title
ACCEPT THE ANNUAL ACTUARIAL REPORT ON THE CITY’S SELF-FUNDED MEDICAL PLANS AND ADOPT BY MOTION THE RECOMMENDATIONS OF THE SEGAL COMPANY FOR PREMIUM RATES FOR 2015/2016
recommended action
RECOMMENDATION
It is recommended that the City Council accept the annual Actuarial report for the City’s self-funded medical, dental, and vision plans for the period ending June 30, 2014, as presented in the Segal Company report dated March 26, 2015, and adopt by motion the recommended monthly premium rates for the City’s current self-funded health plans and the fully-insured Kaiser medical plan for fiscal year 2015-2016 (effective July 1, 2015) for medical coverage offered to City employees and retirees (Attachment A).
body
Summary
The City of Stockton currently operates a self-funded medical plan and self-funded dental and vision benefit plans. As such, the City is financially responsible for all claims and administrative costs of these plans. The City functions in the same role as an insurance company setting rates, paying claims, and holding reserves necessary to pay all obligations of the health plans. If the self-funded medical plan expenditures exceed what is projected and there are insufficient reserves to pay claims, the City’s General Fund is obligated to cover any shortfalls. The City purchases stop loss coverage to limit some of this exposure. The City also purchases a fully-insured medical plan through Kaiser Permanente, and a second dental plan option that is fully-insured through Delta Dental.
In the Actuarial report dated March 26, 2015, the City’s Benefits Consultant and Actuary, the Segal Company, provided a comprehensive review of the financial status of the current health benefit plans being offered to City employees and retirees. The report included cost projections for the remainder of Fiscal Year 2014-2015 and Fiscal Year 2015-2016 and recommendations for premium rates to ensure that the self-funded health plan is adequately funded for Fiscal Year 2015-2016. The report reviews the medical plan experience through December 31, 2014.
Rates for the self-funded medical plan are increasing. Segal has provided two rate options for City staff to consider: 1) Rates that continue to reflect a 10% claims fluctuation margin. This option would dictate an approximate 19% medical premium increase; 2) Rates that do not include the 10% claims fluctuation margin, which would dictate just under a 10% medical premium increase. City staff recommends not including the claims fluctuation margin and reflect a medical rate increase slightly under 10%. This recommendation will be discussed in more detail later in the report. The Kaiser medical premium rates are also increasing. All tier levels are increasing by 10.6%.
The self-funded dental rates are decreasing by -9.4% and the self-funded vision rates are decreasing by -5.3% which is directly attributable to favorable plan experience. The fully-insured dental premiums remain unchanged. These rates and percent changes are shown on page 8, Table 1B of the Actuary Report.
DISCUSSION
Background
The City has had a self-funded medical plan since May 1, 1988. The City also contracted for a fully insured medical plan through Kaiser Permanente effective September 1, 2011. The City is self-funded for the vision plan and one dental plan, and fully insured on a second dental plan option.
Each year, the City hires an independent actuary to perform an evaluation to determine the financial position (funding, expenditures, and liabilities) of the self-funded health benefit plans. Key elements of this actuarial evaluation include recommended funding and premium rates to maintain plan benefits. This funding provides for claim payments, administrative expenses, purchase of excess insurance and adequate claims reserves.
Under the Pendency Plan and subsequent Memorandum of Understandings (MOU), which became effective July 1, 2012, the City eliminated all contribution towards retiree medical effective June 30, 2013. However, effective July 1, 2013, eligible retirees were still provided the opportunity to continue their enrollment on the self-funded plan by paying the full premium cost. Retiree participation has decreased significantly since City contributions toward retiree premiums were eliminated. Since 2006, the City has rated active employees separately from retirees. The actuary also identified which plan costs are attributable to the actives and which are incurred by retirees.
The actuary’s responsibility is to calculate the costs of claims, identify medical trends, account for the necessary funding to pay the Plan’s obligations, maintain adequate Plan reserves according to industry and accounting standards, and to assure appropriate funds are allocated to pay premiums for the fully-insured plans. The issue of how the premium cost sharing is determined between the City and the individual employees is not set nor recommended by the actuary. The method of cost sharing with active employees is set by the collective bargaining process and memorialized in the MOU between the City and employee bargaining organizations that represent the employees.
