Memorandum
City of Lawrence
Human Resources Division/City Manager’s Office
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TO: |
David L. Corliss, City Manager
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FROM: |
Lori Carnahan, Human Resources Manager
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CC: |
Diane Stoddard, Assistant City Manager Cynthia Wagner, Assistant City Manager Ed Mullins, Finance Director Casey Toomay, Budget Manager Michelle Spreer, Human Resources Specialist
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DATE: |
June 16, 2011
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RE: |
2012 Employee Healthcare Plan, City Commission Study Session June 21, 2011
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I have been asked to discuss the 2012 Employee Healthcare Plan recommendations at the Tuesday Study Session. The following are two major areas regarding the employee healthcare plan for 2012 that have previously come up for discussion.
Fund Balance
Fund Balance is also referred to as Retained Earnings (RE) and casually referred to as the healthcare plan’s savings account. The other common term used related to this fund is Minimum Retained Earnings (MRE), the level for which fund balance should not fall below. The following all contain discussions on fund balance:
The MRE is calculated using a policy statement contained in the Healthcare Committee Ongoing Goals and Objectives (Attachment 5, 4/26/11 memo) reviewed/revised annually by the healthcare committee and presented for approval as part of the healthcare budget memo annually.
It reads:
Recommended levels of 16% 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 each year not to exceed 120% of projected expenses. Interest earned on retained earnings will be used to offset the budget request to fund retained earnings.
It means:
The healthcare committee will work to design a plan and secure funding to maintain an ending fund balance equal to or greater than MRE for the end of the year following the year for which we are designing the plan, in this case December 31, 2013.
In order to calculate projected expenses conservative estimates are made by Hays (and by City staff prior to Hays). Caution is used in projecting costs as it is done in March for expenses that are actually incurred ten to twenty two months in the future in a highly inflationary market. Most plans, including our stop loss insurance, are underwritten only 90 days in advance of actual utilization. In addition to claims and administration fees, included are stop loss insurance, wellness activities, flu shots and consultant fees.
Revenue requests are calculated not only using the projected expenses to the plan (which would call for matching revenues to expenses) but also include the amount needed to maintain MRE, address Other Post Employment Benefits (OPEB) obligations and smooth out fluctuations in year to year revenue needs from both the city and plan members.
Smoothing out the peaks and valleys in funding requests is of primary importance to the healthcare committee. It allows for both city leaders to incrementally plan for increases to funding and also for plan members to make incremental increases to their personal budgets. There are very few healthcare programs that experience overall program decreases and many plans that shift cost out of the plan into member pockets.
Based on historical trend our current fund balance of $7.655 million will likely be MRE by 2018 if we do not make changes (tripled to $9 million by 2023). 1999-2002 MRE was established at a flat rate of $1,000,000. Modified to a percentage for 2003 to keep up with inflation, it is now $2.496 million in 2011 and projected to be $3.078 million by 2013 (Attachment 2, 4/26/11 memo). With a relatively stable plan design, MRE tripled in ten years. Currently neither the city nor plan members have to contribute additional money in order to keep the necessary fund balance. It’s likely that neither will have to fund it for another six years if actual projected expenses and revenues are funded. If not, and fund balance is used to pay for ongoing expenses, the fund will fall to MRE in less than six years. At that time the city and plan members will fund not only expenses but also money needed to add to fund balance to maintain MRE.
Lastly, since 2008 the healthcare fund balance has been the mechanism which houses the OPEB liability as reported in the January 1, 2011 Actuarial Valuation. This liability relates to the City’s future requirements to fund retiree healthcare expenses and as of December 31, 2010 the City of Lawrence OPEB liability was $2.13 million.
A more prudent use of excess fund balance is to adopt less conservative estimates of projected expenses but maintain methodology. This was done at the recommendation of Hays in 2009 for 2010 and again in 2010 for 2011. It will be revisited again if it turns out that the lower expenses experienced in 2010 are maintained for a year or two more.
A healthy fund balance also allows the plan to implement programs like the wellness clinic that need short term start up money in order to achieve the long term desired outcomes for the plan.
Health Reimbursement Account (HRA)
Health Reimbursement Account (HRA) is one form of an Account Based Health Plan (ABHP). Combining an HRA with the current PPO program provides first dollar coverage for non-preventative services and the ability to roll over portions of the HRA into the next year for those with low utilization. The funds remain a part of the plan and are not portable by the employee should they leave the plan. The HRA also preserves the choice of the employee to make decisions regarding medical providers.
