Beginning in 2011, the City moved from a fully insured medical insurance plan to a partially self-insured plan in combination with the self-funded HRA.
The objective of this strategy is to better manage the perennial rise in health insurance costs and avoid the spikes in premiums charged by insurance companies based on limited medical claims experience. We understand that healthcare costs are projected to continue to increase in the foreseeable future and this strategy is designed to level out cost increases to manageable levels.
Basics of Partially Self-Funded Plans
In a partially self-funded plan a calculated amount of claims risk is shifted from the insurance company to the sponsor of the plan (the City) up to a predetermined maximum level. In addition, there are other costs for multiple service components in a partially self-insured plan. The following are the other key components of a partially self-insured plan.
- Third Party Administrator (TPA) – the City contracts with a TPA to coordinate and manage the majority of administrative aspects of the plan. The TPA processes and adjudicates all medical claims, coordinates a pharmacy benefit plan, performs utilization review for inpatient services, and handles many compliance issues, etc.
- Provider Network – As part of a partially self-insured plan, a provider network of physicians and hospitals is provided for members to utilize for medical services at discounted rates. The important factors when considering networks are the number of doctors/hospitals and the coverage area, as well as the discount each network can offer on medical services. The higher the discount the lower the actual claims expense paid by the City and plan participants.
- Specific Stop Loss Coverage – To limit the City’s potential liability for catastrophic claims, the plan purchases an insurance policy that covers all costs of an individual’s annual claims above a predetermined maximum dollar amount (i.e. $75,000).
- Aggregate Stop Loss Coverage – Similar to the specific stop loss coverage for individual member’s claims, aggregate stop loss is an insurance policy that caps the City’s total liability for all claims at an agreed upon dollar amount called the “attachment point”. Once total claims for the entire plan reach this attachment point, the aggregate stop loss insurance pays all additional claims costs. The attachment point is determined by the stop loss carrier’s underwriters and is based on the plan’s expected claims amount for the year plus a “corridor” or factor of 20-25%.
The financial aspects of a partially self-insured plan consist of both fixed and variable costs. The variable costs are the actual claims incurred by covered plan members (employees and eligible dependents) during the plan year. The fixed costs are as follows:
- Administrative fees paid to the TPA, charged on a Per Employee Per Month (PEPM) basis;
- Annual specific stop loss insurance premium;
- Annual aggregate stop loss premium
When analyzing partially self-insured plans from a financial perspective, it is necessary to add the fixed costs listed above to the attachment point of the aggregate stop loss coverage. This determines the City’s maximum liability for the plan year. In this partially self-insured arrangement the City has the opportunity to save money if claims expense is less than projected while capping the maximum liability if claims are higher than expected.
Calendar Year 2018 Medical Plan Status
Actual claims experience and related costs in the first ten months of the 2018 is at approximately the level projected when funding strategies for 2018 were developed. This is attributed to accurately projecting claims and related expenses coupled with purchasing adequate stop-loss coverage to limit the City’s liability for each member’s claims exceeding $75,000 in a plan year. It is also a result of making regular adjustments to both the employee’s and City’s contributions to the insurance fund, especially in years of normal claims experience in anticipation of years with higher claims experience.
Status of Health Insurance Fund
When the City changed to the fully insured, high deductible plan combined with the HRA in calendar year 2010, the City Commission approved creation of a new Health Insurance Fund. This fund is designed to account for all health and vision insurance budgeted amounts from the General Fund, Water Services Fund and ECD Fund, as well as all employee payroll deductions for dependent coverage. All insurance premiums, medical, pharmacy and HRA claims are paid from this fund. The unaudited Health Insurance component of the Insurance Fund balance as of June 30, 2018 is $2,236,455. This is an increase of $377,423 above the 2017 fiscal year end balance. (See Attachment A)
Having a financially sound Health Insurance Fund provides the City flexibility when funding insurance costs for the upcoming 2020 fiscal year, beginning July 1, 2019. Normally, a self-funded plan with little or no financial reserves would need to budget an amount sufficient to meet the maximum liability. In the City’s case, however, we have the ability to budget at an amount somewhere between the expected claims liability and calculated maximum claims liability, knowing that we have cash reserves to cover the maximum liability should claims reach that level. Based on actual claims experience through the first ten months, total claims for 2018 are expected to be $2,900,000 as projected. Of this amount approximately $400,000 will be paid from the separate Post Retirement Benefits Fund for retiree medical claims and will not impact the Insurance Fund.
