2011OFA-0944

October 4, 2011

FROM:

Alan Calandro, Director

   

SUBJECT:

Revised SEBAC Agreement 2011

This is a follow-up to requests for further explanation and analysis of the revised 2011 agreement between the state and the State Employee Bargaining Agent Coalition (SEBAC). 1 The agreement's provisions, as reported by the Office of Policy and Management, would yield savings of $ 700. 7 million in FY 12 and $ 901. 2 million in FY 13. A copy of the stated savings is contained in Appendix A.

Some notes on our analysis:

The revised agreement was submitted to the legislature on August 22, 2011 and subsequently deemed approved by the legislature pursuant to section 165 of PA 11-61 as amended by section 11 of PA 11-1 of the June Special Session. 2 This was later than originally targeted by the parties who crafted the agreement and who used annual savings figures in some cases. Despite the delay in ratification and approval, any lost savings due to the onset of the fiscal year were not revised.

It is our understanding that the agreement's savings figures were estimated individually, i. e. on a stand-alone basis. In keeping with this approach, our analysis also determined achievability of these savings on an individual basis. Therefore it is possible that portions of savings for interrelated provisions may be mutually exclusive.

For health related provisions, the analysis below attempts to disaggregate various provisions for the purposes of understanding the impact of contracted changes. However, it is important to note various changes to the health plan have interrelated effects as explained below.

FY 11 health premiums were used for the purposes of this analysis. For retiree health, it was assumed retirees and their dependents had the same Medicare eligibility determination.

OFA does not employ actuaries and has limited access to state contracted actuaries and their associated data and/or assumptions. We are still pursuing additional information, clarification or data from various sources. Therefore this analysis represents our best available information and assumptions at this time.

The analysis that follows is organized into the following categories: 1) Pensions, 2) Health, 3) Wages and 4) other intiatives. A list of the OFA staff involved in this effort appears at the end of this report.

I. Pension Changes

A. Cap Pensionable Salary per Internal Revenue Code

Under the Internal Revenue Code, the current federal ceiling on pensionable salary ($ 245,000 in 2011) applies to the base salaries of pension plan members. 3 Salary earned in excess of this amount may not be used in determining member contributions and benefits. The State currently does not place a ceiling on pensionable salary. The achievement of savings of $ 2. 4 million in FY 12 and $ 2. 5 million in FY 13 is reasonable based upon the number of state employee salaries at retirement in excess of this cap.

For FY 10, 178 state employees exceeded the $ 245,000 compensation limit, with an average of $ 350,151 and median of $ 296,207. It should be noted that 67% of this employee group belong to the constituent units of higher education and may belong to the defined contribution Alternate Retirement Plan (ARP) as opposed to any of the state's defined benefit plans. The federal cap would therefore not apply. In addition, this analysis is based on active employees – all of whom are not necessarily about to retire. The following table illustrates how use of the cap would reduce an individual employee's pension benefit for members of Tier I, II, and IIA with 25 years of state service.

 

SERS Tier I

SERS Tier II & IIA

Normal Benefit Formula

2% x FAS4 x years

35 years or less:  1. 33% x FAS + . 5% x FAS above annual breakpoint* x years

Without Cap

2% x 350,151 x 25 = 175,076

(1. 33% x 350,151 + . 5% x 292,051) x 25 = 152,932

With Cap

2% x 245,000 x 25 = 122,500

(1. 33% x 245,000 + . 5% x 186,900) x 25 = 104,825

Annual Savings $

52,576

48,107

* For FY 11, the annual breakpoint is approximately $ 58,100.

Based on the above pension calculations, if a state employee retires at age 60 and lives to the average life expectancy of age 78, the state would save between $ 865,926 and $ 946,368 in individual pension benefits, depending on the retiree's benefit formula. Actual savings would be based upon how many employees in this salary group retire on average each year. In FY 10, there were 89 retirees (0. 2% of the SERS retiree population5) receiving pensions of $ 125,000 or more, with total annual benefits of $ 13. 1 million. Therefore, if approximately 1,000 employees retire each year, about 2 employees per year would be impacted by the salary cap provision. Over the remaining 21 year amortization period, this would equate to 42 employees at a potential state long-term savings of $ 36. 3 million to $ 39. 7 million over the course of their retirements. Additional compounded state savings of $ 26. 4 million to $ 28. 9 million would accrue to the extent that annual cost of living increases would be based on a lower base pension benefit. 6 Therefore, after recalculating the state's annual required contribution (ARC) based on these long-term changes, the provision would achieve the estimated short-term savings in SERS of $ 2. 4 million in FY 12 and $ 2. 5 million in FY 13.

B. Achieve Pension Savings from Two-Year Wage Freeze

A two-year wage freeze in the biennium should result in an actuarial gain to the pension fund and achieve a significant portion, if not all, of the reported savings of $ 69. 3 million in FY 12 and $ 71. 2 million in FY 13. Actuarial assumptions for SERS currently provide for 4% annual payroll growth. The state's ARC is calculated as a percentage of projected annual payroll. For FY 12, the state's payroll for active SERS members was projected to be $ 3. 295 billion, with an ARC of 31. 06%, or $ 1. 023 billion. For FY 13, the state's payroll for active SERS members was projected to be $ 3. 427 billion with an ARC of 30. 49%, or $ 1. 045 billion. By reducing this base annual payroll by 4% in FY 12 (to $ 3. 163 billion) and assuming no increase in FY 13, savings of $ 40. 9 million in FY 12 and $ 80. 5 million in FY 13 are anticipated, for a total of $ 121. 4 million in the biennium. Thus, the estimated savings of $ 140 million over the biennium are partially achieved. Additional savings could be achieved, however, to the extent that a new valuation lowered the ARC percentages for the biennium or actual payroll was below projected levels.

C. Change Minimum and Maximum COLA for New Retirees to 2% and 7. 5%

Changing the minimum and maximum cost of living adjustments to 2% and 7. 5%, respectively, for retirees after October 2, 2011 would achieve savings of $ 32. 5 million in FY 12 and $ 34. 3 million in FY 13 based on the extent that COLAs are reduced below the current minimum level of 2. 5%. This could occur in any year in which the CPI is below 4. 1667%. 7 Cost of living adjustments (COLA) for retiree pension benefits are made annually each July 1st. For employees retiring after 6/30/99, the annual adjustment is 60% of the increase in the consumer price index (CPI) up to 6% and 75% of the increase in CPI over 6%. The minimum adjustment is currently 2. 5% and the maximum is 6%. Current SERS actuarial assumptions fall between this range, with 2. 7% for post-1997 retirees. Additional state savings would accrue to the extent that annual cost of living increases would be based on a lower base pension benefit. The following table illustrates how use of the lower COLA could potentially reduce an individual employee's pension benefit.

