Memorandum

City of Lawrence

Administrative Services

TO:	David Corliss, City Manager
FROM:	Frank Reeb, Administrative Services Director Lori Carnahan, Personnel Manager Marlo Cohen, Management Analyst Health Care Committee
Date:	August 29, 2007
RE:	Request to Implement Health Care Plan Design Changes for 2008 Benefit Period

The City’s Health Care Committee (HCC) recently finalized their recommendations for the 2008 Health Care Plan design, which increases City and employee funding to the health plan by 6% each (i.e. $360,337 for City and $63,690 for employee) over 2007 funding levels. This includes what was previously approved by the City Commission in their finalization of the 2008 budget. This recommendation follows the 2003 City Commission direction to develop a funding strategy that mitigates large funding fluctuations from year to year. A summary of plan recommendations for the 2008 benefit period follows:

Summary of Recommendations

Maintain current covered services;
Increase participant out-of-pocket expenses for the health and prescription drug benefits by $200 per person not to exceed $400 for all persons covered under a contract;
Modify the prescription drug benefit so there is an increased financial incentive to substitute generic equivalents for brand name drugs;
Adopt two additional coverage levels (i.e. Employee/Child and Employee/Spouse) thereby changing from a two-tier structure to four-tier;
Set full-time regular employee contribution rates (per pay period basis) per coverage level as follows:

$0.00 for Employee,
$57.00 for Employee/Child,
$64.00 for Employee/Spouse,
$91.00 for Employee/Dependents;

Set Firefighter Extraboard and part-time regular employee contribution rates (per pay period basis) per coverage level as follows:

$0.00 for Employee,
$137.00 for Employee/Child,
$170.00 for Employee/Spouse,
$307.00 for Employee/Dependents;

Set retiree contribution rates (per month basis) per coverage level as follows:

$256.00 for Retiree,
$618.00 for Retiree/Child,
$688.00 for Retiree/Spouse,
$789.00 for Retiree/Dependents; and

Eliminate the practice of fully funding Employee/Dependent contracts for married full-time regular employees and set the contribution rate for this group at the Employee/Child rate.

Recommendations

The health plan option offered to employees is a Preferred-Provider-Organization (PPO). While many of the covered services under the plan are considered standard benefits, the plan offers limited preventive services covered at 100% of the allowable charge not subject to the health deductible or coinsurance. The plan does not offer coverage for prescription eyewear or orthodontics. Plan participants perceive benefits as good, and the HCC recommends maintaining current covered services in 2008.

The HCC concluded that current health and prescription drug benefit out-of-pocket maximums (OPM) are significantly lower than the market average (i.e. $1,200 versus $3,000 per individual). The HCC recognizes that competitive benefits are an important recruitment and retention tool. However, OPM should not lag the market excessively. Therefore, we recommend increasing OPM over four years according to the following schedule, while monitoring market averages annually for change. These changes are subject to future revision and Commission approval in future years.

	2007	2008	2009	2010	2011
Health	Ded 300/600	Ded 300/600	Ded 300/600	Ded 300/600	Ded 300/600
	Coins 300/600	Coins 400/800	Coins 500/1000	Coins 600/1200	Coins 700/1400
	OPM 600/1200	OPM 700/1400	OPM 800/1600	OPM 900/1800	OPM 1000/2000
Rx	Ded 100/200	Ded N/A	Ded N/A	Ded N/A	Ded N/A
	Coins 500/1000	Coins 700/1400	Coins 800/1600	Coins 900/1800	Coins 1000/2000
	OPM 600/1200	OPM 700/1400	OPM 800/1600	OPM 900/1800	OPM 1000/2000
Combined	OPM 1200/2400	OPM 1400/2800	OPM 1600/3200	OPM 1800/3600	OPM 2000/4000

Highlights of the recommended schedule are:

Maintenance of the health deductible ($300 per person, not to exceed $600 for all persons covered under a policy);
Elimination of the prescription drug deductible for first dollar coverage;
Annual increase to combined OPM of $200 per person, not to exceed $400 for all persons covered under a policy; and
Achieving a combined OPM of $2000 per person, not to exceed $4000 for all persons covered under a policy by 2011.

The estimated savings for annualized expected health and dental claims in 2008 due to increasing the health OPM is $70,656.

