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ACCEPT THE ANNUAL HEALTH BENEFITS REPORT AND ADOPT THE MONTHLY PREMIUM RATES FOR THE CITY’S HEALTH PLANS FOR FISCAL YEAR 2017/2018
recommended action
RECOMMENDATION
It is recommended that the City Council approve a motion to:
1. Accept the annual Health Benefits Report for the City’s medical, dental, and vision plans for the period ending June 30, 2017, and
2. Approve the recommended monthly premium rates for the City’s health plans for Fiscal Year (FY) 2017-18.
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Summary
The annual Health Benefits Report (Attachment A) dated March 15, 2017, prepared by the Segal Company (Segal), provides a comprehensive review of the current health benefit plans that are offered to City employees and retirees. In addition, the report provides cost projections for FY 2017-18, reviews the medical plan experience through December 31, 2016, and calculates the premium rates for the plan year.
Medical and dental premium rates for all active employees have slightly decreased from last year. Premium rates are increasing for the vision plan and for retirees on the self-funded medical plans. The annual Health Benefits Report includes the cost projections for the remainder of FY 2016-17 and recommendations for premium rates to ensure that the health plans are adequately funded for FY 2017-18. It is important to note that the FY 2017-18 employer contribution rates are increasing by 2% based on the current bargaining unit memoranda of understanding as previously approved by Council for contracts effective from July 1, 2016 through June 30, 2019. Council is being asked to approve the premium rates for each of the City’s health plans effective July 1, 2017.
DISCUSSION
Background
The City of Stockton (City) has undergone significant benefit design and delivery changes to its health plans over the last several years due to strategic and financial policy decisions, the Affordable Care Act (ACA), and the general change of the benefits marketplace in the Stockton area.
The City has maintained a self-funded medical plan since May 1, 1988, and has contracted for a fully-insured medical Deductible Health Maintenance Organization plan with Kaiser Permanente (Kaiser DHMO) since September 1, 2011. More recently, in July 2016, the City added two additional Health Maintenance Organization (HMO) plans; one through Kaiser Permanente (Kaiser HMO) and another through Sutter Medical Group (Sutter Health Plus). The City also self-funds a vision plan through Vision Service Plan (VSP) and a dental plan provided by Delta Dental, and provides an alternative fully-insured dental plan option (Dental HMO) through Delta Dental. Therefore, all eligible City employees have a total of four (4) medical plan options, a vision plan, and two (2) dental plan options. In addition to these plans, members of the Operating Engineer’s Local 3 (OE3) also have six (6) additional medical plans offered through their union.
With respect to the self-funded plans, the City is financially responsible for all claims and administrative costs. The City functions in the same role as an insurance company by setting rates, collecting premiums, paying claims, and establishing reserves necessary to pay all incurred obligations under of these plans. If the costs for the self-funded plans exceed what is projected and there are insufficient reserves to pay claims, the City’s General Fund is obligated to cover the shortfalls. To mitigate exposure, the City purchases stop-loss insurance. In contrast, under the City’s fully-insured plans the insurance carrier collects the premiums and pays the health care claims. In addition to paying a share of premium costs, employees are responsible for paying any deductible amounts or co-payments required for covered services under their selected health plan.
Segal, as the City’s independent benefits consultant and actuary, prepared the annual Health Benefits Report for the fiscal year ending 2017, which includes an actuarial evaluation of the City’s self-funded benefit plans. This actuarial portion of the report evaluates the financial position (funding, expenditures, and liabilities) of the self-funded health benefit plans. Further, it examines key areas such as claim payments, administrative expenses, stop loss, and claim reserves, and calculates the costs of claims, identifies medical trends, accounts for the necessary funding to pay the plans’ obligations, maintains adequate reserves per industry and accounting standards, and assures appropriate funds are allocated to pay premiums for the self-funded plans. Finally, the Health Benefits Report includes the monthly premiums for the fully-insured plans, taking all administrative obligations into account necessary to support and provide these benefits.
Premium cost sharing is determined by the City and its employees through collective bargaining as approved by Council. The actuary does not set or make any recommendations. Cost sharing with active employees is set by the collective bargaining process and memorialized in the memoranda of understanding between the City and the bargaining units. Further, the actuary does not determine the types or design of employee benefits. The types and design of employee benefits are determined by legal requirements, such as the ACA, and through the applicable collective bargaining process. Segal’s report does take the plan design into account when preparing the cost analysis, and all plan design changes, plan requirements, and fees under the ACA are reflected in the Health Benefits Report.
On June 30, 2013, the City eliminated all city-provided contributions toward retiree medical premiums. Eligible retirees were permitted to continue enrollment in the City’s self-funded Preferred Provider Organization (PPO) plan effective July 1, 2013, by paying the full premium cost. With the elimination of City contributions toward premiums, retiree participation continues to decrease. The retiree enrollment in the PPO plan for 2016-17 decreased by 33% from 2015-16. The City reserves the right to discontinue inclusion of retirees in the City-sponsored self-funded PPO plan at any time.