2019 Plan Analysis and Financial Impact of Proposed Plan
- Beginning in 2017 the Board of Commissioners approved a three-year contract with Blue Cross Blue Shield of Tennessee for administrative services through December 31, 2019. The current administrative fee is $48.99 PEPM and is scheduled to increase to $49.70 for the 2019 plan year.
At the current level of covered members (293) the annual cost of this service is projected to be $174,745 for 2019. However, the actual cost will be determined by the actual number of covered employees throughout the year. Blue Cross also charges a separate fee of $4.00 PEPM, or approximately $14,065 annually for administration of the HRA portion of the medical plan. This fee will remain unchanged for 2019.
- Annually, the City requests competitive quotes for stop loss reinsurance to ensure we continue to receive the most competitive rates available for this coverage which limits the City’s maximum liability for medical claims incurred by plan members. This year five insurance companies submitted stop-loss coverage quotes, including BlueRe, our current stop-loss carrier. The Board of Commissioners will consider a separate resolution during the November 12, 2018 meeting recommending acceptance of the proposal with BlueRe of Tennessee for stop loss insurance in 2019. This recommendation will include increasing the specific attachment point for individual member’s annual claims from $75,000 to $85,000. This change will result in a savings of over $25,000 in potential fixed cost expenses to the plan compared to the current cost of this coverage and over $50,000 compared to the renewal quote with a $75,000 specific attachment point. Please see supporting memorandum to Agenda Item 4643 for a detailed explanation of stop-loss insurance recommendations for 2019.
The Blue Cross third party administrative proposal and the BlueRe reinsurance proposal for calendar year 2019 combine to provide the following maximum liability calculation:
| |
2019 |
2018 |
Difference |
| Annual Specific Stop Loss Premium |
$354,711 |
$381,383 |
$(26,672) |
| Annual Aggregate Stop Loss Premium |
$16,665 |
$16,665 |
$0 |
| Total Annual Administrative Fees (including HRA fee) |
$188,810 |
$186,315 |
$2,495 |
| Aggregate Stop Loss Attachment Point |
$3,736,288 |
$3,835,665 |
$( 99,377) |
| Maximum Liability** |
$4,296,474 |
$4,420,028 |
$(123,554) |
** The maximum liability amount shown above does not include medical claims paid through the HRA component of the health plan and are not factored into the stop loss coverage. Based on 2018 (year to date) HRA claims and prior history, staff is conservatively estimating that 2019 HRA expense will remain at approximately $450,000.
While the above table shows a decrease in the City’s maximum liability for 2019 of $123,554 it should be noted that $24,177 is a decrease in “fixed expense”. The additional reduction in maximum claims is an actuarial calculation provided by Blue Re underwriters and generally shows that they expect actual claims expense (variable expense) trending down in 2019. Staff is projecting that actual claims expense in 2019 will remain relatively flat at approximately $2,900,000. Therefore, staff projects a decrease in overall plan expenses in 2019 to be approximately $24,000. However, if actual claims costs exceed this projected amount, the additional expense will be absorbed by Health Insurance Fund reserves.
Accordingly, staff is currently projecting no increase in the City’s health insurance budget for FY 2020 beginning July 1, 2019. Of course, this will be reevaluated during the budget preparation process in spring of 2019.
Staff is also recommending no increase in the employee’s share of the insurance costs for dependent coverage in 2019. Employee payroll deductions will remain at the same level as 2018 as follows:
| Coverage Level |
2019 Per Pay Period |
2018 Per Pay Period |
Difference |
| Employee Only |
$0.00 |
$0.00 |
$0 |
| Employee/Spouse |
$151.84 |
$151.84 |
$0 |
| Employee/Child |
$143.06 |
$143.06 |
$0 |
| Family |
$234.67 |
$234.67 |
$0 |
|