The HCC recommends implementing an increased financial incentive for plan participants to substitute generic prescriptions for brand name drugs in order to increase the generic substitution rate. We recommend increasing participant responsibility for brand name drugs to $20 plus 20% coinsurance while maintaining responsibility for generics at 20% coinsurance. MedTrak Pharmacy Services estimates this plan design change will result in 13.21% savings (i.e. $117,305).

The HCC recommends changing from two coverage levels to four, so that employees may choose from Employee (Single), Employee/Child, Employee/Spouse, or Employee/Dependent (Family) coverage. This change will address a concern employees have regarding the fairness of charging the same Family contribution rate to employees that have one versus multiple dependents covered under their membership. Additionally, this change may increase the affordability of coverage for those groups that contribute a greater amount toward their coverage (i.e. retiree, part-time regular, and Firefighter Extraboard). These groups often meet the criteria for the lower costing Employee/Child and Employee/Spouse tiers. Blue Cross Blue Shield of Kansas is not projecting an immediate effect on the overall estimated cost to the plan in 2008 by implementing a four-tier structure. However, there may be a future reduced liability as employees drop coverage for dependents that have other coverage as the new tiers are made available.

The HCC recommends establishing the full-time regular employee contribution rate for Family coverage according to HCC funding guidelines. It is important to note that the Family premium equivalent under the four-tier structure is greater than under the two-tier structure. Because funding guidelines are based on percentages, our recommended Family contribution rate has increased to $91.00 per pay period, which is a 9% increase over the 2007 rate of $83.50. The Employee/Child and Employee/Spouse contribution rates were determined by calculating what percentage of the Family premium equivalent each tier was, then applying those percentages to the recommended Family employee contribution rate. Employees whose health contracts meet the criteria for Employee/Child and Employee/Spouse will contribute $34.00 and $27.00 less per pay period, respectively, than those whose contracts meet the Family criteria.

Full-time Regular Employee Contribution Rates

	Single	Employee/Child	Employee/Spouse	Family
Per Pay Period Rate	$0.00	$57.00	$64.00	$91.00

The HCC recommends establishing the contribution rates for Firefighter Extraboard and part-time regular employees according to the current practice. Currently, the City fully funds the premium equivalent for Single coverage and does not contribute toward the cost of dependent coverage for any other coverage level.

Firefighter Extraboard and Part-time Employee Contribution Rates

	Single	Employee/Child	Employee/Spouse	Family
Per Pay Period Rate	$0.00	$137.00	$170.00	$307.00

The HCC recommends establishing the retiree contribution rates for Single and Family coverage according to HCC funding guidelines. Currently, retirees are responsible for 80% of the premium equivalent for these tiers. However, the HCC recommends establishing the retiree contribution rates for the Employee/Child and Employee/Spouse tiers at 100% of the premium equivalent. As nearly all current retiree Family contracts will meet the criteria for the Employee/Spouse tier, retirees with dependent coverage would experience a rate decrease of $41.00 per month. We recommend phasing out the City contribution toward retiree Single and Family coverage as well, possibly starting in 2009. These recommendations are due to the funding and liability issues surrounding GASB 45.

Retiree Contribution Rates

	Single	Retiree/Child	Retiree/Spouse	Family
Per Month Rate	$256.00	$618.00	$688.00	$789.00

The HCC recommends eliminating the practice of fully funding Family contracts for married full-time regular employees. This practice is not impartial and likely originated due to administrative reasons that are no longer valid, such as the employee responsibility for dependent coverage being small enough to be considered negligible. The HCC believes it to be appropriate to apply the Employee/Child contribution rate to this employee group. However, we recommend phasing in the rate incrementally over two years (i.e. 50% in 2008, 100% in 2009). Doing so would increase 2008 revenues due to employee contributions by $11,856.

Health Care Committee 2007-2008 Work Plan

The City’s Health Care Committee will meet periodically in the coming months to begin the process of developing recommendations for the City’s 2009 budget, including a review of the health care plan design. Among the items to be reviewed will be: 1) whether there should be a policy change in the plan design to include an employee contribution for single coverage; and 2) retiree health care coverage and City contributions for this coverage. Staff does not recommend the retention of a consultant or broker to market our health care plan in 2008. This recommendation is based on the relatively recent marketing of these benefits (2005 for the 2006 plan design) and a general satisfaction with current fees and services. We would anticipate marketing these benefits in 2009 for the 2010 plan year.

Action Request

The HCC requests approval from the City Manager to implement the recommended health plan design changes for the 2008 benefit period. In order to meet internal deadlines for open enrollment we request a decision on or before September 11.

Attachments