Present Situation
Self-Funded Plan
The City has two self-funded medical plans for active and retired employees. These self-funded plans are Preferred Provider Organization (PPO) plans administered by Anthem Blue Cross and are referred to as the (1) Original, and (2) Modified plans. As outlined below, the Original self-funded medical plan only has one plan participant (a retired employee) and is a closed plan; meaning unavailable to any additional members either active or retired. The Modified self-funded medical plan, which is still offered to both active and eligible retired employees, went into effect on January 1, 1993 and has approximately 205 plan participants. Total enrollment for both self-funded plans are as follows:
|
Plan |
December 2016 Enrollment |
|
Modified (Active) |
183 |
|
Modified Under 65 (Retired) |
2 |
|
Modified Over 65 (Retired) |
20 |
|
Original Over 65 (Retired) |
1 |
|
Total Enrollment in Self-Funded Plan |
206 |
Fully-Insured Plans
For active employees, the City offers three fully-insured medical plans: (1) Kaiser Deductible Health Maintenance Organization (Kaiser DHMO) plan, (2) Kaiser Health Maintenance Organization (Kaiser HMO), and (3) Sutter Health Plus (Sutter HMO). Total enrollment for the fully-insured plans are:
|
Plan |
December 2016 Enrollment |
|
Kaiser (DHMO) |
525 |
|
Kaiser (HMO) |
175 |
|
Sutter Health Plus HMO |
285 |
|
Total Enrollment in Fully-Insured Plans |
985 |
With the addition of the Kaiser and Sutter plans, enrollment continues to decline in the City’s self-funded plans. Currently, there are 181 employees who have opted out of the City’s medical plans. However, these employees still have the option to enroll in the City’s dental and vision plan.
Employer Contribution (All bargaining groups) FY 2017-18
During the recent collective bargaining process, the City agreed to a 2% increase in the monthly employer contribution for FY 2017-18. The new monthly City contribution rates for active employees are as follows:
|
Description |
FY 2017-18 Monthly City Contribution Amount |
|
Employee Only |
$631 |
|
Employee + One |
$1,146 |
|
Employee + Family |
$1,526 |
Health Plan Premiums
The health plan premium renewal rates and the projected plan expenses were calculated using the most recent 36 months of available claims experience, from January 1, 2014, through December 31, 2016, for active employee enrollment. With the addition of the Kaiser and Sutter plans, enrollment continues to decline in the City’s self-funded plans.
The following table shows the proposed monthly health insurance premiums for all active employees for FY 2017-18. These premiums include medical plan rates and the City’s administrative fees. Of note, the medical insurance premiums listed below had a modest decrease in rates. The rates for the self-funded Modified PPO plan declined by -6.0%, while the rates for the Kaiser DHMO and Kaiser HMO plans declined by -0.6% and -0.5%, respectively, and the Sutter Health Plus plan declined by -0.1%. The rates for the dental plan declined by -3.3%, while the rates for the basic vision plan increased by 8.8% and the enhanced vision plan (vision buy up) increased by 5.9% to 6.3%.
|
Active Employee Proposed Monthly Health Insurance Premiums FY 2017-18 |
|
|
Modified PPO Medical |
Kaiser DHMO |
Kaiser HMO |
Sutter Health Plus HMO |
Dental |
Vision |
Vision Buy Up |
|
Employee Only |
$734.04 |
$627.85 |
$735.31 |
$684.12 |
$48.46 |
$6.80 |
$9.80 |
|
Employee + One |
$1,321.32 |
$1,130.14 |
$1,323.56 |
$1,232.22 |
$96.91 |
$13.60 |
$18.60 |
|
Employee + Family |
$1,762.05 |
$1,506.84 |
$1,764.73 |
$1,643.76 |
$125.98 |
$17.67 |
$24.67 |
Further, the following table shows the proposed monthly medical insurance premiums for those retirees remaining on the City’s self-funded plans and paying the full cost of the premiums under either the Original PPO (closed plan) or the Modified PPO plan. As enrollment declines in the retiree plan, the monthly premium rates have increased. The premium rates for the retiree under 65 increased by 2.9%, while the premium rates for the retiree over 65 increased by 11.7%, and the retiree over 65 on the Original PPO plan increased by 8.2%. The table below illustrates the proposed monthly medical insurance premiums for FY 2017-18:
|
Retiree Proposed Monthly Medical Insurance Premium - FY 2017-18 |
|
|
Modified PPO Retiree Under 65 |
Modified PPO Retiree Over 65 |
Original PPO Retiree Over 65 |
|
Retiree Only |
$2,254.99 |
$801.28 |
$1,498.57 |
|
Retiree + One |
$4,059.04 |
$1,442.35 |
$2,697.47 |
|
Retiree + Family |
$5,412.35 |
$1,923.42 |
$3,596.93 |
