Memorandum
City of Lawrence
Human Resources
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TO: |
Tom Markus, City Manager Diane Stoddard, Assistant City Manager |
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FROM: |
Lori Carnahan, Human Resources Manager Michelle Spreer, Benefits Specialist |
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CC: |
Casey Toomey, Assistant City Manager Bryan Kidney, Finance Director |
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DATE: |
May 13, 2016 |
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RE: |
2017 Employee Healthcare Plan Budget Memo |
Annually the Human Resources benefits staff meets with the Healthcare Committee (HCC) and Hays Companies, our benefits consultants, to discuss plan design and funding of the healthcare plan which includes city and employee/retiree contributions.
As part of this process, we utilize Hays’ Health Plan Intelligence (HPI) data to review City of Lawrence Healthcare Plan trends. We benchmark our trends against other plans in Hays’ book of business, nationally and within the Heartland region, which includes primarily self-funded employers with at least 300 employees in Kansas, Missouri, Iowa and Nebraska.
The City’s 2015 total healthcare plan expenses (which include claims, all administrative costs and stop loss premiums) finished under budget but still increased approximately 10.5%* over 2014. According to Hays’ HPI data, the City’s total plan expenses were 12.7% below the heartland norm for 2015.
While the City’s 2015 healthcare claims costs, on a Per Employee Per Year (PEPY) basis, increased approximately 1.5% over 2014 (according to Hays’ HPI data), the overall claims costs increased 8.7%*. The number of employees enrolling in the plan continues to go up each year.
Over the past 5 years (2011 – 2015), the city’s overall healthcare claims costs have averaged a 5%* increase while the national claims costs have average 4% growth each year as reported in the Mercer Annual Health Plan Survey.
Based on these discussions, staff recommendations for 2017 are outlined below.
Executive Summary
· Staff recommends a 12% ($979,000) increase in city funding to $9,138,000.
· Staff recommends an overall 12% increase in total employee contributions (this includes a combination of premiums and plan design changes).
· Staff recommends increasing deductibles to $1,500 individual/ $3,000 family with the out of pocket maximum increasing to $3,300 individual/ $6,600 family (includes deductible).
· Retiree contributions and COBRA rates will be set once stop loss rates are finalized this fall.
· No plan coverage changes.
· The plan must comply with Patient Protection and Affordable Care Act (PPACA) regulations in 2016 which include additional fees to be paid directly to Health and Human Services (HHS) and/or the IRS totaling approximately $61,600.
Revenues vs. Expenses
From 2010 – 2012 total plan revenues (which include city and employee/retiree contributions) exceeded expenses as shown in Attachment A – Revenues vs. Expenses 2010 - 2015. In 2013 the plan was nearly balanced. As of 2014, the reverse is occurring and expenses are now exceeding revenues.
Human Resources staff did not request additional city funding from 2012 – 2014 due to budget constraints and tough economic times. The plan was able to withstand this because we had a large reserve fund balance at the time.
Fund Balance and Minimum Fund Balance
Maintaining Minimum Fund Balance at 20% of projected plan cost for two years out allows the City to smooth out increases to city funding as well as employee contributions. Having a healthy fund balance allows funding of current and future incentives related to wellness programs.
The fund balance also funds the cost of catastrophic claims, the amount determined by our stop loss contract each year. In 2017 it will be set at 120%; no change from 2016. The 120% represents the amount of claims the city is responsible for paying over the projected costs before stop loss insurance begins paying claims.
Total claims (active and retiree) continue to come in under projected but overall expenses continue to increase year over year. As illustrated in Attachment B – Internal Financial Summary, the city was able to add to the fund balance 2010 – 2012. However, we have spent from the reserve balance over the past 3 years. We expect to spend from the fund in 2016 as well as 2017; even with a request for 12% increase in overall funding for 2017.
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Year |
Fund Balance +/- |
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2010 |
+$570,790 |
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2011 |
+$1,066,962 |
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2012 |
+$813,250 |
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2013 |
-$85,328 |
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2014 |
-$325,267 |
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2015 |
-$910,379 |
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2016 |
Projected -$1.7M |
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2017 |
Projected -$1.0M |
Healthcare Plan Design
Hays introduced staff and the healthcare committee to the term Member Burden in 2010. Member burden is described as the employees’ cost share when factoring in both contributions and their share of medical expenses, such as deductibles and co-insurance.
We have monitored member burden over the past several years which has ranged from 24 to 29%, with 2015 ending at approximately 27.4%. The 2017 recommended plan design would take our member burden to approximately 30.4%.
Below is a look at the City’s healthcare plan member burden as compared to our market cities and the Mercer Survey for governmental plans for year-end 2015.
