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ACCEPT THE 2018 ANNUAL HEALTH BENEFITS REPORT AND ADOPT THE MONTHLY PREMIUM RATES FOR THE CITY’S HEALTH PLANS FOR FISCAL YEAR 2018-2019
recommended action
RECOMMENDATION
It is recommended that the City Council approve a motion to:
1. Accept the 2018 Annual Health Benefits Report for the City’s medical, dental, and vision plans; and
2. Approve the recommended monthly premium rates for the City’s health plans for Fiscal Year (FY) 2018-2019.
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Summary
The annual Health Benefits Report (Attachment A) dated March 12, 2018, prepared by AJ Gallagher & Company (Gallagher), 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 2018-19, reviews the medical plan experience through December 31, 2017, and calculates the premium rates for the plan year.
Medical and dental premium rates for all active employees have increased from last year. Premium rates have decreased for the vision plan. The annual Health Benefits Report includes the cost projections for the remainder of FY 2017-18 and recommendations for premium rates to ensure that the health plans are adequately funded for FY 2018-19. The employer contribution rates are increasing by 2% based on the current bargaining unit memoranda of understanding, which were previously approved by the City Council for contracts effective from July 1, 2016 through June 30, 2019. Staff requests the City Council approve the health plans premium rates effective July 1, 2018.
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 decisions, the Affordable Care Act (ACA), and the general change of the benefits marketplace in the Stockton area.
Since May 1988, the City maintains a self-insured medical plan. A fully-insured Kaiser Deductible Health Maintenance Organization plan (Kaiser DHMO) was added in September 2011. Subsequently, in July 2016, the City added two additional Health Maintenance Organization (HMO) plans with Kaiser (Kaiser HMO) and Sutter Medical Group (Sutter Health Plus HMO). The City also has a self-insured dental plan through Delta Dental and a self-insured basic vision and buy-up vision plan through Vision Service Plan (VSP). In addition, the City also offers a fully-insured Dental HMO through Delta Dental.
City employees who are benefit-eligible can choose among four medical plans, two dental plans, a basic or buy-up vision plan. Employees who are members of the Operating Engineer’s Local 3 (OE3) can choose to enroll in the City’s plans or they can select a plan from the seven additional plans offered through their union.
Under the self-insured plan, 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 these plans. If the costs for the self-insured plans exceed what is projected, and there are insufficient reserves to pay the 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 the selected health plan.
Gallagher, the City’s benefit consultant and actuary, prepared the annual Health Benefits Report for the fiscal year ending 2018, which includes an actuarial evaluation of the City’s self-insured benefit plans. The actuarial portion of the report evaluates the financial position (funding, expenditures, and liabilities) of the self-insured health benefit plans. Further, it examines key areas such as claim payments, administrative expenses, stop loss, and claim reserves, and calculates the cost 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-insured plans. The Health Benefit Report also includes the monthly premiums for the fully-insured plans, taking into account all administrative obligations 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 cost sharing 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. Gallagher considers the plan design, plan requirements, and applicable ACA fees as part of its cost analysis when developing the Health Benefit 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-insured 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 2017-18 decreased by 22.2% since last year. The City reserves the right to discontinue inclusion of retirees in the City-sponsored self-insured PPO plan at any time.
Present Situation
Self-insured plan
The City has two self-insured medical plans for active and retired employees. These self-insured PPO plans are administered by Anthem Blue Cross and are referred to as the Original and Modified plans. As outlined below, the Original plan has only one plan participant (a retired employee). This is a closed plan, meaning it is unavailable to any additional members, either active or retired. The Modified plan, is offered to both active and eligible retired employees. This plan, effective since January 1993, has approximately 179 plan participants.
Total enrollment for the self-insured plans is:
|
Plan |
Enrollment as of 12/31/2017 |
|
Modified (active) |
164 |
|
Modified (retired) |
14 |
|
Original (retired) |
1 |
|
Total Enrollment in self-insured plans |
179 |
Fully-insured plan
The City offers three fully-insured medical plans:
1. Kaiser Deductible Health Maintenance Organization (Kaiser DHMO)
2. Kaiser Health Maintenance Organization (Kaiser HMO)
3. Sutter Health Plan Plus (Sutter HMO)
Total enrollment for the fully-insured plan is:
|
Plan |
Enrollment as of 12/31/2017 |
|
Kaiser DHMO |
412 |
|
Kaiser HMO |
305 |
|
Sutter HMO |
392 |
|
Total Enrollment in fully-insured plans |
1,109 |
Enrollment continues to decline in the City’s self-insured plans as more employees select one of the HMO plans. Some employees have access to other health plans, such as through a spouse’s group health insurance. However, these employees have the option to enroll in the City’s dental and vision plans.
Employer Contribution
During the collective bargaining process, the City Council agreed to a 2% increase in the monthly employer contribution for FY 2018-19. The current FY 2017-18 and FY 2018-19 monthly contribution are:
|
Description |
City Contribution FY 2017-18 |
City Contribution FY 2018-19 |
|
Employee only |
$631 |
$644 |
|
Employee + one |
$1,146 |
$1,169 |
|
Employee + family |
$1,526 |
$1,557 |
Health Plan Premiums
The renewal rates and the projected plan expenses were calculated using the most recent 36 months (January 1, 2015 through December 31, 2017) of available claims experience for active employee enrollment. The monthly health insurance premiums for active employees include the medical premium and the City’s administrative fees.