Retiree Group

COLA Rate

%

Average Annual Benefit

$

COLA

$

Post 10/2/2011

2. 50

30,000

750

Post 10/2/2011

2

30,000

600

Annual Savings

n/a

n/a

150

As of the 2010 SERS valuation, the state paid $ 1. 26 billion in annual retirement benefits. The benefits paid to current retirees would not be impacted by the provision; however, as the COLA adjustment would only apply to new retirees after October 2, 2011. Therefore, initial COLA savings would be minimal as the post-2011 retiree group is slowly populated, however significant savings would be achieved in the long-term as the post-2011 retirees eventually become the new retiree majority. Using assumed growth and decline rates as well as benefit levels, pension payouts for the post-2011 retirees are expected to outnumber the pensions of pre-2011 retirees within 16 years. At an average COLA rate of 2. 5%,8 savings of $ 412 million could be achieved over the current 21 year amortization period. At an average COLA rate of 2. 3%, savings of $ 812 million could be achieved over the same period. The SEBAC Agreement estimated 20-year savings of $ 1. 34 billion are expected to be achieved, when compounded at an assumed annual interest rate of 8. 25% over the 21 year period. Therefore, after recalculating the state's annual required contribution (ARC) based on these long-term changes, it is believed the provision would achieve the estimated short-term savings in SERS in FY 12 and FY 13.

Savings may be offset to the extent that in some years, COLAs may be increased above the current maximum level of 6%. However, based on the past two decades of CPI annual increases below 4. 1667%, this is unlikely.

D. Increase Early Retirement Reduction Factor to 6%

Increasing the early retirement reduction factor to 6% per year has reported pension savings of $ 8. 9 million in FY 12 and $ 8. 5 million in FY 13 which are achievable, in addition to health savings of $ 26. 1 million in FY 12 and $ 23. 9 million in FY 13. For SERS Tier II and IIA members, the basic normal pension benefit is currently reduced by one-quarter of one percent (. 0025) for each month, or 3% per year, an employee retires prior to attaining age 60 with at least 25 years vesting service, or age 62 with at least 10 but less than 25 years vesting service. These reductions are required because pension benefits would be paid over a longer than anticipated time period.

According to retiree demographic information from the 2010 SERS valuation (see table below), on average, state employees have been retiring at an average age of 55 years (including hazardous duty retirees, who are eligible to retire after 20 years of state service regardless of their age). In addition, the current 3% early retirement reduction factor does not cover the full actuarial impact of those retiring early.

 

Retiree Group

  

Number

Average Age as of 6/30/2010

Average Age at Retirement

 

Annual Benefits

$

 

Average

Benefit

$

Pre-1980

2,101

86. 8

56. 8

35,395,069

16,847

1980-1997

19,106

75. 8

54. 8

533,055,433

27,900

1997-2010

20,575

62. 2

55. 2

695,574,921

33,807

Total

41,782

68. 9

55. 1

1,264,025,423

30,253

The following table illustrates how use of the increased early retirement reduction factor of 6% per year would reduce the pension benefit for an individual non-hazardous employee retiring 5 years early for members of Tier II and IIA with 25 years of vesting service.

 

SERS Tier II & IIA

$

Normal Benefit

33,807

With 3% Penalty for 5 years

28,736

With 6% Penalty for 5 years

23,665

Annual Savings

5,071

Based on the above pension calculations, if the above state employee retires at age 55 and lives to the average life expectancy of age 78, the state would save on average $ 116,633 in individual pension benefits, plus $ 158,804 due to lower annual cost of living increases for a total savings of $ 275,137 per early retiree. 9 Additional state savings would accrue when compounded at an assumed annual interest rate of 8. 25% over the 21 year period. Given this level of individual savings, only a small percentage (3. 3%) of annual retirements would be needed to achieve the SEBAC agreement estimated pension savings of $ 8. 92 million in FY 12 and $ 8. 48 million in FY 13. Actual savings would depend on how the number of early retirees each year and their specific demographics differ from the above scenario.

The total reported saving from this provision are $ 35 million in FY 12 and $ 32. 4 million in FY 13; approximately $ 26. 1 in FY 12 and $ 24. 0 million in FY 13 are attributed to retiree health. Savings to retiree health are probable assuming a greater percentage of individuals retire closer to 65, when the cost to the state to provide healthcare is less. However, it is unclear how the full estimated savings were calculated. The reported savings for retiree health are approximately 4. 4% of the total appropriated for FY 12 retiree health expenditures and approximately 3. 7% of the FY 13 appropriation10.

The annual savings to the state to continue to provide health insurance for active employees as opposed to pre-Medicare (pre-65) retirees is approximately $ 11,65011. The per employee annual savings will increase in the future as the cost differential of providing active health care and pre-65 retiree health care increases due to increases in medical costs12. Actual savings to the state would depend on the age eligible individuals retire and the extent to which they retire later due in part to the early retirement reduction factor. In addition, an increase in the average retirement age will likely reduce Other Post Employment Benefit (OPEB) liabilities13 as it is assumed the cost of providing retiree health care would be less.

Increase Normal Retirement Age by 3 Years

For current employees retiring after July 1, 2022, increasing the normal retirement eligibility age from age 60 and 25 years of service to age 63 and 25 years of service or age 62 and 10 years of service to age 65 and 10 years of service would result in the reported savings of $ 22 million in both FY 12 and FY 13 as more employees should delay their retirement. Increasing the number of years an employee would contribute to his or her retirement and decreasing the number of years the state would pay pension benefits would result in an actuarial gain to the SERS retirement fund and a reduction in the ARC. Savings would be somewhat offset by older retirees generating a higher pension benefit due to increased salary and years of service as a result of three or more additional years of employment. Nevertheless, the estimated savings of $ 22 million in FY 12 and FY 13 appear to be reasonable.

E. Implement a New Tier III

Although certain longer-term savings are achievable, short-term reported savings of $ 9. 6 million in FY 13 are unclear as the population of new employees is expected to be low due to the hiring freeze as well as plans to leave 1,000 retirement vacancies unfilled. The new Tier III offers the same plan as Tier IIA, as modified by the terms of the agreement, with two exceptions: 1) Tier III pension benefits will be calculated using a 5-year final average salary as opposed to the 3-year final average salary used for Tier IIA; and 2) Tier III hazardous duty retirement increased to the earlier of age 50 and 20 years of service or 25 years of service regardless of age. Therefore, savings associated with the formation of the new Tier III can be attributed to three factors: 1) lower pension benefits due to the 5-year averaging of salaries, 2) reduced number of payout years for hazardous duty pension benefits due to the increased service requirement, and 3) the lack of an unfunded liability for the new tier.

As a result of the 5-year averaging, the normal costs of Tier III as a percentage of payroll should be lower than the normal cost of Tier IIA. As of the 2008 SERS valuation, the projected FY 10 normal cost for the state for Tier IIA non-hazardous duty employees was 4. 55% of payroll. For hazardous duty Tier IIA employees the normal cost for the state was 7. 62%. 14

Increasing the number of years a hazardous duty employee would contribute to his or her retirement and decreasing the number of years the state would pay pension benefits would result in an actuarial gain to the SERS retirement fund and a reduction in the ARC. Savings would be somewhat offset by older hazardous duty retirees generating a higher pension benefit due to increased salary and years of service as a result of three or more additional years of employment.