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City Of Lawrence |
Overland Park |
Lenexa |
Shawnee |
Olathe |
Mercer Government |
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27.4% |
34.2% |
26.8% |
25.6% |
34.6% |
31.6% |
We will continue to monitor this number as we recommend changes to the healthcare plan in future years as well.
Attachment C – Plan Design Options illustrates 3 plan design alternatives for 2017.
· Option 1 – No changes – Current plan design and funding with projected 2017 costs.
o Would require extreme funding increases and/or drastic plan design changes in future years.
o Would drop our fund balance below the minimum required by end of 2017.
· Option 2 – Recommended – This includes:
o No plan coverage changes
o Increase in deductible from $1,200 individual $2,400 family to $1,500 / $3,000 respectively and increase Out of Pocket Maximums from $2,400 individual / $4,800 family to $3,300/$6,600 respectively (total impact to employees is approximately $500,000 in claims)
o Increase of 6% to total employee contributions (impact to employees is $122,000)
o Increase of 12% to city funding (total impact to city is $979,000)
· Option 3 – this option illustrates a Health Savings Account (H S A) Plan (with no funding from the city directly to employees’ H S A’s) and is balanced with revenues matching expenses. It includes a 12% increase in city funding but the impact to employees is an extreme increase in out of pocket costs.
The Health Reimbursement Account (HRA) with Cigna allows the City to establish a maximum amount of money employees may carry over from their HRA into the next year before new money is awarded. Staff recommends setting the maximum rollover at $1,900 through 12/31/2017.
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The Healthcare Committee Ongoing Goals and Objectives, Attachment D states that revenues will be split at 65/35 between the city and employees toward the cost of dependent coverage. Due to our plan performing so well for several years and the city’s budget not allowing for increased funding, staff requested very little additional funding from employees or the city. Because of this, the split had been out of balance as our overall expenses continue to increase.
Staff recommends increases to employee per pay period contributions as follows.
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If the 2017 plan design and funding requests are approved, the split between employee and city funding for dependent coverage will be as follows:
· Employee/Spouse – 74% City/26% employee
· Employee/Child – 71% City/29% employee
· Family – 76% City/24% employee
Attachment E – Plan Funding Modeling projects future trend, to include claims, administrative expenses and stop loss insurance. It is recommended to have “Fund Balance EOY” equal to or greater than “Recommended Minimum Fund Balance” for at least one year beyond the year for which the budget is being prepared; 12/31/2018.
This chart is an illustration of what would happen to our Fund Balance if no changes were made in plan design or funding (revenues from city/employees) beyond 2017. As you can see by the end of 2018, the fund balance falls below the minimum balance required.
Plan growth assumptions are at the bottom of the chart. With incremental increases in funding (both city and employee) and plan design changes, it is projected our “Fund Balance EOY” 2017 will still be above minimum fund balance.
These projections are done early in the year (April) for the following year. With only a few months of claims data, the projections are typically conservative. The 2017 projections will be updated this fall once Hays has received stop loss quotes and more claims data for 2016. They will be updated again in March of 2017 while preparing for the 2018 plan year. This is the cycle that is followed each year.
Patient Protection & Affordable Care Act – PPACA – In accordance with PPACA regulations the healthcare plan was required to pay new fees beginning July 1, 2013. Staff will work closely with Hays and Cigna to ensure all fees are calculated correctly and paid on time to HHS and/or IRS. The fees are included in the cost projections.
· Patient Centered Outcomes fee (aka Comparative Effectiveness Research Fee)
o Funds research that evaluates and compares health outcomes, clinical effectiveness, risks and benefits of medical treatment and services.
o Annual fee on insured and self-insured plans from 2013 to 2019
o $2.17 per covered life on the plan for the 2015 plan year, due in July 2016 (approximately $4,600).
o Fee is adjusted each year to reflect inflation in National Health Expenditures, as determined by the Secretary of Health and Human Services.
· Reinsurance Assessment Fee
o Funding to lessen impact of high-risk individuals entering the individual market.
o $27 per covered life on the plan for the 2016 plan year (approximately $57,000), due in December 2016.
o 2016 is the last year of this fee.
· Eligibility rules
o Variable hour employees (part-time, temporary) eligible if average 30 hours/week
o Staff will test hours on a 12 month look back (October – September) each year
o Part time temporary hours are managed to stay below 30 hours/week on a 12 month average. All part time regular employees are currently eligible for the healthcare plan.
CHAMP Wellness
A top “Policy” initiative for 2016/17 is to develop a plan that will move the City of Lawrence to a tobacco free campus. An “Environment” related project is to complete the transition of workplace vending machines to 50% healthy food choices at a competitive price.
