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 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 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 2020 Medical Plan Status
Overall, actual claims experience and related costs in the first ten months of the 2020 are significantly below the level projected when funding strategies for 2020 were developed. This is primarily the result of actual medical claims for our group being below the level projected as well as purchasing adequate stop-loss coverage to limit the City’s liability for each member’s claims exceeding $90,000 in a plan year. Also contributing are the accuracy of projections for administrative and related expenses, and a possible reduction in some elective surgeries due to COVID-19. Based on actual claims experience through the first 10 months of 2020, total claims are expected to be approximately $2,800,000 or approximately $400,000 below the projected amount of $3,200,000.
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 Health Insurance component of the Insurance Fund as of June 30, 2020 has a balance of $3,073,815 This is an increase of $476,681 above the balance at the end of fiscal year 2019. (See attachment A)
Having a financially sound Health Insurance Fund provides the City flexibility when funding insurance costs for the upcoming 2022 fiscal year, beginning July 1, 2021. Normally, a self-funded plan with little or no financial reserves should budget an amount sufficient to meet the maximum liability. In the City’s case, however, we have the ability to budget an amount somewhere between the expected claims liability and calculated maximum claims liability, knowing that we have sufficient cash reserves to cover the maximum liability should claims reach that level.
2021 Plan Analysis and Financial Impact of Proposed Plan
- The administrative fee currently charged by Blue Cross Blue Shield is $49.97 per employee per month (PEPM). They have offered a new three-year agreement through 2023. If accepted, the administrative fee will remain unchanged in 2021 and would increase by 1.7% in 2022 to $50.83 PEPM and by another 2.7% in 2023 to $52.20 PEPM.
At the current level of covered members (300) the annual cost of this service is projected to be $179,900 in 2021, $183,000 in 2022 and $188,000 in 2023. However, the actual cost will be determined by the number of covered employees throughout the year. Blue Cross also charges a separate fee of $4.00 PEPM, or approximately $14,400 annually for administration of the HRA portion of the medical plan. This fee will remain the same for 2021.
- Annually, the City requests competitive quotes for stop loss reinsurance to ensure we continue to receive the most competitive rates available for this important coverage which limits the City’s maximum liability for medical claims incurred by plan members. This year only two insurance companies submitted stop-loss coverage quotes, including HM, our current stop-loss carrier and BlueRe, the stop-loss division of Blue Cross Blue Shield. The Board of Commissioners will consider a separate resolution during the November 9, 2020 meeting recommending acceptance of the proposal to remain with HM Insurance Company for stop loss insurance in 2021.
This recommendation will be for the same level of coverage as currently provided by HM and includes an increase in cost of approximately 44.3%. Please see supporting memorandum to Resolution 2020-116 for a detailed explanation of stop-loss insurance recommendations for 2021.
The Blue Cross third-party administrative proposal and the HM reinsurance proposal for calendar year 2021 combine to provide the following maximum liability calculation:
| |
2021 |
2020 |
Difference |
| Annual Specific Stop Loss Premium |
$520,719 |
$353,870 |
$ 166,849 |
| Annual Aggregate Stop Loss Premium |
$ 14,904 |
$ 15,624 |
$ (720) |
| Total Annual Administrative Fees (including HRA fee) |
$194,300 |
$194,300 |
$ |
| Aggregate Stop Loss Attachment Point |
$3,845,030 |
$4,008,645 |
$($163,615) |
| Maximum Liability ** |
$4,574,944 |
$4,571,719 |
$ 2,514 |
** 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 2020 (year to date) HRA claims and prior history, staff is estimating that 2021 HRA expense will be approximately $400,000.
While the above table shows the City’s maximum liability only increasing $2,514 in 2021, it should be noted that $166,849 is an increase in “fixed expense.” The actuarial calculation of maximum claims is provided by the reinsurance company’s underwriters and generally shows that they expect actual claims expense (variable expense) for our group to decrease compared to 2020 levels. The increase in fixed expenses appears to be almost completely offset by the projected reduction in variable expenses. While we would prefer to have a reduction in fixed expenses and assume reasonable risks of a possible increase in variable expenses, any additional claims and other related costs will be absorbed by Health Insurance Fund reserves.
Accordingly, staff is currently projecting no increase in the City’s health insurance budget for FY 2022, beginning July 1, 2021, except for costs associated with any new positions approved as part of the budget. This will be the third consecutive year that the City’s per employee insurance costs will remain at the same level as budgeted in FY 2019.
Staff is also recommending that the City continue to pay 100% of the employee coverage costs and that employees' share of the insurance costs for dependent coverage remain unchanged again in 2021. These amounts will be at the same level as originally established in 2018 as follows:
| Coverage |
2021 Per Pay Period |
2020 Per Pay Period |
Difference |
| Employee Only |
$0.00 |
$0.00 |
$0.00 |
| Employee/Spouse |
$151.84 |
$151.84 |
$0.00 |
| Employee/Child |
$143.06 |
$143.06 |
$0.00 |
| Family |
$234.67 |
$234.67 |
$0.00 |
|