductible 50% Coinsurance
240 day waiting period for inlays, crowns, bridges and dentures
· Nervous and Mental:
Inpatient limited to 15 days per person per year
Outpatient limited to 16 visits per person per year, lifetime maximum of 112 individual visits
First 2 visits paid at 100% by the plan, each additional has a 50% Coinsurance
Chiropractic services limited to 12 visits per person per year