The purpose of this memorandum is to inform City Council of the: (1) higher percent increase in City health insurance rates versus the rate previously budgeted for FY 2018 and reported to City Council, and (2) a plan for paying for this increase.
- Increase the amount set aside in the FY 2018 proposed budget for the employer share of health insurance by $1.7 million to reflect the overall projected 14.8% rate increase in employer paid health insurance premiums for FY 2018.
- Fund this $1.7 million amount from the following FY 2018 accounts:
a. $340,000 from Police Department non-personnel monies not needed to equip the planned overhires,
b. $100,000 from FY 2018 Contingent Reserves,
c. $555,000 in additional budgeted FY 2018 vacancy savings,
d. $612,000 by reducing the planned increased OPEB contributions in FY 2018 from $2.6 million to $2.0 million, and
e. $100,000 from storm and sanitary sewer and permitting enterprise accounts to cover the health insurance cost increases for employees funded by these enterprise funds.
In the last few weeks, the City received final health care cost projections data and recommendations from Aon Hewitt (Aon) who is the City’s health and benefits consultant. The projected increases, which will be used to set the FY 2018 premiums, were finalized for Kaiser at a 9.5% premium rate increase and for United Health Care (UHC) at an 18.1 % for FY 2018. These averages are based upon current employee enrollment average to a 14.8% increase. The City had budgeted an 8.1% increase for FY 2018. This results in a 6.7% gap which equates to a $1.7 million shortfall.
Nationally, according to Aon, rates for Health Maintenance Organization (HMO) type plans such as Kaiser rose about 8.1% while Preferred Provider Organization (PPO) rates such as for UHC were expected to increase 8.4%. Aside from changes to the plan that began in FY 2014, Kaiser’s annual increases have been approximately 7% to 7.5%, due in part to the facility based nature of the Kaiser plan that employs its own doctors and owns or leases its own facilities. UHC premiums have varied widely from a negative 4% to a 10% increase.
For the City, the 18.1% increase from UHC is mainly due to last year’s higher than normal medical claims, with inpatient admissions comprising the largest component of the cost increases. While the number of large claims above $100,000 in 2016 did not appreciably change, the number of claims above $300,000 increased from one in 2015 to six in 2016. These claims above $300,000 were attributable to six participants alone, costing the City’s plan nearly $1 million more than 2015.
Emergency room visit costs in the UHC plan continued to stay below national norms which indicates that the larger deductibles put in place by the City over the last few years have been effective. Aon also reports that while in-network utilization by employees in the UHC plan was higher, the effective network discounts are now smaller than they have been in prior years. In the Kaiser HMO plan, inpatient utilization rose significantly, but pharmacy costs dropped in part due to the drop in Hepatitis C medication pricing as well as a decrease in utilization of brand prescriptions and a substantial increase in the use of generics.
Seeking to temper medical cost pressures has been and will continue to be a priority for the City. The establishment of a self-insurance structure for the PPO plan in FY 2009; shifting from a 100% employer paid premium to a cost sharing of generally 80% / 20% split that began in FY 2007 and was completed in FY 2013; institution of significant deductibles in FY 2014 and the establishment of a consumer driven health insurance plan (i.e., a higher deductible with an employer paid savings account amount) in FY 2016, have all contributed to helping to temper the cost increase pressures of health insurance. More work remains to be done such as exploring where wellness programs should be expanded, more promotion of on-line real time medical consultations for non-emergency conditions (in lieu of a doctor’s office visit), the consideration of stop-loss insurance, and increasing the savings account contribution by the City in the consumer driven health insurance plan. These concepts, along with other ideas, will all be considered during the next few months and the coming year.
BUDGETING FOR HEALTH INSURANCE:
Annually in August, Aon uses a survey of health care trend data developed by health care vendors to assist the City in establishing health insurance premium renewals. That survey information (which showed an 8.1% to 8.4% industry trend for the plan types relevant to the City) was used by City staff in the fall to set the proposed health insurance premium rates that departments used in preparing their budget submissions.
While health insurance costs included in a proposed budget should ideally not change before the budget is adopted when the employer and employee premiums are set for the coming year, the discrepancy between the budgeted 8.1% and final 14.8% numbers in FY 2018 raises the issue of how to improve projections.
The second part of the development of the health insurance rates for FY 2018, which occurred after the end of 2016 and after the proposed budget was prepared, was the analysis by Aon of the actual City renewal data from UHC and Kaiser. In addition, since Kaiser is paid on a per capitation rate, negotiations occurred which reduced Kaiser’s requested increase from 15% to 9.5%. What did not occur until recently was the checking of UHC experience data during the fall and early winter in order to begin to capture data and increase the proposed the 8.1% early estimate. This periodic checking of the data and projection of trends will be instituted for upcoming fiscal years so that the chance of a large gap between what was budgeted and what is needed is substantially reduced.
The impact of the adjusted rates for FY 2018 is the need for $1.7 million in additional funding within the General Fund employer share cost increase projected at $1.6 million. An additional $0.1 million cost increase will be distributed to non-General Fund fee-funded programs such as storm and sanitary sewers and permitting enterprise accounts. A recommendation for funding this increase will be included in the technical expenditure for add/delete and includes the following sources:
- Police overhire non-personnel savings ($340,000): The proposed budget included $1.5 million for 17 overhire police officer positions in each of two annual recruit classes to cover attrition. The total cost included salaries and benefits for the additional officers and non-personnel costs for their uniforms and equipment. Because some non-personnel items must be purchased new for each officer (uniforms, body armor and ammunition for training) and some may be handed down through attrition (radios and firearms), the proposed budget included $204,000 baseline funding and a $369,000 set aside until the final costs could be determined. The final estimate for non-personnel is $233,000, leaving $340,000 available for other purposes.
- Contingent reserves ($100,000): The proposed budget includes $206,238 in contingent reserves set aside for City Council contingency for add/delete or FY 2018 mid-year contingencies. $100,000 is proposed to be reallocated to the health insurance leaving $106,238 for add-delete purposes.
- Vacancy savings ($555,000): Each annual operating budget assumes a vacancy savings of salaries and related benefits such as health insurance. In general, more vacancy savings occurs than is deducted from the operating budget. This gives City staff some margin for risk mitigation if less turnover occurs than normal, or to cover unexpected or unavoidable expenses. By increasing the vacancy savings by $555,000 that margin of risk mitigation is reduced but is one that City staff believe can be managed to.
- Other Post Employment Benefit (OPEB) contributions ($612,000): The proposed budget includes $8.3 million in OPEB contributions in FY 2018, which is a $2.6 million increase over the FY 2017 approved budget and contribution rate increase from 3.14% to 4.44%. Funding the remaining health insurance rate increase from OPEB contributions would result in a $2.0 million increase over FY 2017 while continuing to increase the contribution from to 4.12% rather than 4.44%.
The General Fund increase includes the cost increase for non-General Fund positions that receive all or a portion of their funding from General Fund sources such as those programs which are partially grant funded and the Libraries.
 Under a PPO plan patients can visit any provider but those providers who are “in-network” will cost the patient less to visit in regard to rates and what a PPO plan will cover than an “out-of-network” provider. Indemnity plans are similar but do not have an “in-network” and “out-of-network” distinction.