OFFICE OF FISCAL ANALYSIS

Legislative Office Building, Room 5200

Hartford, CT 06106 (860) 240-0200

http: //www. cga. ct. gov/ofa

sHB-6582

AN ACT ESTABLISHING THE CONNECTICUT HEALTHCARE PARTNERSHIP.

OFA Fiscal Note

State Impact:

Agency Affected

Fund-Effect

FY 10 $

FY 11 $

Comptroller

GF - Cost

$245,600

$245,600

State Comptroller - Fringe Benefits1

All Funds –

See Below

See Below

See Below

Department of Revenue Services

GF - See Below

See Below

See Below

Note: GF=General Fund

Municipal Impact:

Municipalities

Effect

FY 10 $

FY 11 $

Various Municipalities

Savings

Potential

Potential

Explanation

Section 1: Self-Insuring

This bill would require the Comptroller to begin to convert the state health plans (dental may be excluded) to self-insured plans beginning on or after July 1, 2009. This would require: 1) written consent from the State Employees' Bargaining Agent Coalition (SEBAC); 2) cancelling the current fully-insured contract which is not set to expire until July 1, 2011; and 3) negotiating an administrative services only (ASO) contract for the self-insured plans.

As a self-insured employer, the state would pay directly for participant claims on an incurred-and-reported basis. When an entity moves from fully-insured plans to a self-insured mechanism, the premiums paid to a health insurer cease and claims begin to be paid directly from a self-insured pool, in this case appropriated by the legislature. There is a potential one-time savings due to the typical 30 to 60 day lag in the payment of provider health claims after services are rendered.

Currently, the Comptroller pays approximately $70 million in fully-insured health care premiums each month for active and retired state employees. One-time savings will result from the lag in claims incurred but not yet reported to the new self-insured in the first two months of the transition. Assuming that half of the claims incurred are paid in the first two months, the state would obtain a one-time savings of $70 million in FY 10.

The current fully-insured contract for state employee and retiree health insurance includes an average rate cap of 10% per year across all health care plans to hold down costs in FY 10 and in FY 11. The state's premium rates in FY 10 and FY 11 will be determined from the past year's average monthly claims per employee. For example, if the average FY 09 trend increase is 5%, then premiums would similarly increase by 5% in FY 10. If instead the average FY 09 claims were 13%, premiums would only increase 10% due to the rate cap. Other administrative charges would only increase according to the CPI index. By going self-insured, these rate caps become obsolete and the state assumes direct financial responsibility for all costs of enrollees' medical claims.

The first quarter of FY 09 had an average claims loss ratio of 97 percent (versus an average rate of 88% last year). 2 As a result, savings over the FY 10 - FY 11 period may be minimal or non-existent should loss ratios remain at current levels or continue to increase. Based on information obtained from the Comptroller's Office, switching to a self-insured plan could result in FY 10 rates that are 5. 9% higher than the maximum rate under the existing fully-insured contract, which equates to an additional $69 million in health costs for the state plan.

The estimated savings from eliminating the risk charge for claims fluctuations currently paid under a fully insured plan would be $20 million annually. The State may wish to budget for the purchase of stop-loss insurance for individual claims exceeding a set dollar amount to cover fluctuations in claims from year to year. This stop-loss insurance would cost the state approximately $10 million annually.

The Comptroller's Office indicates the need for three additional staff positions, consisting of two (2) Retirement and Benefit Officer positions and one (1) Retirement and Benefits Coordinator with a July 1, 2009 start date to work on the transition to an ASO plan and to prepare to open the plan to additional groups. The salaries and fringe benefits associated with these three positions total $245,600.

To the extent that the state of Connecticut can provide ongoing health coverage at a lower cost than private health plans, additional annual savings could be achieved. While the bill does not require the state to provide for reserves to cover claims, it is a common practice to establish a rate stabilization reserve consisting of approximately 2 months worth of anticipated claims.

Sections 2 – 11: Pooling

By permitting the Comptroller to offer coverage under the state employee health plan the bill provides an additional health insurance option to non-state public employers beginning January 1, 2010; municipal-related and non-profit employers beginning July 1, 2010; and to small employers (defined as 50 employees or less) as of January 1, 2011. The bill requires that the total premium the newly enrolled employers pay be the same as those the state pays for the same coverage except it may adjust the rate for a small employer to reflect its group characteristics. It specifies that employers may require an employee contribution toward the premium, subject to any collective bargaining agreement. It also permits the Comptroller to charge participating employers an administrative fee on a per member per month basis.

Participation in the state plan would be voluntary but will require a minimum of two years participation. The bill proposes immediate acceptance of any employer group that applies in its entirety for coverage. Partial groups applying for coverage are to be reviewed by a health care actuary which will increase the cost to the current health care actuarial services agreement. If it is determined that the group would adversely affect the state pool, the partial group shall be denied coverage. In doing so, the bill seeks to address a potentially negative impact to the state employee pool by preventing an employer from shifting a significantly disproportional share of its medical risks to the state employee plan.

Permitting additional participants to join the current state employee health plan could potentially impact the existing pool. The cost of the state employee health plans is based upon the demographics and claims experience of the existing composition of state employees and retirees. To the extent that additional covered lives affect the claims loss ratio, costs of the state will be directly impacted. While at least 22 other states allow municipalities to participate in their state employee health plans by pooling together (11 states) or in a separate pool like the Municipal Employee Health Insurance Plan (11 states), there are currently no states offering this coverage to small businesses or to non-profits in general.