Further, the actuary does not determine the Plan design or benefits provided to its members other than changes that are mandated under the Patient Protection and Affordable Care Act (ACA) or other federal or state legislation. Other benefit changes are set by collective bargaining and by the City’s Plan documents. The actuary does take the plan design into account when preparing the cost analysis, and all plan design changes and requirements and fees under the Affordable Care Act (ACA) are reflected in the subject report.
From 2005 through 2010, the City set its funding of medical premiums at less than actuarially recommended levels due to City’s economic circumstances. This resulted in the depletion of the existing Internal Service Fund (ISF) fund reserves until 2009, when the Internal Service Fund (ISF) for the medical plan had a negative fund balance and paid claims exceeded revenues by over $2 million. To avoid this scenario, it is essential to carry out the reserving methodology recommended by the actuary.
The annual Actuarial report is submitted to the Human Resources Department who then works with the Budget office and City Manager’s office for review, comment, and submission to Council for final approval.
Present Situation
The City has two self-funded medical plans for its active and retired employees: The Original Plan and the Modified Plan.
The “Original” plan was the City’s first self-funded plan. It is a closed plan, meaning it has not been a healthcare option to active employees or new retirees since the Modified plan went into effect on January 1, 1993 (enrollment in the Original plan as of February 2015 was only two, Medicare-eligible retirees).
The City’s predominant self-funded plan is the “Modified” plan, which is offered to both active and retired employees (enrollment as of February 2015 was 350 actives/retirees). The City’s Kaiser Plan for active employees has the majority enrollment (February 2015 enrollment was 792), making the current enrollment ratio 30% / 70% respectively.
Enrollment demographics in these plans have changed significantly during the last four years due to migration to the less expensive Kaiser group plan and employees enrolling in alternative health plans, such as a spouse’s employer plan. Currently, there are 175 employees who have opted out of the City’s medical plans completely, an increase from 133 last year. Most of these employees, however, have enrolled themselves and their family members in the City-sponsored dental and vision plans.
During fiscal year 2014-2015, active employee enrollment in the self-funded plan dropped from 476 to 350 while the Kaiser plan enrollment increased from 711 to 792. Currently there are only 37 retirees on the self-funded plans. These retirees pay the entire premium, as the City no longer contributes to retiree medical costs. As Kaiser does not provide group coverage to participants without an employer contribution, there are no retirees on a City-sponsored Kaiser plan.
Claim experience from January 1, 2012 through December 31, 2014, was used to develop the premium rates for this coming fiscal year. Active plan premium increases are mainly due to increases in claims cost. Medical and prescription drug costs increased by 37% from 2012-2013 to 2013-2014, and have increased by another 18% through December 2014. Additionally, “adverse selection” continues to erode enrollment numbers, meaning the healthier population migrates to a lower cost plan (currently Kaiser), and the higher cost participants remain on the plan with richer benefits and less restrictions (self-funded plan).
The self-funded plan currently has an out-of-pocket maximum of $5,000/single and $10,000/family and includes deductibles, co-pays, and co-insurance as required by the Affordable Care Act (ACA). The 2015-2016 increases take into consideration the impact of adding a new drug out-of-pocket maximum of $1,600/single and $3,200/family to ensure that out-of-pocket expenses remain under the ACA limit of $6,600 single/$13,200 family.
All of the above, along with the phasing out of certain federal subsidies, and the introduction of new fees and taxes required under the ACA are factored into the actuarial recommendation for rates for next fiscal year.
Staff and the City’s health plan consultant anticipate that adverse selection will continue to impact the self-funded plan for several reasons: 1) Staff anticipates continued migration from the self-funded plan to the lower cost Kaiser plan; 2) Due to healthcare reform requirements, the City will be offering the Kaiser plan as an option to part-time employees, however at full premium cost. This may result in further imbalance between the two plans.
