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. $85,000).
- Aggregate Stop Loss Coverage – Similar to the specific stop loss coverage for individual members’ 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 compared to a fully-insured plan, 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 2019 Medical Plan Status
Actual claims experience and related costs in the first ten months of the 2019 is at approximately the level projected when funding strategies for 2019 were developed. This is a result of 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 $85,000 in a plan year. Based on actual claims experience through the first ten months of 2019, total claims are expected to be approximately $2,900,000 as projected. Of this amount approximately $300,000 will be paid from the separate Post Retirement Benefits Fund for retiree medical claims and will not impact the Insurance Fund.
Status of Health Insurance Fund
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 FY 2019 Health Insurance component of the Insurance Fund as of June 30, 2019 has a balance of $3,213,140. This is an increase of $338,400 above the 2018 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 2021 fiscal year, beginning July 1, 2020. 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.
2020 Plan Analysis and Financial Impact of Proposed Plan
- The current administrative fee charged by Blue Cross Blue Shield is $49.97 PEPM and will remain the same for the 2020 plan year.
At the current level of covered members (294), the annual cost of this service is projected to be $176,300 for 2020. 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 $14,100 annually for administration of the HRA portion of the medical plan. This fee will also remain the same for 2020.
- 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 seven 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 11, 2019 meeting recommending acceptance of the proposal with HM Insurance Company for stop loss insurance in 2020.
This recommendation will be for the same level of coverage as currently provided by BlueRe and will actually include a slight fixed cost reduction of just under 2% in 2020 as compared to 2019. It is also approximately 4.5% below the renewal quote from BlueRe. Please see supporting memorandum to Resolution 2019-102 for a detailed explanation of stop-loss insurance recommendations for 2020.
The Blue Cross third party administrative proposal and the HM reinsurance proposal for calendar year 2020 combine to provide the following maximum liability calculation:
| |
2020 |
2019 |
Difference |
| Annual Specific Stop Loss Premium |
$348,654 |
$364,360 |
$(15,741) |
| Annual Aggregate Stop Loss Premium |
$19,298 |
$16,723 |
$2,575 |
| Total Annual Administrative Fees (including HRA fee) |
$190,400 |
$190,400 |
$0 |
| Aggregate Stop Loss Attachment Point |
$3,948,328 |
$3,836,200 |
$112,128 |
| Maximum Liability ** |
$4,506,680 |
$4,407,474 |
$ 99,997 |
** 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 2019 (year to date) HRA claims and prior history, staff is estimating that 2020 HRA expense will remain at approximately $450,000.
While the above table shows the City’s maximum liability increasing approximately $100,000 in 2020, it should be noted that $13,166 is actually a decrease in “fixed expense”. The actuarial calculation of maximum claims is provided by reinsurance company’s underwriters and generally shows that they expect actual claims expense (variable expense) to increase only slightly compared to the 2019 level. However, the generally accepted medical inflation rate (trend) is 7%, therefore, staff is projecting that actual claims expense in 2020 will increase by $200,000. However, this additional claims expense and any reasonable costs exceeding this projection, can be absorbed within the projected revenues within the Insurance Fund or the fund balance, if necessary.
Accordingly, staff is currently projecting no increase in the City’s health insurance budget for FY 2021 beginning July 1, 2020. This will be the second consecutive year that the City’s insurance costs will remain at the same level as budgeted in FY 2019.
Staff is also recommending that employees’ share of the insurance costs for dependent coverage remain unchanged for the second consecutive year. Employee payroll deductions in 2020 will remain at the same level as in 2018 as follows:
| Coverage |
2020 Per Pay Period |
2019 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 |
|