On March 30, 2017, staff and Segal consultants met with representatives from the all bargaining units to review the Health Benefits Report including the plan rates, and employer and employee contributions. The premiums presented in the report and how they compare to last fiscal year are as follows:
Modified PPO Medical Rates FY 2017-18*
|
|
Premium |
Employer Contribution |
Employee Contribution |
Employee Cost Decrease from FY 2016-17 |
|
Employee Only |
$789.30 |
$631.00 |
$158.30 |
-$59.62 |
|
Employee + One |
$1,431.83 |
$1,146.00 |
$285.83 |
-$108.13 |
|
Employee + Family |
$1,905.70 |
$1,526.00 |
$379.70 |
-$146.36 |
Kaiser DHMO Plan Medical Rates FY 2017-18*
|
|
Premium |
Employer Contribution |
Employee Contribution |
Employee Cost Decrease from FY 2016-17 |
|
Employee Only |
$683.11 |
$631.00 |
$52.11 |
-$16.69 |
|
Employee + One |
$1,240.65 |
$1,146.00 |
$94.65 |
-$30.63 |
|
Employee + Family |
$1,650.49 |
$1,526.00 |
$124.49 |
-$41.47 |
Kaiser HMO Plan Medical Rates FY 2017-18*
|
|
Premium |
Employer Contribution |
Employee Contribution |
Employee Cost Decrease from FY 2016-17 |
|
Employee Only |
$790.57 |
$631.00 |
$159.57 |
-$17.09 |
|
Employee + One |
$1,434.07 |
$1,146.00 |
$288.07 |
-$31.36 |
|
Employee + Family |
$1,908.38 |
$1,526.00 |
$382.38 |
-$42.43 |
Sutter Health Plus Plan Medical Rates FY 2017-18*
|
|
Premium |
Employer Contribution |
Employee Contribution |
Employee Cost Decrease from FY 2016-17 |
|
Employee Only |
$739.38 |
$631.00 |
$108.38 |
-$14.15 |
|
Employee + One |
$1,342.73 |
$1,146.00 |
$196.73 |
-$26.02 |
|
Employee + Family |
$1,787.41 |
$1,526.00 |
$261.41 |
-$35.25 |
*The rates include medical, dental and basic vision
Operating Engineers’ Local 3 (OE3) Health Plan Options
Employees in the Operating Engineers’ Local 3 (OE3) bargaining groups including the Operations and Maintenance Unit (O&M), Trades and Maintenance Unit (T&M), and Water Supervisory Unit have additional health plan options available through the Operating Engineers’ Public and Miscellaneous Health and Welfare Trust Fund. In addition to the above-referenced City health plans, employees in these units may also choose from six other OE3 medical plans. The OE3 plan rates are established and set by the Board of Trustees of the Operating Engineers’ Public Employee Health and Welfare Trust Fund. The employer contribution costs are budgeted and funded through the Health Internal Service Fund (ISF). Currently, there are 114 employees who participate in an OE3 plan. The administrative cost to manage each OE3 plan is $27.55 per employee per month. This fee is paid by the employees that select these plans.
FINANCIAL SUMMARY
Historically, high costs in the self-funded plan created a burden on the City’s General Fund due to a lack of reserves. In 2011, the health fund had a $3.5 million fund balance deficit with no reserves for claims fluctuation or economic impacts. The fund’s fiscal health has improved with proper administrative management of the City plan, setting rates set as recommended in the Health Benefits Report, and through proper fiscal management. In 2013, the health fund achieved a positive balance, and in 2014 the recommended reserves were fully funded for the first time.
The fund balance in the Health Insurance ISF (Fund 552) as of June 30, 2016, was $13,960,730 after funding the estimated necessary reserve of $582,600 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 2016-17.
The June 30, 2016, balance is sufficient to fund the recommended reserves for the fiscal year ending June 30, 2017. The same reserve factor guidelines have been used by Segal to project the FY 2017-18 reserves of $1,808,000 for the self-funded plan Claims Fluctuation Reserve (CFR) and the combined Economic Reserves of $8,310,600 for the self-funded plan and fully-insured plans (see page 25 of the Health Benefits Actuary Report). A healthy reserve balance reduces the financial impact from high claims costs or excess enrollment shifts.
Including a margin in the rates is the mechanism by which fluctuation reserves are funded. Since the recommended industry standard CFR has been met, a claims margin of 10% for active rates does not have to be added to the 2017-18 premium rates.
To ensure that the City charges rates that reflect the true cost of health care expenses for employees and retirees, staff is submitting the Health Benefits 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 to the City’s efforts to maintain fiscal sustainability. The premium rates are used to determine the appropriate funding levels for the health plans and establish fair and appropriate rates to charge employees and retirees. The projected premium rates will be reflected in the proposed FY 2017-18 Health Internal Service Fund budget.
Attachment A - City of Stockton Health Benefits Report - Fiscal Year Ending 2017 prepared by Segal Consulting