As a matter of information, in 2013, staff and labor representatives conducted a Request for Proposal (RFP) seeking alternative fully-insured indemnity plans to replace the self-funded plan. The hope was by moving benefits to a fully-insured model, it would transfer the risk of claims fluctuation from the General Fund to the insuring entity. This RFP process concluded in February of 2014 and no viable proposals were received. Therefore, the City continues the self-funded plan and will establish premium rates for another year. City staff, with the help of its healthcare consultant, continue to search for other health plan alternatives.
Rate Recommendations
Staff reviewed the two Monthly Premium Rate tables provided by the actuary, and recommend adopting rates for the self-funded plan without the claims fluctuation margin. During the last several years, the City has adopted rates which include reserves for: Incurred But Not Reported (IBNR) claims costs, Claims Fluctuation, and Economic Changes, based on our actuary’s recommendation. These reserves have created a stable and well-funded reserve account, enabling staff to recommend the lower cost medical rate. This would be a 9%+ increase for the self-funded medical plan. A more detailed discussion of the reserve account is below in the financial summary.
Listed in the following table is a summary of the recommended monthly premium rates for 2015-2016. Overall rate increases, which include dental and vision, are increasing from 7.6% to 8.5% depending on plan choice and tier selection:
|
|
Modified Medical Plan |
Original Plan** |
Kaiser Medical |
|
Rate Tier |
Active* |
Retiree Under 65 |
Retiree Over 65 |
Retiree Under 65 |
Retiree Over 65 |
Active* |
|
Employee only |
$778.43 |
$1,953.91 |
$571.04 |
N/A |
$1,102.30 |
$635.58 |
|
Employee +1 |
$1,413.04 |
$3,517.67 |
$1,027.91 |
N/A |
$1,984.18 |
$1,155.27 |
|
Employee +Family |
$1,885.25 |
$4,681.87 |
$1,370.07 |
N/A |
$2,645.10 |
$1,536.63 |
|
Percent change from prior year |
Emp only 7.9% Emp +1 7.7% Emp + Family 7.6% |
Ret only 27.5% Ret + 1 27.5% Ret+Family 27.4% |
All Tiers 3.7% |
N/A |
All Tiers 20.5% |
Emp only 8.5% Emp +1 8.3% Emp + Family 8.4% |
* Active rates include dental and vision benefits.
** The Original Plan is a closed plan, covering only Medicare eligible retirees.
Segal based their active and retiree rates on actual claims experience and administrative expenses for the last two years, plus anticipated revenue. The retiree rates were also based on a blend of claims for the Original and Modified plans, segregated by under and over age 65.
As shown above, the Modified Plan rates are increasing as follows: Active employee rates for medical, dental, and vision for the Modified Plan are increasing approximately 8%. Retirees under age 65 premium rates are increasing approximately 27%, and Retirees over age 65 are increasing by 3.7% for all tiers. For Retirees on the original plan (only two), rates are increasing by 20.5% for all tiers.
Kaiser rates, plus dental and vision, for 2015/16 are increasing approximately 8% due to trend and ACA fees. These rates also reflect the City’s internal costs for eligibility administration.
The self-funded Modified plan rate increases for the Retirees Under 65 and Original plan rates for Retirees Over 65 are significant due to high medical and prescription claims costs. Both plans have extremely low enrollment, and those remaining on the plans are higher cost plan participants. The reduction in revenue from the decline in enrollment was greater than the reduction in claims costs. The projected rates incorporate an anticipated continued deterioration in the enrollment and even higher adverse selection by the retirees to the self-funded plan.
Retirees under age 65 (or non-Medicare eligible retirees) have plan options now available to them through the state of California. The federally mandated ACA included a requirement that states either set up their own marketplace for people to buy health insurance or have one set up by the federal government. California chose to set up its own marketplace, Covered California. These marketplaces offer one-stop shops where individuals can compare health insurance plans and buy the plan that works best for them. The City will continue to keep information about Covered California on our website and at Human Resources as an informational source for healthcare alternatives.