Assuming the state annually fully funds the normal cost of this new tier, there would be no unfunded liability cost component for Tier III. To put this in perspective, the Tier IIA liability for 2010 was estimated at $ 1. 16 billion (or 5. 5%) of a total liability (before being offset by system assets) of $ 21. 05 billion – a 27% increase in Tier IIA liability in the two year period from 2008 to 2010. 15 Thus, by fully funding the normal cost of the new Tier III members each year, the state would avoid additional growth of the unfunded liability from all future newly hired employees.

Overall savings will depend on the amount of new hires each year and their associated pensionable salaries in comparison to what their state pension costs (and associated liabilities) would have been under Tier IIA.

F. Keep 1,000 Retirement Vacancies Unfilled

The reported savings from keeping 1,000 retirement vacancies unfilled is $ 65 million in FY 12 and FY 13. The savings are based on an average employee salary of $ 65,000 per year and keeping 1,000 positions vacated by retirements unfilled. Savings are achievable, but will depend on how closely actual average employee salaries at retirement are in comparison to the assumed average salary level and the extent to which these positions remain unfilled during the biennium. As of August 10, 2011 there have been 724 retirements taken or filed for in FY 12. 16

G. Offer a Hybrid Option to ARP Participants

The reported savings of $ 10. 7 million in FY 12 and $ 11. 2 million in FY 13 is achievable, assuming more than 50% of current ARP participants switch to the new Hybrid plan. The Hybrid Plan offers defined benefits identical to Tier II/IIA and Tier III SERS members, but requires employee contributions 3% higher than the contributions required from certain SERS members. Upon leaving state service, the employee would have the option of accepting the defined benefit amount or “cashing out. ” Under the cash out option the employee would receive a return of his or her contributions, a 5% employee match, and 4% interest. Employees cashing out would permanently waive any entitlement to retiree health insurance unless they convert the cash out option to a periodic payment. Non-hazardous duty SERS Tier IIA members currently contribute 2% of their salary. 17 Current ARP members contribute 5% of their salary. Under the Hybrid Plan, members would still contribute 5% of their salary, so there would be no difference in employee contributions between the original ARP and Hybrid plan.

As of the 2008 SERS valuation, the projected FY 10 normal cost for the state for Tier IIA non-hazardous duty employees was 4. 55% of payroll. The state currently contributes 8% of payroll for ARP participants. Therefore, the savings to the state would result from a 43% lower contribution level. It is anticipated the state would achieve additional savings for hybrid plan participants choosing to cash out as they would receive a lower overall benefit and may not be entitled to retiree health insurance. In FY 10, the state contributed $ 24. 6 million to ARP participants. The FY 12 appropriation for ARP is $ 38 million. Assuming 50% of current ARP participants switch to the Hybrid Plan, the state could achieve savings of approximately $ 8. 2 million annually. Thus, as previously stated, the agreement's estimated savings is achievable, assuming more than 50% of current ARP participants switch to the Hybrid plan.

Individuals who leave state service and elect to cash-out their contributions in one lump sum waive any entitlement they may have to retiree health insurance. Savings may accrue to the state to the extent that the state would no longer provide retiree health insurance for those individuals who decide to cash out their contributions in this fashion.

It is unclear if the reported savings makes any projections as to the percentage of individuals who would waive retiree health as a result of this provision or if there will be any savings to retiree health. In FY 11 the state spent on average approximately $ 6,732 to $ 30,711 per retiree on health insurance annually. The average cost depends significantly on whether the retiree and their dependents are Medicare eligible and which coverage group the retiree is enrolled in (e. g. individual, individual and one dependent, family plan).

H. Adjust Pension Break Point

The fiscal impact of an adjustment to the breakpoint for pension benefit calculation of SERS members in Tier II, IIA, and III is uncertain as details regarding the specific adjustment to be made have not yet been established. The basic pension benefit is calculated by using a formula that takes into account an employee's final average salary, his or her average salary in excess of the year's breakpoint, and years of credited service. When the Tier II pension formula was first created18, it was anticipated that the breakpoint would not have increased at a rate greater than annual pay raises. By establishing a fixed percent increase for the breakpoint, the current breakpoint system benefits higher paid members more than lower paid members.

II. Health Changes

As previously stated, for the purposes of this analysis individual health provisions discussed below were analyzed and discussed independently. However, any savings assumes changes to benefits and plan design are interrelated. In addition, savings assume changes in individuals' behavior are directly related to changes in the mix and quantity of services utilized. For example, the utilization of more preventative services may result in a reduction in the number of office visits, diagnostic testing and prescriptions prescribed.

A. Extend 3% Retiree Health Contribution to All Employees

The SEBAC 2009 agreement required the following contributions to retiree health19,20:

1) All new employees as of July 1, 2009 contribute 3% of their salary for 10 years towards retiree health.

2) Employees with less than 5 years of state service as of July 1, 2010, are required to contribute 3% of their salary until they reach 10 years of service.

The agreement extends the 3% retiree health contribution to all new employees and those not currently contributing. The agreement requires the contribution be made for 10 years or until retirement. The amount contributed will be phased in according to the following schedule:

Fiscal Year

% of Salary

FY 14

0. 5

FY 15

2

FY 16

3

In addition, commencing on July 1, 2017 (FY 18) the state will begin contributing an amount equal to that which is contributed by employees for retiree health costs until the end of the agreement on June 30, 2022 (FY 22).

The reported savings from this provision are $ 871 million over 20 years beginning in FY 14. The underlying assumptions for the reported savings have been unavailable. However, by making certain assumptions, these savings to retire health are reasonable21.

It is estimated the following contributions could be made to the OPEB fund from the agreement's provisions:

 

Estimated Contributions to OPEB Fund (7/1/13 thru 6/30/22)

$

Employees not contributing as of July 1, 2013

741. 1 million

State Contributions22

702. 4 million

The state does not currently pay an OPEB annual required contribution (ARC), as it does with the pension fund. In contrast, OPEB liabilities are paid on a pay-as-you-go basis. The estimated ARC for 2009 was $ 1. 9 billion, based on a 4. 5% discount rate23. However, if the state were to begin prefunding total OPEB liabilities sufficiently, the state would be able to use a deeper discount rate, effectively reducing the ARC and total OPEB liabilities24, 25.

B. Increase Minimum Service for Retiree Health to 15 Years

Eligibility requirements for retiree health were previously amended by the SEBAC 2009 agreement. Pursuant to the 2009 agreement employees were eligible for retiree health if the following requirements were met:

1) Employees with 10 or more years of state service as of July 1, 2009 need 10 years of state service.

2) Employees with less than 10 years of state service as of July 1, 2009 need their age plus years of service to equal at least 75.

The agreement amends the SEBAC 2009 agreement and requires the following in order to be eligible for retiree health:

3) Individuals who retiree after October 2, 2011 need (unless they would have been eligible for retiree health under the provisions of SEBAC 2009):

a) A minimum of 15 years of state service, and

b) their age plus years of service must equal at least 75.

