8-4-06 A Continuing Challenge: Managing the Cost of Health Benefits

Volume 19 For Publication Date: August 4, 2006 No. 17

A Continuing Challenge: Managing the Cost of Health Benefits

As a sign that health benefit premiums have yet to stabilize, last month the Public Employees’ Retirement System (PERS) announced that the premiums for its HMO and PPO offerings in the coming year will be increasing by 11% to 13%. More than 40% of all school agencies—both K-12 and community college—have soft caps or no caps on the agency’s contributions to health benefits, which results in a significant challenge in meeting the budgetary demands of these cost increases. Such increases can equate to an across-the-board salary increase of 1%-2%, or even more. Districts that have hard caps in place also face a challenge, albeit a different one. In those districts, employees are bearing the brunt of the cost increases, thereby increasing the pressure for the district to provide higher salaries in order to maintain the employees’ level of purchasing power. Managing the total cost of an agency’s health benefits program is critical, no matter who is paying the bulk of the cost.

So, what are districts doing to manage the costs? To reduce utilization, some are increasing copays and deductibles. To reduce administrative costs, some are turning to self-insurance, securing competitive proposals from brokers and administrators, and/or negotiating administrative fees. Some districts are alternatively joining a trust or a Joint Powers Authority to reduce administrative costs and improve purchasing power. Others are eliminating high-cost, low-usage parts of their plans, or providing them as optional employee-paid choices. At this time, though, we will focus on two possible solutions that some districts have employed to reduce costs.

Re-enrolling

Does your agency have solid controls in place to ensure that plan coverage is dropped or changed as participant eligibility changes? As employees leave the district or reduce their contracted hours, the benefits office should be notified in a timely manner so that coverage on the plan (other than COBRA) is discontinued or reduced. Dependents should be monitored so that when they reach the age threshold or a status change causes them to lose eligibility to be covered, they are removed from the active plan (and to COBRA coverage if necessary). The status of retirees and their dependents needs to be monitored as well, in case they should be removed from coverage or changed to a different type of plan.

But even districts that believed they had good controls in place have been surprised by the outcome from re-enrollment. A full re-enrollment means that everyone covered by the district’s plans—employees, retirees, and dependents—must complete the paperwork as if they are enrolling in the plans as new employees. This includes requiring documentation of dependent eligibility, such as birth certificates and marriage licenses, before enrolling them in the plans. Districts that have done this acknowledge that it is a significant administrative burden at the time, but that it was well worth it because it effectively culled out ineligible plan participants—as much as 10% of the participants in some districts. This can translate to a significant cost savings.

Because of the burden on the benefits office and on the participants, re-enrollment should not be done every year, but should be done periodically. And, if your district hasn’t done it in recent memory, consider doing it during your next open enrollment period. We liken this to a warehouse inventory—you keep records all year of the items coming into and out of the warehouse, but at the end of the year a physical inventory is taken and is compared to the inventory on the books. Think of health benefits re-enrollment as a periodic “physical inventory” of the participants on your district’s health plans.

Health Savings Accounts

As discussed in previous Update articles, health savings accounts (HSAs) are a relatively new option—a way of offering a lower cost plan and providing an additional benefit to employees at the same time. The plan is at a lower cost because an HSA is paired up with a high deductible health plan. If, for example, the high deductible health plan is set up with a $1,200 deductible, then the cost of the premiums for that plan are significantly lower because the first dollar of coverage is not provided until the $1,200 deductible is met. The savings from the lower premiums can then be deposited into the health savings account to help employees meet the deductible.

The additional benefit to employees is that the HAS functions similarly to an Individual Retirement Account (IRA), but for medical purposes only. Unused dollars in that account roll over each year and can accumulate on into retirement. If there is a significant medical expense in a given year, only the amount of that year’s deductible is what’s at risk. And, similar to an IRA, the employee owns the HSA and it is portable from employer to employer. Earnings within the HSA and withdrawals from it remain nontaxable as long as the funds are used for medical expenses.

There are requirements that must be met, such as minimum deductible amounts, maximum out-of-pocket amounts, interactions with flexible spending accounts, and more, so contact your insurance broker or administrator to develop the details to form a plan that would work for your district. A growing number of school agencies in California are implementing these plans as an option for employees to choose, while at the same time continuing to offer some of the traditional plans, since an HSA-compatible plan may not work for everyone. But those agencies that have offered these plans report significant savings in the costs of their health benefits program, and the individuals enrolled in these plans are, with few exceptions, continuing with these plans during open enrollment periods.

Conclusion

No discussion about the cost of health benefits is complete without addressing retiree benefits. More than 60% of education agencies—and the percentage for the community college segment is higher—provide district-paid health benefits for retirees to some degree. If the cost of these benefits has been recognized on a “pay-as-you-go” basis, as it has been for most agencies, then the future liability for these benefits is continuing to grow. And, for all agencies that provide any type of coverage for retirees, there will be new requirements for regular actuarial studies and for beginning to recognize the future liability, if any, on the financial statements (per Governmental Accounting Standards Board Statements No. 43 and 45). If the liability is recognized, but not funded, eventually the agency’s net assets will dwindle and may even become negative. This will make it difficult for the agency to issue debt or voter-approved measures.

The first step is to secure an actuarial study to determine the amount of the liability, and, within that, be sure to verify that the assumptions within the actuarial study are reasonable given the district’s circumstances. The amount of the liability can be funded over any period of time, and a plan for funding the liability will need to be developed. Keep in mind that the funds set aside may not be recognized technically as “funding” to offset the liability unless the funds are placed into an irrevocable trust, and there are a number of agencies that are offering services in this area. To start funding the liability sooner rather than later, look at sources of one-time funding coming into your agency as a possible set-aside to start funding your agency’s retiree health benefit liability.

—Sheila G. Vickers