As of the date this staff report was written, the City will have four different Employer Contribution caps effective July 1, 2015. These rates are determined through the collective bargaining process:
Mid-Management/Supervisory Unit (B&C) and Unrepresented
Employee Only: $ 543
Employee + One: $ 988
Employee + Family: $1,313
Fire and Fire Management
Employee Only: $ 532
Employee + One: $ 969
Employee + Family: $1,287
Stockton City Employees’ Association (SCEA), Operation &
Maintenance (O&M), Trades & Maintenance (T&M), Water Supervisory
Unit, and Stockton Police Management Association (SPMA)
Employee Only: $ 522
Employee + One: $ 950
Employee + Family: $1,262
Stockton Police Officers’ Association (SPOA)
Employee Only: $ 481
Employee + One: $ 875
Employee + Family: $1,165
Based upon the above-noted employer contribution caps, the following tables list the total premium costs, the employer and employee contribution rates, and the dollar rate change by bargaining unit for the 2015/2016 fiscal year. All rates noted include dental and vision coverage. Bargaining unit representatives were provided the proposed rates and the actuarial report on April 1, 2014.
B&C and Unrepresented
Modified Medical Plan
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$778.43 |
$543.00 |
$235.43 |
$45.75 |
|
Employee + One |
$1,413.04 |
$988.00 |
$425.04 |
$81.76 |
|
Employee + Family |
$1,885.25 |
$1,313.00 |
$572.25 |
$106.94 |
Kaiser High Deductible Medical Plan
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$635.58 |
$543.00 |
$92.58 |
$38.97 |
|
Employee + One |
$1,155.27 |
$988.00 |
$167.27 |
$69.83 |
|
Employee + Family |
$1,536.63 |
$1,313.00 |
$223.63 |
$92.83 |
Fire and Fire Management
Modified Medical Plan
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$778.43 |
$532.00 |
$246.43 |
$56.75 |
|
Employee + One |
$1,413.04 |
$969.00 |
$444.04 |
$100.76 |
|
Employee + Family |
$1,885.25 |
$1,287.00 |
$598.25 |
$132.94 |
Kaiser High Deductible Medical Plan
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$635.58 |
$532.00 |
$103.58 |
$49.97 |
|
Employee + One |
$1,155.27 |
$969.00 |
$186.27 |
$88.83 |
|
Employee + Family |
$1,536.63 |
$1,287.00 |
$249.63 |
$118.83 |
SCEA, SPMA, O&M, T&M, and Water Supervisory Units
Modified Medical Plan
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$778.43 |
$522.00 |
$256.43 |
$56.75 |
|
Employee + One |
$1,413.04 |
$950.00 |
$463.04 |
$100.76 |
|
Employee + Family |
$1,885.25 |
$1,262.00 |
$623.25 |
$132.94 |
Kaiser High Deductible Medical Plan
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$635.58 |
$522.00 |
$113.58 |
$49.97 |
|
Employee + One |
$1,155.27 |
$950.00 |
$205.27 |
$88.83 |
|
Employee + Family |
$1,536.63 |
$1,262.00 |
$274.63 |
$118.83 |
SPOA
Modified Medical Plan Including Dental and Vision
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$778.43 |
$481.00 |
$297.43 |
$56.75 |
|
Employee + One |
$1,413.04 |
$875.00 |
$538.04 |
$100.76 |
|
Employee + Family |
$1,885.25 |
$1,165.00 |
$720.25 |
$132.94 |
Kaiser High Deductible Medical Plan
|
Active Monthly Premium Rates (FY 2015/2016) |
Total Cost |
Employer Contribution |
Employee Contribution |
Employee Cost Increase |
|
Employee Only |
$635.58 |
$481.00 |
$154.58 |
$49.97 |
|
Employee + One |
$1,155.27 |
$875.00 |
$280.27 |
$88.83 |
|
Employee + Family |
$1,536.63 |
$1,165.00 |
$371.63 |
$118.83 |
Employees in the O&M, T&M and Water Supervisory bargaining units also have access to health plans through the Operating Engineers union (OE3). The premium costs associated with the OE3 plans are not included in this report. However the employer contribution costs for the employees that choose these plans are budgeted and funded through the Health Internal Service Fund (ISF). The OE3 plan rates are established and set by the Board of Trustees of the Operating Engineers’ Public Employee Health and Welfare Trust Fund. Currently, there are 60 employees on the OE3 plans. This enrollment number has stayed consistent since last year. City staff has calculated the administrative cost for assisting in administering OE3 plans to be $26.98 per employee per month (or $19,426), which is noted in the “Key Findings” section of the actuary report. Currently, this cost is not added to the OE3 premiums, requiring other plan participants to subsidize these costs.