The reported savings from this provision are $ 3. 8 million in FY 12 and $ 9. 7 million in FY 13. Savings to the state would depend predominately on two factors: 1) the number of individuals who would no longer be eligible for retiree health and 2) the number of individuals who retire closer to age 65 when they are Medicare eligible and the cost to the state for providing health insurance is less26.

Our analysis indicates the state would save approximately $ 2. 3 million in FY 12 and $ 5. 1 million in FY 13 based on the following assumptions:

1) The annual cost differential between active health and pre-65 retiree health is $ 12,815 in FY 12 and $ 14,097 in FY 13;

2) medical costs for the state increase approximately 10% per year;

3) approximately 180 employees annually retire with less than 15 years of state service27;

4) 100% of those with less than 15 years of state service are under age 65; and

5) individuals with less than 15 years of state service in FY 12 have not reached 15 years in FY 13 and remain under the age of 65.

It is assumed individual savings will increase in the future as the cost differential of providing active health care and pre-65 retiree health care increases due to increases in medical costs.

Lastly, the state will save approximately $ 6,732 to $ 30,711 per retiree on health insurance annually for individuals who retire prior to being eligible.

C. Require Premium Share for Certain Early Retirees

Currently, retirees pay medical premiums based on the following:

1) The effective date of their retirement;

2) if they or their dependents are Medicare eligible; and

3) which plan and coverage group the retiree is enrolled in.

The agreement requires individuals who retire early to pay a retiree premium share until they reach normal retirement age or 65, whichever is earlier28. The premium does not apply to individuals who have 25 years of state service as of July 1, 2011 or who retire before July 1, 2013. The premium share would be capped at 25% of the person's actual pension benefit. For example, the average SERS pension benefit for individuals who retired after 1997 is $ 33,800; therefore the maximum annual premium contribution would be $ 8,452.

The premium share is based on the number of years of service and the number of years early the individual retires. Per the agreement, early retirement premium shares range from 2% to 40% of the cost of health insurance, with an average of 15%. Specific savings were not identified for this provision.

The following table displays the average annual state savings per early retiree by coverage group.

 

Average State Savings Per Early Retiree

Coverage Class

Increase Premium Share to 2%

Increase Premium Share to 15%

Increase Premium Share to 40%

Retiree Only

$ 78

$ 1,596

$ 4,517

Retiree + One Dependent

$ 222

$ 3,527

$ 9,882

Family

$ 294

$ 4,329

$ 12,088

Savings may also accrue to the state if retirees defer retirement until age 65 when they are Medicare eligible. The nature of the savings would be the same as similar provisions which assume individuals retire closer to age 65.

D. Health Enhancement Program/Value Based Plan

The agreement introduces the Health Enhancement Program (HEP), also referred to as the Value Based Plan.

In summary, the agreement states the following:

1) The program is voluntary.

2) Individuals and their dependents that choose to participate are required to follow all physician recommended disease management procedures and receive age appropriate diagnostic testing.

3) Individuals who choose not to participate in the program and/or do not fulfill its requirements are subject to the following:

a) An additional $ 100 per month increase in their health insurance premiums29. The $ 100 increase is the same irrespective of coverage group or plan type.

b) A $ 350 per individual, annual deductible, with a family annual maximum of $ 1,400. The deductible applies to those services which are not currently subject to a copay.

c) Individuals will be ineligible for copay reductions and office copay waivers30.

4) Individuals enrolled in a dental plan will be required to receive two dental cleanings per year without cost sharing.

5) A $ 35 emergency room copay will be implemented for individuals who are not admitted to the hospital or for whom there was a reasonable medical alternative.

6) The HEP parameters apply to current employees and those who retire after October 2, 2011.

The total reported savings from the HEP program provisions discussed in this section are $ 121. 7 million in FY 12 and $ 124. 2 million in FY 1331. In general the reported savings assumes the following:

1) 50% of eligible individuals will not participate in HEP and therefore will be subject to $ 100 more per month in health premiums and the annual deductible;

2) there will be a 10% reduction in claims costs in the first two years; and

3) in the long term, savings assumes a decrease in overall health care costs from better care coordination and better health outcomes32.

Value based insurance design (VBID), such as the state's HEP, hinges on promoting the use of high valued services with established benefits and discouraging the use of services with little value33. VBID programs ideally invest in services which aim to prevent and prohibit adverse events from occurring and thereby avoiding their associated costs. In theory VBID generates savings when the investment in prevention and other related services are less costly than services provided to manage and address adverse events, such as costly emergency room visits34. Other employers, including states, municipalities, and large corporations have implemented VBID programs with one or more similar elements to the state's HEP.

In many cases, VBID has focused on targeted prescription drug copay changes and disease management35. For example, programs to help manage individuals with diabetes are prevalent. Many employers who have implemented VBID initiatives have implemented programs which target one or both of these areas. The agreement introduces a program focused on targeted disease management and prevention.

The literature we have reviewed evaluating the cost savings and impact on overall health care spending to a plan as a result of VBID methods is inconclusive36. The research suggest further, more rigorous analysis of current VBID programs must be conducted to assess overall cost savings and the impact on health outcomes related to VBID plan provisions. Researchers suggest plan savings depend on various factors, including37:

1) The underlying clinical risk in the population treated;

2) the effectiveness of the program at increasing the use of high-valued health care services38;

3) the ability of those high valued services to mitigate risk; and

4) the cost of the health care services averted.

Our analysis of potential savings to the state from the implementation of HEP provisions is discussed below.

Increase Premium and Deductible

The reported savings assumed 50% of eligible employees would not enroll in HEP and therefore would be subject to increased premium costs and the medical deductible. Assuming 50% of eligible employees did not enroll in the HEP program, roughly 26,596 employees, the state would save approximately $ 31. 9 million annually from increased annual premium costs and approximately $ 18 million from the annual deductible.

As of September 19, 2011, approximately 96% of eligible employees enrolled in the HEP plan, approximately 51,126 employees. The estimated annual savings from increased premium costs with 96% participation is approximately $ 1. 9 million and the estimated annual savings from the medical deductible is approximately $ 1. 1 million for FY 12 assuming a program start date of October 1, 2011.

Claims Costs/Utilization and Plan Edits

The reported savings assumes a 10% reduction in claims costs from compliant individuals as a result of better care coordination in the first two years. A 10% reduction in total claims costs for the active employee population, based on FY 11 estimated expenditures, is approximately $ 52. 5 million. It is unclear if the reduction in claims costs is achievable in the short term.

A portion of the reported savings is attributable to “plan edits”. This provision requires all insurers to implement benefits uniformly. For example, if one insurer requires prior authorization for a MRI and another insurer does not, the agreement would require both plans to require prior authorization. Savings would be achieved to the extent that plan edits reduce the utilization of certain services, such as imagery and physical therapy. According to supporting documents, plan edits are estimated to save approximately $ 19 million annually. However information on current utilization, the cost for targeted services, and the underlying assumptions behind the savings has not been made unavailable.