Both our current PPO plan and the proposed HRA/PPO plan pay 100% of preventative services. Currently first dollar coverage for non-preventative services is paid by the employee through a traditional deductible ($300 for individual coverage). An HRA would place that in the middle of the annual costs incurred in any given year (page 4, 4/26/11 memo) with the first $250 of costs incurred paid 100% by the HRA.
Option B recommends for an individual plan increased deductible from $300 to $500 ($750-$250HRA) and an increase in out of pocket maximum from $1,000 to $1,750. It is likely that increases to one or both would be implemented in 2012 regardless of additional funding provided by the city and plan participants. Both are flat dollar amounts in an inflationary program, and adjustments need to be made periodically to maintain an even balance between the percentage of healthcare costs borne by the plan and borne by the plan participant. It is also likely that the level recommended would not be as great had the committee not had a directive to provide a flat city funding scenario. Option C is more reflective of typical increases we make to the plan.
With the implementation of an individual contribution, employee payroll contributions will increase by $11/pay period for a total of $286/year under options B & C. Additionally, Hays estimated the impact of plan changes on employee deductible and out of pocket expenses for options B & C for employee out of pocket costs. The plan had an average of 2002 participants in 2010, using 2010 claims data the chart below shows the number that met (in 2010) and estimated would have met (options B & C) deductibles and out of pocket maximums and the related financial impact. Approximately 1271 plan participants would have experienced the same or less expenses out of their pocket with options B & C; 450-465 would have experienced increases as shown in the table below; and the remaining 266-281 would have experienced some increase but lower than the amounts listed below.
Projected 2012 Impact of Plan Changes on Employee Deductible and Out of Pocket Expenses Utilizing 2010 Claims Data
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Individual Deductible participants/increase |
Family Deductible families/increase |
Individual Out of Pocket Max participants/increase |
Family Out of Pocket Max families/increase |
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Current Plan |
731 |
353 |
65 |
27 |
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Option B |
450 |
+$200 |
210 |
+$400 |
45 |
+$500 |
15 |
+$1000 |
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Option C |
465 |
+$150 |
225 |
+$300 |
70 |
- $50 |
33 |
- $100 |
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At the beginning of our discussion on ABHP plans, Hays asked the healthcare committee to evaluate their individual perceptions as to why the City should examine the use of an ABHP. The committee ranked the goals in this order of importance:
1. Control costs
2. Introduce consumerism
3. Expand employee choice
4. Provide vehicle for retiree health funding
The top two were addressed in recommending the HRA for 2012. Implementing the HRA with the PPO plan, future projected increases in utilization decrease from 10% to 8% (Attachment 2, 4/26/11 memo). This allows for a lower increase in funding by the city and plan participants or slower movement of healthcare costs out of the plan and into participant pockets.
In addition, an HRA is one form of applying consumerism to a health care plan. In the attached document Hays discusses the Impact of Consumerism on the City’s healthcare plan.
Update
A revision was made to the April 26, 2011 2012 Employee Healthcare Plan-Budget and Plan Design Memo (page 7). “FTE” was replaced with “Authorized Positions” for the purpose of making transfers from the various city funds to the healthcare plan. Additionally an update is provided that illustrates how an additional $1.2 million would be allocated should funding for the current healthcare plan be incorporated into the 2012 budget. It would mean an additional $662,229 to the general fund.
Conclusion
The 2012 Plan Design Alternatives (page 3, 4/26/11 memo) represent the culmination of five months of consultation, research, consideration and our best professional opinion of the impact of various options on employees/retirees through monthly contributions, the city through funding, plan members through out of pocket costs and ultimately the future health of the plan through fund balance. While there can be a myriad of scenarios, many of which were reviewed by the healthcare committee, these are a summary of what we feel are the best representation of options using various financial considerations.
To alter the scenarios will ultimately have an effect on fund balance which in turn affects the future financial health of the plan. While it can be done and projected ending fund balance can be lowered somewhat and the plan will remain healthy in the near future. I will ultimately be requesting additional money either from the city or plan participants in future years to not only pay for the 10% projected inflationary effects of health care but also to fund MRE and OPEB liabilities in the fund balance. In which year I do that is dependent in part on decisions made for the 2012 fund balance. This is best illustrated on page 2 and attached charts of the 5/26/11 follow up memo for 2009 and 2010 plan funding.
I am comfortable with the utilization of fund balance as listed in the 2012 Plan Design Alternatives. I (as I also stated in the 2009) am far less comfortable with utilizing fund balance beyond that point although doing so in small amounts will not create instability in the fund for 2012. I would much prefer to utilize fund balance for onetime costs such as health clinic implementation which has a positive ROI than ongoing and inflationary costs such as claims.