Municipalities, non-state public employers, non-profit organizations and small employers currently offering health coverage through private health insurers are required to pay an Insurance Premiums Tax to the state of Connecticut. To the degree that this bill results in these groups shifting their participation in fully-insured health plans to procure coverage under Connecticut General Statute 5-259(i) the state would experience a revenue loss to the Insurance Premiums Tax. Current law exempts new or renewal contracts or policies written to provide health care coverage to municipal employees under a plan procured pursuant to Connecticut General Statute 5-259(i) from the Insurance Premiums Tax. In other words, MEHIP participants are currently exempted from the premiums tax. As a result, there would not be a loss to the premiums tax should MEHIP participants shift to coverage under the pooled state health plan.

There are approximately 110,000 municipal employees (including boards of education). It is anticipated that certain municipalities (particularly smaller towns and non-state public groups) small non-profit organizations and small employers will achieve savings from the state's large-group purchasing power, pooled risk and administrative economies of scale. In order for these groups to determine if they can achieve a savings under the state plan, employers must examine not only the rates and plan design but also 2 to 3 years of its utilization data. The table below provides a comparison of current average annual premium rates within various public and private sectors.

 

Average Annual Premium Rates

 

Employer

Single Coverage

Employee Share

Family Coverage

Employee Share

National*

Small Firms

$4,826

12%

$12,508

34%

Large Firms

$4,793

16%

$13,096

23%

Regional*

Northeast

$5,033

17%

$13,740

21%

State+

State of Connecticut

$5,844

3%

$15,778

12%

Industry*

State/Local Government

$5,547

12%

$12,843

22%

Local**

CT Cities & Towns

$6,828

10%

$18,660

10%

CT Boards of Education

$5,400

16%

$18,936

13%

*National, Regional, and Industry PPO plan data obtained from 2008 Employer Health Benefit Survey. + State POE health plan data obtained from Office of the State Comptroller. ** Local data obtained from CT Public Sector Healthcare Cost & Benefit Survey 2008

Background

Health insurance costs are attributed primarily to claims experience. These “loss costs” for state employees and retirees are generally in the range of 80 percent of the premium paid to health plans, but can vary from year to year based upon the health experience of the pool of covered lives. The cost of plan administration includes the processing of claims, establishing provider networks, negotiating provider payments, and providing utilization review and disease management services. In addition, under a fully insured plan there is a risk charge to cover the potential fluctuations in claims from year to year. Private health insurers are also required to maintain minimum reserve requirements based upon Connecticut insurance law.

The benefits provided under the state employee health plans are established in a collectively bargained agreement between the State of Connecticut and the State Employees Bargaining Agent Coalition (SEBAC). The current 20-year agreement expires in 2017. Currently, the state plan is provided on a fully-insured basis through 4 vendors (Anthem Blue Cross and Blue Shield, Health Net, Oxford/United Health and Caremark) offering 12 plans for active and retired employees. It covers approximately 57,000 employees, 37,000 retirees and their dependents.

As a result of the recent negotiation with the state's health care vendors, the state employee health plan premiums for FY 09 did not contain a rate increase. The finalized FY 10 premium rates will be published in a Comptroller's Numbered Memorandum expected before the end of April. The FY 09 premiums rates for the state employee plans are published with the Comptroller's Numbered Memorandum 2008-16 and can be found using the link: http: //www. osc. state. ct. us/2008memos/attachments/att200816. htm

Beginning in FY 09, the state's prescription drug plan became funded on a self-insured basis (Memorandum of Understanding dated 3/20/08 between the state and SEBAC). The savings associated with this change is estimated to be $14. 5 million. Per the agreement, this savings will be deposited in the state's Other Post Employment Benefits (OPEB) trust fund which was established to begin to address the state's unfunded retiree health liability estimated at $21. 7 billion. An established rate stabilization reserve has not been created for the state's self-insured prescription drug plan.

The Out Years

The future cost of the state employee health plan will be based upon the demographics and claims experience of the future composition of state employees and retirees. To the extent that additional covered lives impact the loss ratio of the plans, a resulting impact may be experienced on the plan's cost to the state. The annualized ongoing fiscal impact identified would continue into the future subject to inflation.

Sources: Public Hearing Testimony 3/2/09, Employer Health Benefits 2008 Annual Survey, The Kaiser Family Foundation & Health Research & Educational Trust, 2008 Connecticut Public Sector Healthcare Cost and Benefit Survey, OLR Research Reports, Office of the State Comptroller, State Health Plan Subscriber Agreement.

1 The fringe benefit costs for state employees are budgeted centrally in the Miscellaneous Accounts administered by the Comptroller on an actual cost basis. The following is provided for estimated costs associated with additional personnel. The estimated non-pension fringe benefit rate as a percentage of payroll is 25. 43%. Fringe benefit costs for new positions do not initially include pension costs as the state's pension contribution is based upon the 6/30/08 actuarial valuation for the State Employees Retirement System (SERS) which certifies the contribution for FY 10 and FY 11. Therefore, new positions will not impact the state's pension contribution until FY 12 after the next scheduled certification on 6/30/2010.

2 Health insurance costs are attributed primarily to claims experience. These “loss costs” for state employees and retirees are generally in the range of 80 percent of the premium paid to health plans, but can vary from year to year based upon the health experience of the pool of covered lives.