In general it is reasonable to expect utilization will increase initially for the state employee health and dental plans as a result of the HEP. The reported savings from the HEP program are identified as being net of increases in utilization. However information about current utilization of preventative and other related services is currently unavailable. It is uncertain what assumptions were made about increases in preventative services and the anticipated decrease in other services to arrive at the overall 10% reduction in claims. Therefore it is uncertain if the 10% claims reduction is reasonable given the parameters of the program and the experience of the state employee health plan.

In addition, it is unclear what the total estimated savings estimates are from dental plan requirements. Supporting documents assert that research suggests individuals with chronic conditions may have complications if regular dental care is not received. However, the agreement requires dental cleanings and unlimited periodontal care for all individuals in HEP. It is unclear if the estimated savings from individuals with chronic conditions will offset the increase in utilization from all other plan members including otherwise healthy individuals. Lastly, the state will be responsible for 100% of certain dental care services as HEP individuals will no longer be required to pay any out-of-pocket expenses for dental cleanings39.

In summary, reported savings assumes an increase in preventative medical and dental services will decrease utilization of other, likely higher cost services. It is uncertain if changes in behavior and utilization will occur and lead to long term savings.

Emergency Room Copay

Currently under the state employee and retiree health plan there is no copay for emergency room visits. The new provision institutes a $ 35 emergency room copay for individuals who are not admitted to the hospital or for whom there was a reasonable medical alternative.

Estimate savings from an emergency room copay range from $ 7 to $ 8 million. The savings assumes approximately a 5 to 10% reduction in claims overall. The savings assumes individuals will receive care during an office visit or at an urgent care center as opposed to the emergency room, where the cost of care is less.

For claims incurred in FY 10, the state paid approximately $ 20. 7 million for emergency room visits associated with the top 25 clinical categories, for active employees40. Cost per encounter ranged from $ 399 to $ 1,376. If 5 to 25% of encounters experienced for these categories are subject to the $ 35 copay, the state could save between $ 51,200 and $ 255,841 annually. As previously stated the majority of the savings would arise from shifting emergency care out of the emergency room and into physician offices or urgent care centers. The average savings per visit would be approximately $ 65041. If 5 to 25% of visits shift from the emergency room into a physician office the state could save between $ 954,244 to $ 4,771,220 annually.

In addition, it is uncertain if the emergency room copay is sufficient to significantly mitigate utilization. The average national emergency room copay is $ 107, which is approximately 67% higher than what is being implemented in the state employee plan. Other health plan initiatives in conjunction with the emergency room copay may impact utilization and result in savings.

In conclusion, the total savings from the HEP and its various provisions discussed herein would depend on actual changes in utilization of services, the extent to which plan design changes impact over all health outcomes, and the rate of participation.

E. Enhance Disease Management Programs (including tobacco cessation & obesity counseling) & Related Copay Changes

The state employee health plan currently provides obesity counseling and tobacco cessation programs for state employees and retirees through the plan's various health care providers; these programs remain voluntary for plan members. In addition, the agreement requires disease management for individuals in one of 5 identified disease categories who are enrolled in HEP42. Individuals identified as having one or more of the five diseases will have reduced or waived prescription drug copays and office visits copays as discussed below.

The reported savings from tobacco cessation and obesity programs are $ 1 million in FY 12 and $ 2 million in FY 13. Savings from reduced or waived copays for individuals with certain chronic conditions are not specified. It is unlikely the reported savings from smoking cessation and obesity programs are achievable in FY 12 and FY 13. In addition, it is uncertain if the incentive payment's structure or amount is sufficient enough to increase voluntary program participation. Current participation data is unavailable for disease management programs.

There may be savings to the state employee and retiree health plan to the extent that participation in a disease management program results in reduced health care costs in the long term43. Any savings would be offset by: 1) the $ 100 cash incentive which is not currently provided by the state health plan44 and 2) the waiver and reduction in copays for individuals with certain disease diagnoses.

As of the end of FY 10, the state employee and retiree health plan had the following number of members with disease diagnoses in one of the following chronic disease categories:

Disease

Number of Members45

As a % of Total Members Covered

Asthma

7,460

3. 7

Diabetes

7,428

3. 7

COPD[1]

6,390

3. 2

CAD [2]

2,070

1. 0

Colon Cancer

682

0. 3

[1] Chronic Obstructive Pulmonary Disease: umbrella term for chronic lung

disease such as emphysema. [2] Coronary Artery Disease (Heart Disease)

The average the state paid per patient per month for the following five disease categories is as follows:

 

Asthma

$

Diabetes

$

COPD

$

CAD

$

Colon Cancer $

Actives

464

898

1,070

1,511

2,053

Pre-65 Retiree

603

1,222

1,978

1,979

2,086

Medicare Retiree

143

196

229

216

245

The state will incur an additional cost for waiving copays for visits necessary for the treatment and monitoring of individuals with one of the identified diseases. Current office visit copays range from $ 5 to $ 15. The cost depends on the plan, provider, and type of visit. The reported savings assumes the additional costs would be offset by a reduction in acute care for individuals with chronic conditions and long term savings arising from better health outcomes. It is uncertain if there will be a net savings to the state.

Active employees and retirees had 505,915 and 325,345 office visits respectively from February 2010 through January 2011. If roughly 50% of those visits are for the management of a chronic disease, waiving the copay would cost the state approximately $ 4. 2 million annually46. Any additional costs may be offset by a presumption that better care coordination may lead to a reduction in medical services.

F. Institute Mandatory Mail Order and Prescription Copay Changes

Currently, the mail order program is a voluntary service. The agreement requires mail order for maintenance medication after the first prescription is filled, for all employees and individuals who retire after October 2, 2011 who are not Medicare eligible47.

In addition, the agreement makes the following changes to prescription copays:

Rx Type

Current Copay

$

New Maintenance Copay

$

New Non-Maintenance Copay

$

New Rx Copay for Prescriptions for Treatment of Certain Diseases

$

New Rx Copays for Diabetes Prescriptions

$

Generic

5. 00

5. 00

5. 00

waived

waived

Preferred Brand

10. 00

10. 00

20. 00

5. 00

waived

Non-Preferred Brand

25. 00

25. 00

35. 00

12. 50

waived

The reported savings from mandatory mail order and prescription drug copay changes are approximately $ 19. 9 million in FY 12 and $ 20. 5 million in FY 13. Savings are likely from mandatory mail order; however information necessary to assess the reasonableness of the savings has been unavailable. The state reimburses the pharmacy (retail or mail order) the negotiated cost of the drug plus a dispensing fee. Savings to the state are the result of the state being able to negotiate lower drug prices and a discounted dispensing fee for mail order prescriptions versus retail prescriptions.

It is unclear if there will be savings from changes to prescription drug copays48. Information necessary to assess savings has been unavailable. In general, on a per prescription basis, the state will save $ 10 per non-maintenance brand name drug. The state will incur 100% of the cost of diabetes prescriptions and an additional $ 5-$ 12. 50 per prescription for drugs prescribed for the treatment of the 5 diseases previously identified for HEP participants.

