Memorandum

Memorandum

City of Lawrence

Administrative Services Department

TO:	Dave Corliss, City Manager
FROM:	Frank Reeb, Director of Administrative Services Lori Carnahan, Personnel Manager Marlo Cohen, Management Analyst
CC:	Debbie Van Saun, Assistant City Manager Ed Mullins, Finance Director Casey Liebst, Budget Manager
Date:	July 13, 2007
RE:	Health Care Plan Funding 2008 Follow Up

On July 13, Frank Reeb met with the City Manager, Finance Director, and Budget Manager, to update them on the Health Care Committee (HCC) recommendations from earlier that morning. Those recommendations include changing the tier structure of the health plan from a 2 tier to 4 tier structure; incrementally increasing the total out of pocket maximums (comprehensive major medical and prescription drug coverage) over a four year period; and changes to the prescription drug program. While discussing these changes with the City Manager and other staff, including the potential cost savings to the health care plan and cost shifting to employees, the possibility of a second (i.e., lower) City funding option for the 2008 health plan was discussed. This memo provides a brief comparison of the current and alternative funding options as the Commission considers the overall 2008 budget.

When considering the two options described below, all of the HCC recommendations for 2008 will be implemented, subject to the City Manager’s approval, regardless of which funding option the Commission selects. As for potential savings and cost shifting, it is important to note that actuarial research has been completed for the change to a 4 tier structure and it does not result in any projected savings to the plan for 2008. Actuarial research for the recommended out of pocket maximum increases has not yet been completed; however, based on earlier analysis of various scenarios from Blue Cross and Blue Shield of Kansas, Administrative Services Department staff believe a cost shift of approximately $50,000-$90,000 can be expected for 2008. Actuarial research for the prescription drug program changes has also not yet been completed but it is likely to yield some savings to the plan through greater utilization of generic prescription drugs. An August health care memo will include specific information on the potential cost savings and/or cost shifting for all of the recommendations .

Option 1 (current City funding as described in the March 27^th memo)

In a March 27, 2007 memo the Health Care Committee recommended 2008 Health Care Plan City funding of $6,365,947.41, a 6% ($360,336) increase over 2007 funding levels. The HCC also recommended a 6% funding increase by employees. With these funding increases the projected minimum retained earnings level at the end of 2008 would be $5,336,405. Further, the funding program used projected the plan would not fall to minim mum retained earnings (MRE) until the end of 2010.

While admittedly a conservative funding option, this option meets the Health Care Committee funding objective of maintaining at least 25% of projected costs for at least one year beyond the year for which the budget is being prepared. In addition, this funding option is consistent with the Commission direction in 2004 to provide funding recommendations that would minimize the possibility of large funding differences from year to year (i.e., large double digit increases one year and little or no increases the next).

Option #2 (Fund at 2007 City funding levels and employees fund at 6% increase)

Given that the retained earnings for the end of 2007 is expected to be at a healthy level (although the second half of 2007 remains and we are aware of some high dollar claims yet to be incurred) and given some potential cost savings and cost shifting from the HCC recommended changes for 2008, the possibility to fund the health care plan at 2007 City contributions ($6,005,610) is an option. If the city did not fund the additional 6% ($360,336) in 2008 but employees did increase funding contributions by 6%, the projected ending minimum retained earnings for 2008 would be $4,976,069. The plan would be projected to fall to minimum retained earnings in mid year 2009. Staff believes that is this option is pursued the City Manager’s recommended mill levy increase for the general fund (0.3 mill) would not be required.

While this option allows the City to meet a worst case claims year in 2008 (i.e., actual claims hitting the aggregate stop loss level of 120% of expected claims), this option is not consistent with the Health Care Committee funding objective of maintaining at least 25% of projected costs for at least one year beyond the year for which the budget is being prepared. In addition, this funding option would not be consistent with the Commission direction in 2004 to provide funding recommendations that would minimize the possibility of large funding differences from year to year (i.e., large double digit increases one year and little or no increases the next) as it increases the possibility of recommending a double digit increase in preparation for the 2009 or 2010 budgets.

Option #1 remains the recommended option of the Health Care Committee and the Administrative Services Department. Staff is prepared to discuss these options during the July 16^th study session.