The wellness program continues to enhance the onsite programming which includes:
· Community Supported Agriculture (CSA) – working with local farmers to have fresh fruits and vegetables delivered once a week for a period of time – program currently in its third year;
· Walk Kansas and other community events;
· Parks & Recreation discounts;
· Purchasing Fitbits through payroll deduction;
· Physical environmental changes such as standing work stations, improved break areas and stairs.
The WellCare Clinic, housed at Lawrence Memorial Hospital, is currently in its 5th program year providing annual biometric screenings, health assessments, wellness advisor visits, flu shots and minor acute care to our employees. At the completion of program year 4 on September 30, 2015 the clinic utilization was at 59%. Of those visits 45% were wellness related with the remaining 55% acute care.
Embedded in the clinic is an incentive program that allows employees to earn money to be placed in their HRA at Cigna to help pay for future out of pocket healthcare costs. There is up to $400 annually that employees can earn per program year by remaining tobacco free, achieving healthy outcomes for some biometrics and engaging in healthy activities ranging from annual physicals to community health events to educational activities.
The CHAMP Wellness budget is currently $330,100 and is built into the City’s Healthcare
Plan Attachment F.
· WellCare Clinic (includes biometrics, flu shots and all clinic services)-$185,360
· Onsite programming, policy and environment initiatives -$144,740
Those who have participated all four years (cohort group) in the biometric and Personal Health Assessment at the WellCare Clinic have experience the following with regard to their clinical risk factors which include blood pressure, glucose level, high body weight, elevated triglycerides, elevated LDL cholesterol and low HDL cholesterol:
· Drop of 2% in number of participants with high levels of Hemoglobin (HbA1c).
· A 14% decrease in number of participants with high blood pressure.
· 7% fewer participants with 2 or more clinical risk factors.
· Increase of 8% in the number of participants with zero clinical risk factors.
Other Post-Employment Benefits (OPEB) Obligations under GASB 45
In 2004 the Governmental Accounting Standards Board (GASB) released Statement 45 (GASB 45) which issued a new set of accounting rules concerning health and other non-pension benefits for retired public employees. These benefits, also referred to as “other post-employment benefits” (OPEB), include non-pension benefits such as life insurance, dental coverage and long-term care, as well as retiree health benefits. GASB 45 encourages public sector employers to set aside funds for OPEB benefits, instead of a “pay as you go” funding method. Employers are encouraged to fully fund OPEB benefits in order to show a more favorable financial statement.
The intent of GASB 45 was to bring governmental accounting standards more in line with public sector pension accounting standards. GASB 45 requires that an actuarial valuation be conducted every two years to determine the OPEB liability and expense. The Annual Required Contribution (“ARC”) component of the expense does not change during the interim years. Fiscal year 2015 was a full valuation year Attachment G Fiscal Year 2016 will be an interim year.
The City’s net OPEB obligation as of December 31, 2015 was $5,881,000. The 2015 Annual Required Contribution was $1,524,000. If the Net OPEB Obligation had been fully funded as December 31, 2014, a contribution equal to the 2015 ARC would fully fund the liability as of December 31, 2015. The city allocated $1,000,000 in 2014, $1,040,000 in 2015 and 2016 to the retiree fund. It is recommended that the City allocate $1,165,000 to the retiree fund for the 2017 plan year. Contributions from retirees in the form of monthly premiums in 2015 were $438,738.
Beginning with the 2013 budget, Hays divided out the retiree revenues and expenses from the active employees, also shown in Attachment E. This will allow the City to better track the liabilities under OPEB and assist us in determining where the fund balance for OPEB should be set.
As shown in Attachment E, the retiree fund balance at the beginning of 2016 (based on projected 2015 revenues and expenses) will be approximately $1,421,000. Projected retiree expenses for 2017 are $1,382,000 and projected revenues (from both retiree premiums and city funding) are $1,638,000. This will allow the city to add to the retiree fund balance helping to meet the OPEB obligations.
Transfers to Healthcare Plan
Each year staff calculates the breakdown of city funding to the healthcare plan for each department to assist them in developing their budgets. Beginning in 2013 staff began allocating and tracking retiree healthcare expenses separately from active employees. With this change the projected actual retiree expense for healthcare has been allocated to each fund based on where the retiree worked while employed. See Attachment H – Transfers to Fund Health Plan 2017.
Current funding plus an additional 12% translates into $9,358 per authorized position, and $23,771 per retiree. These per person amounts reflect total projected plan expenses.
Requested Action:
Approve 12% increase in healthcare plan budget for total city funding of $9,138,000 as outlined in Attachment G – Transfers to Fund Health Plan 2017.