Similar to the state, other employer plans have reduced and/or waived copays for prescriptions prescribed for the treatment of certain diseases, such as diabetes and asthma. In addition to copay changes, many plans have included substantial case management for individuals with certain chronic diseases as part of their plan design. The literature we have reviewed on similar plans has been mixed. Savings have been reported, however, in many cases, the savings were not offset by the additional administrative and case management costs associated with the plan's design. In addition, the literature does suggest reducing copays for certain prescription drugs may improve adherence to prescription drug regimens, which suggests increased utilization and therefore increased prescription drug costs for the employer.

Without additional information it is unclear if increased costs bore by the state from increased utilization and reduced/waived copays will be offset by increased copays for non-maintenance prescriptions which may make up a smaller percentage of total prescriptions. In addition, it is uknown how extensive the case management will be for individuals with chronic diseases and if any additional administrative costs will be borne and if those additional costs will be offset by better health outcomes.

G. Drugs Coming off Patent

Savings targets of $ 1. 5 million in FY 12 and $ 12 million in FY 13 are reported for drugs coming off patent. It is reasonable that savings may be realized if expensive brand name drugs become available in less expensive generic form and are in addition to what was assumed in the biennial budget. Actual savings to the state would depend on which drugs are considered in the savings estimates and the extent of utilization in the state employee and retiree health pool, for which information is currently unavailable. 49 The estimated FY 12 and FY 13 savings represent less than 0. 5% and 3% respectively of FY 11 estimated state prescription drug expenditures. Savings attributable to prescription drugs coming off patent are not contingent on an agreement between the state and SEBAC.

H. Implement Unspecified Health Cost Containment Initiatives

Savings targets of $ 40 million in FY 12 and $ 35 million in FY 13 are reported for health cost containment initiatives50. Health cost containment initiatives may include contract renegotiations and improved service delivery.

Projected savings for contract negotiations may be realized. The estimated savings from negotiated rates outlined below for medical and dental care represent 110% of the savings attributable to Health Cost Containment initiatives in FY 12 and 97% of savings for FY 13.

The biennial budget assumed rate increases for medical care of 9. 1% for both active employees and retirees51. The actual negotiated rate increases for medical care for FY 12 is 3% for active employees and 0% for retirees. For FY 13 the estimated rate increase for active employees is 9. 9%, 6. 3% for pre-65 retirees, and 0. 4% for post-65 retirees. OPM estimates the savings as a result of lower than projected rate increases to be approximately $ 36. 3 million in FY 12 and $ 33. 6 million in FY 13.

The biennial budget assumed a rate increase for dental care of 6. 5%. The final negotiated rate increase for FY 12 and FY 13 was 5. 2%. OPM estimates the savings associated with the negotiated rate to be approximately $ 2. 6 million in FY 12 and $ 5 million in FY 13.

Other savings initiatives have been proposed by the Health Care Cost Containment Committee which may provide additional savings. However specific provisions and related savings estimates are not currently available.

Targeted savings from health related provisions total approximately $ 187. 9 million in FY 12 and $ 203. 4 in FY 13. Health related savings represent approximately 27% of the total reported savings in FY 12 and approximately 23% in FY 13.

III. Compensation Changes

A. Institute a Hard Wage Freeze for Biennium

Savings estimates of $ 138. 9 million in FY 12 and $ 309. 6 million in FY 13 as a result of a hard wage freeze for all state employees are in-line with independent analysis and deemed reasonable and achievable. It should be noted that due to the anticipated delay in implementation, general wage increases, annual increments and lump sum payments for bargaining units with existing settled contracts were provided as of July 1st. The ratified agreement was submitted to the legislature for approval on August 22, 2011, with the wage freeze approved by all but two of the 34 bargaining units in the coalition's 15 unions. These two units account for $ 6. 8 million of the wage freeze savings in FY 12. 52 Subtracting out these units, the delayed implementation of the wage freeze has reduced FY 12 estimated savings by $ 3. 8 million each pay period. Assuming 5 pay periods, savings would be reduced by $ 19 million for the General and Transportation Funds. By rejecting the wage freeze, the two units retain their current contract expiration date of June 30, 2012. Thus, it is possible that wage freeze saving for these units will be obtained in FY 13. In addition, wage freeze savings from these units may be achieved in FY 12 through alternate means, as the units forgo job protection provisions as a result of their rejection. It is anticipated that lost savings due to implementation delays would be recovered at the start of FY 14. As lump sum payments could be recouped in the biennium, the FY 12 lost savings of $ 19 million would be correspondingly reduced.

B. Achieve One-Time Longevity Savings and Suspend Longevity for New Hires

The estimated savings of $ 7 million in FY 12 as a result of suspending the October 2011 capped longevity payments and securing equivalent savings from uncapped longevity recipients is more than achievable. The April 2011 longevity payment for capped units was approximately $ 6. 3 million for all appropriated funds. The April 2011 longevity payment for uncapped units (including non-union employees) was approximately $ 11. 5 million for all appropriated funds. Prohibiting longevity payments to new hires will begin to achieve savings after ten years, when an employee would normally begin to receive longevity.

IV. Other Changes

A. Technology Initiatives & Budget Savings Initiatives

Savings estimates associated with utilizing new technologies are $ 40 million in FY 12 and $ 50 million in FY 13. Savings estimates for implementing savings ideas proposed by state employees are $ 90 million in both FY 12 and FY 13. The achievability of these estimated savings are somewhat uncertain as detailed information as to the focus of or methods used had not previously been provided. However, OPM has recently issued holdbacks which are, in part, attributable to these two initiatives. As a result, the estimated savings can be deemed at least partially achievable to the extent that these holdbacks do not have to be released.


OFA Staff
:

Jennifer Proto

Holly Williams

APPENDIX A

Agreement Provisions & Reported Savings

 

FY 12 $

FY 13 $

20-Year

Projection $

 

(in 000's)

Pension Changes

 

Provision 1: Cap salary that can be considered as part of an individual's pension benefit as provided under the Internal Revenue Code.

2,400

2,500

62,000

Provision 17 Related Savings: Pension savings due to 2 year wage freeze.

69,316

71,198

140,000

Provision 2: Change the minimum COLA for individuals who retire after 10/2/11 from 2. 5% to 2. 0% with the highest amount going from 6. 0% to 7. 5%.

32,525

34,315

1,342,000

Provision 3: Change the Early Retirement reduction factor from 3% to 6% for each year before eligible to take Normal Retirement with associated health care savings.

35,000

32,400

662,000

Provision 4: Increase the Employee Contribution to 3% for Retiree Health Care Trust Fund for all employees (not just new employees) phased in beginning 7/1/13.

-

-

871,000

Provision 5: For current employees who retire after 7/1/2022, Normal Retirement eligibility increase from Age 60 and 25 YOS or Age 62 and 10 YOS to Age 63 and 25 YOS or Age 65 and 10 YOS. By 7/1/13, present employees may elect to pay the actuarial pension costs of maintaining the normal retirement eligibility that exists in the present plan which is scheduled to change effective July 1, 2022.