The medical insurance premiums had a modest increase in rates. The Kaiser DHMO and Kaiser HMO plans increased by 2.9% and the Sutter Health Plus plan increased by 7.2%. The rates for the dental plan increased by 4.8%, while the rates for the basic vision plan (basic and buy-up) decreased by 12.1%
The following table shows the monthly health insurance premiums for FY 2018-19:
|
|
Anthem PPO |
Kaiser DHMO |
Kaiser HMO |
Sutter HMO |
Dental |
Vision |
Vision Buy-up |
|
Employee Only |
$761.24 |
$646.32 |
$756.78 |
$733.50 |
$50.78 |
$5.98 |
$8.98 |
|
Employee + one |
$1,370.28 |
$1,163.36 |
$1,362.32 |
$1,321.10 |
$101.56 |
$11.96 |
$16.96 |
|
Employee + family |
$1,827.34 |
$1,551.12 |
$1,816.24 |
$1,762.24 |
$132.02 |
$15.54 |
$22.54 |
As noted earlier, the City has discontinued any contribution toward retiree health premiums. Retirees who remain on the City’s self-insured plan, pay the full cost of the premiums. As enrollment declines in the retiree plans, the monthly premium rates have increased. The rates for the self-funded Modified PPO plan increased by 3.5%. Currently, there are 15 participants in the retiree PPO plans. The insurance premiums for FY 2018-19 are:
|
|
Modified PPO Retiree Under 65 |
Modified PPO Retiree Over 65 |
Original PPO Retiree Over 65 |
|
Retiree Only |
$2,338.54 |
$830.97 |
$1,554.09 |
|
Retiree + One |
$4,209.43 |
$1,495.79 |
$2,797.41 |
|
Retiree + Family |
$5,612.88 |
$1,994.68 |
$3,730.20 |
On March 12, 2018, a meeting was held with representatives from the bargaining units. During the meeting, Gallagher reviewed the Health Benefits Report, the plan rates, and the employer and employee contributions.
The monthly rates and how they compare to last fiscal year are shown below:
PPO Plan (Active PPO, Dental, and Vision)
|
|
FY 2017-18 Health Premium |
FY 2018-19 Health Premium |
FY 2018-19 Employer Contribution |
FY 2018-19 Employee Contribution |
Increase from FY 2017-18 monthly |
|
Employee Only |
$789.30 |
$818.00 |
$644.00 |
$174.00 |
$15.70 |
|
Employee + one |
$1,431.83 |
$1,483.80 |
$1,169.00 |
$314.80 |
$28.97 |
|
Employee + family |
$1,905.70 |
$1,974.90 |
$1,557.00 |
$417.90 |
$38.20 |
Kaiser DHMO Plan (Active DHMO, Dental, and Vision)
|
|
FY 2017-18 Health Premium |
FY 2018-19 Health Premium |
FY 2018-19 Employer Contribution |
FY 2018-19 Employee Contribution |
Increase from FY 2017-18 monthly |
|
Employee Only |
$683.11 |
$703.08 |
$644.00 |
$59.08 |
$6.97 |
|
Employee + one |
$1,240.65 |
$1,276.88 |
$1,169.00 |
$107.88 |
$13.23 |
|
Employee + family |
$1,650.49 |
$1,698.68 |
$1,557.00 |
$141.68 |
$17.19 |
Kaiser HMO Plan (Active HMO, Dental, and Vision)
|
|
FY 2017-18 Health Premium |
FY 2018-19 Health Premium |
FY 2018-19 Employer Contribution |
FY 2018-19 Employee Contribution |
Increase from FY 2017-18 monthly |
|
Employee Only |
$790.57 |
$813.54 |
$644.00 |
$169.54 |
$9.97 |
|
Employee + one |
$1,434.07 |
$1,475.84 |
$1,169.00 |
$306.84 |
$18.77 |
|
Employee + family |
$1,908.38 |
$1,963.80 |
$1,557.00 |
$406.80 |
$24.42 |
Sutter HMO Plan (Active HMO, Dental, and Vision)
|
|
FY 2017-18 Health Premium |
FY 2018-19 Health Premium |
FY 2018-19 Employer Contribution |
FY 2018-19 Employee Contribution |
Increase from FY 2017-18 monthly |
|
Employee Only |
$739.38 |
$790.26 |
$644.00 |
$146.26 |
$37.88 |
|
Employee + one |
$1,342.73 |
$1,434.62 |
$1,169.00 |
$265.62 |
$68.89 |
|
Employee + family |
$1,787.41 |
$1,909.80 |
$1,557.00 |
$352.80 |
$91.39 |
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 the 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 seven other OE3 medical plans. The OE3 plan rates area established and set by the Board of Trustees of the Operating Engineers’ Public and Miscellaneous Health and Welfare Trust Fund. The employer contribution costs are budgeted and funded through the Health Internal Service Fund (ISF). Currently, there are 40 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-insured 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 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 Fund ISF (Fund 552) as of June 30, 2017, was $13.9 million after funding the estimated necessary reserve of $404,000 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 2017-18.
The June 30, 2018 projected balance is sufficient to fund the recommended reserves for the fiscal year ending June 30, 2019. The same reserve factor guidelines have been used by Gallagher to project the FY 2018-19 reserves of $1.4 million for the self-insured plan Claims Fluctuation Reserve (CFR) and combined the Economic Reserves of $10.2 million for the self-insured plan and fully-insured plans. 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. The FY 2018-19 rates for the Modified PPO Plan include a margin of 10%.
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 2018-19 Health Internal Service Fund budget.
Attachment A - City of Stockton 2018 Health Benefits Report