For retirees, Council adopted a resolution implementing the Pendency Plan which eliminated all City contribution towards retiree medical benefits effective July 1, 2013.
Retirees can continue to enroll in the City-sponsored self-funded Modified Medical plan, if on a Kaiser plan, convert to an individual plan upon retiring, or apply for and enroll in a federally subsidized plan from the California Healthcare Exchange. City Modified Plan enrollment will require the retiree to pay 100% of the premium contribution. The City reserves the right to discontinue inclusion of retirees in the City-sponsored Modified Medical plan at any time.
Staff has reviewed the Actuary report and concurs with its findings. Staff recommends that the City Council accept the Segal Company annual Actuarial study and implement its premium rates without the 10% claims margin for the 2015-2016 fiscal year.
FINANCIAL SUMMARY
The fund balance in the Health Insurance ISF (Fund 552) as of June 30, 2014, was $(115,018,579) per page 150 of the Comprehensive Annual Financial Report (CAFR), including a $123.7 million liability for the City’s Other Postemployment Benefits (OPEB) obligation to retirees. With the elimination of City retiree medical contributions, this OPEB liability will be eliminated following the implementation of the bankruptcy plan of adjustment. Excluding the OPEB liability, the fund balance would be $8,638,945 after funding the estimated necessary reserve of $1,354,100 for Incurred But Not Reported (IBNR) claims. The IBNR reflects claims that occurred prior to the close of the fiscal year, but are not processed until after July 1. On a cash basis, these expenses will occur in FY 2014-15.
The June 30, 2014, balance of $8.6 million reflects a continued improvement in the health fund’s reserve status. As of June 30, 2011, the health fund showed a $3.5 million fund balance deficit after accounting for required IBNR reserves. Year-end for June 30, 2012 had a $1.4 million fund balance deficit, and year-end June 30, 2013 had a fund balance of over $4.9 million. The improved fiscal health of the fund, for the first time in several years, is due to the City properly managing the plan, setting the rates as recommended in the actuary report, and through proper fiscal management. Please note the high-level financial summary of the healthcare fund on the following page:
|
Health Internal Service Fund (Excluding OPEB Liability) |
2010-11 Actual |
|
2011-2012 Actual |
|
2012-2013 Actual |
2013-2014 Actual |
|
Beginning available balance (before IBNR) |
($1,830,000) |
|
$540,000 |
|
$2,634,000 |
$7,120,000 |
|
Revenues |
$40,413,000 |
|
$37,569,000 |
|
$27,586,000 |
$22,062,000 |
|
Expenditures |
($38,043,000) |
|
($35,475,000) |
|
($23,101,000) |
($19,189,000) |
|
Balance Before IBNR |
$540,000 |
|
$2,634,000 |
|
$7,120,000 |
$9,993,000 |
|
IBNR |
($4,079,000) |
|
($4,084,000) |
|
($2,164,000) |
($1,354,000) |
|
Ending available balance |
($3,539,000) |
|
($1,449,000) |
|
$4,956,000 |
$8,639,000 |
Since the fund balance achieved the recommended industry standard claims fluctuation reserve, a claims margin of 10% for active rates does not have to be added to the 2015-2016 premium rates. Including a margin in the rates is the mechanism by which fluctuation reserves are funded. At June 30, 2014, the Health Internal Service Fund has a sufficient balance to fund the recommended claims fluctuation reserve of $2,327,400, and the Economic Reserve of $4,327,400 (see page 36 of the Actuary Report).
To ensure that the City charges rates that reflect the true cost of health care expenses for employees and retirees, staff is submitting the Actuarial report and proposed premium rates for Council approval. Implementation of health plan premium rates that accurately reflect the cost of medical, dental, and vision benefits are critical in the City’s effort to correctly budget and finance the cost of the health plan coverage provided and charge fair and appropriate rates to employees and retirees. The projected premium rates will be reflected in the proposed 2015-2016 Health Internal Service Fund budget.
Attachment A - Final Actuary Report as of June 30, 2014