22,000

22,000

677,000

Provision 6: New Tier III for individuals hired after 7/1/11, Normal Retirement eligibility Age 63 and 25 YOS or Age 65 and 10 YOS and salary based on Final five year average; HD 20 Years of HD service and age 50 or 25 Years of HD Service regardless of age and salary based on final five year average pay; Early Retirement Age 60 and 15 YOS; Ten year cliff vesting.

-

9,649

2,982,000

Provision 7: Increase number of retirees due to absence of ERIP; reduce refills.

65,000

65,000

1,300,000

Provision 8: Provide the availability of individuals in the Alternate Retirement Plan to switch to a Hybrid-Defined benefit/Defined contribution type plan.

10,750

11,190

235,000

Pension Total

236,991

248,252

8,271,000

       

Health Care Changes

 

 

 

Provision 9: Plan Changes value and non value based: $ 35 Emergency Room copay; Certain cost savings changes wherein individuals would have to get preauthorization before a second MRI would be paid for, etc.

1,200

3,700

75,000

Provision 10: Value based health and dental - Provide a Value based health and dental care plan under which individuals and their families could chose to participate and agree to follow all plan and physician recommended physicals, disease management protocols and diagnostic testing. Failure to comply would result in the individual and their families being placed in the Nonvalue added plan with the concomitant cost increase. The cost for this plan would the same as the current plan plus any scheduled experience determined increases. Value Added for Retirees – Voluntary for current Retirees; Mandatory for individuals who retire on and after 10/2/11. If new retirees elect nonvalue added, cost is $ 100 per month.

102,500

102,500

2,378,000

Provision 11: Nonvalue based health and dental - If the employee chose not to participate their cost for health care would be the same as calculated in the first year for Value based, plus $ 100 per month additional. Institute a $ 350 Medical Deductible per year per individual.

18,000

18,000

249,000

Provision 12: Reduce Costs with Generics - drugs coming off patent.

1,500

12,000

380,000

Provision 13: Tobacco and Obesity - reduce costs through voluntary referral program.

1,000

2,000

85,000

Provision 14: Other Health Cost Containment Initiatives - the Healthcare Cost Containment Committee will identify additional cost savings through renegotiation of contracts and improved service delivery.

40,000

35,000

420,000

Provision 15: Pharmacy Copays and Mandatory Mail Order for Active Employees and New Retirees: Increase to $ 5, $ 20 and $ 35 for non maintenance drugs. Additional drugs coming off patent which will now be available as generics. Mandatory Mail Order - maintenance drugs for active employees, future retirees and current retirees under 65 must be ordered through the mail. Voluntary for current retirees over 65 (mandatory once enrolled).

19,876

20,500

698,000

Provision 16: Minimum Service for Retiree Medical – Increase to 15 years of actual state service for Normal, Early Retirement and HD Retirement with continuation of Rule of 75 for Deferred Vested.

3,822

9,705

987,000

Health Care Total

187,898

203,405

5,272,000

       

Other Changes and Cost Savings

 

 

 

Provision 17: Hard Wage Freeze – FY 12 and FY 13.

138,852

309,550

6,330,000

No state employee would receive any increase in salary for either of the next two fiscal years, including no payment for individuals who were at their top step as a bonus.

Provision 18: Adjust break point in Tier 2, Tier 2A and Tier 3.

-

-

(458,000)

Provision 19: Salary Increases – FY 14, FY 15 and FY 16 - provide three percent plus step increases or their equivalent in those units with them.

 

 

(600,000)

Provision 20: Technology Initiatives - utilize new technologies and reduced licensing procurement and consulting costs.

40,000

50,000

1,000,000

Provision 21: SEBAC Budget Savings Initiative - implement savings ideas proposed by employees to reduce costs in agencies through reduced procurement costs, more efficient agency operations and other initiatives.

90,000

90,000

1,800,000

Provision 22: Longevity - No longevity payment would be made in October, 2011 to those units with capped longevity and an equivalent savings amount would be negotiated from those with uncapped longevity. No one during the biennium will have those years count for that period. Individuals first hired on or after 7/1/11 (military service counts) would never receive a longevity payment.

7,000

-

53,000

Other Changes and Cost Savings Total

275,852

449,550

8,125,000

       

Grand Total

700,741

901,207

21,668,000

1 The original agreement signed May 27, 2011 was not ratified. Benefit changes not included in the revised 2011 SEBAC agreement which were included in legislation are outside of the scope of this memo.

2 The agreement amends provisions contained in the agreement reached between the state and SEBAC on pension and health related issues in 1997 and extends the expiration date of the underlying agreement from 2017 to 2022. The 1997 agreement was last amended in 2009.

3 In addition, under its rules for public employee pension plans, the Internal Revenue Service has set a cap for annual pension benefits (Section 415(b)(1)(A)). Since 2009 this cap has been $ 195,000.

4 FAS refers to final average salary. In calculating an employee's pension benefit an average of the three highest paid years (any 12 consecutive month period) of credited service are used for Tiers I, II, and IIA. In addition, no one year's earnings can be greater than 130% of the average of the preceding two years. Mandatory overtime earnings are not subject to this limitation.

5 Includes retirees of the State Employee Retirement System (SERS, the primary plan for state employees), as well as the Judges, Family Support Magistrates and Compensation Commissioners Retirement System (JRS), the Probate Judges & Employees Retirement System (PJERS), the State's Attorney Retirement System, and the Public Defender Retirement System.

6 Assumes a 2. 5% annual COLA increase.

7 Since 1913, the annual increase in CPI has been less than 4. 1667% 2/3 of the time and above 4. 1667% 1/3 of the time. The last year in which the annual CPI increase exceeded 4. 1667% was 1991.

8 In comparison to the current assumed COLA of 2. 7% for Tier IIA non-hazardous duty employees.

9 Assumes current 2. 7% COLA for post-1997 retirees.

10 The biennial budget appropriated $ 597. 4 million in FY 12 and $ 648. 3 million in FY 13 for retiree health care expenses.

11 The savings reflects the average per employee savings between the state's share of active health insurance costs for an individual plus one dependent versus the state's average share of pre-65 retiree health insurance costs for the same coverage group. The savings are based on 2011 health insurance rates as provided by the Office of the State Comptroller. The savings estimate assumes the employee and their dependent have the same Medicare eligibility determination.

12 In general, the reported savings assumes the state's health claim costs increase at an annual rate of approximately 10%.

13 As reported in the most recent OPEB valuation (dated April 1, 2008), the state's liabilities were $ 26. 6 billion of which 55% of the liability is attributable to active employees and 45% is attributable to retired employees already receiving benefits. A new OPEB valuation is anticipated in the Fall of 2011.

14 A similar break-out of liability by tier group was unfortunately not provided in the 2010 valuation, however, it is assumed these normal cost rates have not changed significantly.

15 Source: SERS 2008 and 2010 actuarial valuations.

16 Data provided by the Office of the State Comptroller.

17 Tier II members are non-contributory to their pension plans. Tier III members would contribute 2% like their Tier IIA counterparts.

