HD23 - State Employee Health Benefit Plan Feasibility Study
Executive Summary: Introduction and Background This report provides a summary of the most significant elements of the findings contained in the accompanying report titled A Study of the Feasibility of Expanding the State Employee Health Benefits Program. The study was commissioned by the General Assembly of the Commonwealth of Virginia in response to growing concern over the rapidly increasing cost and limited availability of health care coverage for a variety of public employee groups throughout the State. This summary is intended to complement the full text by highlighting the central themes expressed in that report. The specific groups identified for inclusion in this study included employees of school districts and local governments, constitutional offices, part-time employees and finally, retirees. Methodology and Findings Using survey techniques to elicit information from local government entities throughout the State, and demographic data provided by VSRS, we obtained input from 247 employers representing over 163,000 employees. In addition, personal visits were made to obtain the input of nineteen groups including towns, cities, counties and school districts, and other interested parties such as the Virginia Education Association, Virginia School. Board Association, Virginia Municipal League, Virginia Association of Counties, the Compensation Board, the Virginia Governmental Employees Association, and others, to gain a clear understanding of the prevailing attitudes of various groups. The specific comments of these groups and the detailed analysis of survey responses by type and size of the employing entity are presented in the report. The critical findings are as follows: 1. There is widespread interest in joining the State Employee Health Benefits Program or a similar consolidated program. This interest is directed to securing greater rate stability through pooling claims experience, and to reducing administrative and retention charges through economies of scale. 2. The average premiums paid by all groups with health care programs were roughly equivalent to the cost of the State Employee Health Benefits Program for similar coverage classes. Wide variations exist, however, when plan costs are analyzed by employer size and plan design. 3. Because of the diverse scope of benefit plan coverage and the wide variation in public employers' willingness and ability to pay for coverage, extensive participation as dependant upon the provision of a range of benefit plans with a corresponding range of premium rates. 4. The widespread interest in participating in some form of statewide program is generally tempered by a "wait-and-see" attitude that would allow prospective new groups to fully weight the cost and benefits of such a plan before committing to enrollment. Citing these among other factors, we have determined that sufficient interest exists to conclude that the creation of an expanded State Program or a consolidated public employee health benefits program is conditionally feasible. The conditional aspect of its feasibility will depend upon the plan design which will impact participation. Ultimately, the cost efficiency of an expanded program is directly related to the level of participation. Policy Consideration Should the General Assembly authorize expanded participation in a State Program, the range of options for the State varies from simply expanding the current program, to the creation of a full scale program designed to maximize resources allocated to health care coverage. Using the limited approach, small plans in particular would benefit by allowing them to achieve a reduction in costs currently being paid out as part of their annual administration or retention charges. This option could be expanded to any or all of the study target groups in any of a variety of combinations. If only small plans with poor experience participate, however, adequate safeguards would need to be adopted to prevent the costs of the State program from being negatively effected by rising costs of benefits and the addition of staff necessary to perform administrative functions not presently required. Alternatively, were the State to adopt a broad-based program, it should contain cost and quality controls and be designed to encourage the greatest possible participation in order to achieve the greatest long-term savings. The report provides a detailed review of policy considerations inherent in the development of such a program. Legislative issues, structural considerations (both design and administrative), alternatives for placement of administrative responsibility (ranging from an expansion of resources assigned to the Department of Personnel and Training, to potential involvement by VSRS to the creation of an entirely new agency) are among the issues explored. Financial incentives to encourage participation are also discussed. Retiree Benefits The other major focus of the report involved an actuarial analysis of the cost of retiree health care coverage. Retiree health care is one of the most serious public policy issues of our time. Medicare has been restructured recently and plan design changes have been proposed for adoption by the State program. Given the increasing interest in this topic we were asked to examine the cost of both the cash-flow or "pay-as-you-go" approach currently in use and a prefunding approach. Retiree health care costs are generally examined in two categories under age 65 and 65 and over. At present, the State pays no direct subsidy for either group. Nevertheless, retirees under age 65 benefit tremendously from the pooling of their premium rates with the entire active employee population, even though their average costs are as much as 50% greater. The value of that indirect subsidy has been determined to be approximately $2.4 million in 1989 and it will grow to $5.6 million by 1998. For retirees over age 65 we were asked to calculate the cost of providing some form of relief from increasing costs using a service based subsidy. The subsidy which was developed proposes a contribution equal to $1 per year of service per month indexed by 5% per year as a partial hedge against inflation. The annual cost of that subsidy is projected to be $4.6 million in 1989 and to rise to $8.9 million in 1998 on a pay-as-you-go basis. These estimates equal approximately 0.3% of payroll in 1989, rising slightly to 0.4% of payroll in 1998. The contrast between the costs of pay-as-you-go and a prefunding approach are clearly demonstrated by looking at the same benefit subsidy on a prefunded basis. Using a level amortization approach which provides for equal annual payments over each of the next 40 years, the cost of prefunding this benefit is equal to 0.8% of payroll in 1989, falling slightly to 0.7% of payroll in 1998, due to expected expansion of the State payroll. If an alternative amortization method is used which calls for contribution of a constant percentage of payroll over the 40 year period, the constant percentage is 0.7%. Other Items Our report concludes with a possible implementation schedule (assuming the adoption of the most ambitious approach to expanding the State program). Supplementing the report is a set of Appendices which provides detailed analysis of the material discussed throughout the report. In addition, two special sections are provided. The first offers guidance on the possible implementation of a flexible compensation program to permit payment of employee contributions on a pre-tax basis. The second attempts to set forth the requirements necessary for a consolidated plan to comply with Section 89 of the Internal Revenue Code. |
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