18 For Tier II, IIA (and now III*) members, the pension formula is as follows: 1. 33% x FAS + . 5% x FAS above annual breakpoint x years of service up to 35 years + 1. 625% x FAS x years of service above 35 years. In the benefit formula, the breakpoint used is for the calendar year in which last severance from state service occurs. For FY 11, the annual breakpoint is approximately $ 58,100. *Please note: FAS for Tier III is based on a five year average, in contrast to a 3 year average for Tiers II and IIA.

19 In general, if an employee leaves state service prior to attaining 10 years of state service the employee's contributions for retiree health are refunded.

20 In FY 11, approximately $ 22 million in retiree health contributions were deposited into a separate interest bearing account within the General Fund. As reported by OPM, approximately 13,700 employees contributed in FY 11.

21 Savings estimates differ from reported savings because of different underlying assumptions. OFA's estimated savings assume the following: 1) the average wage increase for FY 12 and FY 13 is 0%, 2) the wage increase thereafter is 4. 5% (assuming a general wage increase and an average annual increment) 3) the average salary of a new hire is approximately $ 34,666 in FY 12 (salary based on information provided by the most recent SERS valuation), and 4) approximately 1,000 new hires are added annually. The savings estimate for current, non-contributing employees is based on FY 12 and FY 13's net appropriation for personal service expenditures for all appropriated funds. Employee contributions do not include those employees already required to contribute pursuant to the SEBAC 2009 agreement.

22 The cost of the state's contribution was not included as an offset to the reported savings.

23 The discount rate is the expected long term investment return on the state's assets used to finance the payment of the retiree health benefits. (Source: 2008 OPEB Valuation)

24 For example, the most recent OPEB valuation provided an estimate of the impact on the OPEB fund from various funding scenarios. The first scenario applied a 6. 11% discount rate, resulting in a $ 6. 9 billion reduction in total liabilities and a $ 4. 0 million reduction in the 2009 ARC. The second scenario applied a 5. 10% discount rate, resulting in a $ 2. 9 billion reduction in total OPEB liabilities and a $ 1. 0 million reduction in the 2009 ARC. The actual impact on OPEB liabilities would depend on what discount rate is applied and to what extent employer and employee contributions meet the standards necessary to qualify as prefunding.

25 In FY 11, the state's annual benefit paid out for retiree health was $ 490. 6 million. Pursuant to the Governmental Accounting Standards Board (GASB) Statement 45, if the state were to implement a funding policy and contribute more than the annual benefit to the fund yearly, the state would be allowed to apply a blended discount rate. The blended rate would be the weighted average between the fully funded rate, currently 8. 25%, and the unfunded rate of 4. 5%. (Source: 2008 OPEB Valuation)

26 For retirees who are Medicare eligible, Medicare serves as the primary insurer, while the state serves as the secondary insurer. In general, for services covered by Medicare, Medicare covers 80% of the cost of services and the state covers the remaining 20%, minus any copays. For services not covered by Medicare, the state pays the cost of care, minus any copays.

27 Based on current experience of approximately 15 retirees per month.

28 Retirees who retired prior to July 1997 do not contribute to their health insurance. In addition, individuals who retired after July 1997, but who are Medicare eligible and have Medicare eligible dependents do not contribute towards their health insurance.

29 Enrollment in HEP for eligible employees, retirees and their dependents will only be available during the annual open enrollment period. Therefore individuals who do not register during open enrollment will have an annual premium increase of $ 1,200, irrespective of coverage category. It is assumed individuals who are enrolled but do not comply will incur the additional monthly premium the following plan year if they do not come into compliance.

30 This provision only applies to individuals with specific disease diagnoses. Individuals will not be eligible for waived or reduced prescription copays and waived office visit copays for disease management visits as is available to HEP members and discussed in subsequent sections.

31 The total reported savings are for Provisions 9 – 11 as reflected in Appendix A.

32 Savings from better care coordination assumes the current provider network has the capacity to manage more efficient and effective care coordination. Patient centered medical homes have been organized for the state employee health plan and are in the early stages of managing patient care for some individuals.

33 Kapowich, Joan. “Oregon's Test of Value-Based Insurance Design in Coverage for State Workers. ” Health Affairs. 29. 11 (2010): 1-5.

34 Chernew, M. , Juster, I. , Shah, M. , Wegh, A. , et al. “Evidence that Value-Based Insurance Can Be Effective. ” Health Affairs. 29. 3 (2010): 530-536.

35 Chernew, M. , et al: 530-536.

36 Avorn, J. , Berman. , C. , Brookhart, A. , Choudhry, N. , et al. “At Pitney Bowes, Value- Based Insurance Design Cut Copayments and Increased Drug Adherence. ” Health Affairs. 29. 11 (2010): 1995-2001.

37 Chernew, M. , et al. : 531.

38 For example, the effectiveness of copays to incentivize or disincentivize utilization of targeted services.

39 Currently, the United Healthcare Basic Dental plan provided by the state requires employees to cover 20% of the cost of oral exams.

40 Therefore the costs do not reflect total costs to the plan for all emergency room visits. The 'Top 25 Clinical Categories' were identified by the total amount paid. Total savings reflect 29,239 unique encounters. (Health Care Cost Containment Committee)

41 The savings reflects the cost differential between an average office visit and the average emergency room visit.

42 Identified diseases include: 1) Diabetes Type 1 and 2; 2) Asthma and COPD (Chronic Obstructive Pulmonary Disease, such as emphysema); 3) Heart Failure/Heart Disease; 4) Hyperlipidemia (high cholesterol); and 5) Hypertension (high blood pressure).

43 On average the health care costs for individuals with a chronic disease versus all other plan members are approximately 3. 2% higher. Based on information provided at the January 3, 2011 Health Care Cost Containment Committee for active employees enrolled in Anthem plans, for which the majority of state employees are enrolled in.

44 The agreement provides for an incentive payment for individuals who are in a disease management program. If the member and all dependents comply with the Health Enhancement Program, the member will receive a $ 100 incentive payment per year.

45 The figure is for individuals enrolled in an Anthem Plan only. The figure includes both active employees and retirees. The figures do not represent unique individuals for each category, as a single member may fall into multiple categories.

46 The estimate assumes office visit charges are $ 10.

47 Medicare eligible retirees have to elect to participate in any mail order program. The Federal government does not allow mandatory mail order for Medicare beneficiaries.

48 It is important to note, the SEBAC 2009 Agreement instituted mandatory generic substitution for those drugs where a generic was available as of July 1, 2009. The generic dispensing rate was 5. 03% points higher in October 2010 (the most recent date for which information was available) than October 2009 for the active employee population and 4. 15% points higher in the retiree population.

49 For example, between 2011 and 2012 the following top grossing prescriptions will lose patent protection; Lipitor, Plavix, and Singulair (Medco Health Solutions and IBIS World).

50 Savings attributable to Health Cost Containment Initiatives are not contingent on an agreement between the state and SEBAC.

51 Based on information provided by OPM on 7/19/11.

52 State police (NP-1) and Correctional supervisors (NP-8) rejected the wage freeze.