3a. Health Insurance
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CITY MANAGER'S OFFICE
Jason A. Gage
City Manager
300 West Ash. P.O. Box 736
Salina, Kansas 67402-0736
TELEPHONE. (785) 309-5700
FAX . (785) 820-8532
TOO . (785) 309-5747
E-MAIL. iason.qaQe@salina.orq
WEBSITE . www.salina-ks.qov
Salina
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
City Commission & Board of County Commissioners
Jason Gage, City Manag~
July 26, 2006
Health Insurance Consolidation Follow-Up
Since the last City and County Joint Coordinating Meeting in April, staff has obtained additional
information related to the question of whether or not it is feasible for the City of Salina and Saline
County to experience financial benefit by the combining of their health insurance programs. More
specifically, staff requested an objective opinion on the matter from Mr. Bob Charlesworth of
Charlesworth & Associates, L.C., Overland Park, Kansas. Mr. Charlesworth has been the City's
insurance consultant for many years. Mr. Charlesworth is considered an expert in the field due to his
knowledge and experience related to self-insurance plans, purchased insurance plans, reinsurance,
market conditions and insurance negotiations.
Attached is Mr. Charlesworth's report for your review and discussion. In his report, he summarizes
the various types of multiple plan combinations, including: a Multiple Employer Welfare Arrangement
(MEWA) plan, the MARC IT trust plan, health associations and a legal insurance consortium. Each
has its own respective limitations, including additional administrative and legal overhead. He goes on
to say that a larger group may provide for more accurate claim predictions by insurance providers, but
not necessarily claim savings. This is due primarily to claim costs and insurance pricing being very
closely associated with claim history and census data. In other words, the ability to obtain discounts
by "purchasing in bulk" doesn't necessarily apply to the insurance market.
Mr. Charlesworth's report also indicates that health insurance plan savings are more likely to occur
through mechanisms such as disease management, large case management, prescription
management or cost shifting, rather than combining multiple plans. This is due to the application of
these tools on claims management and control, which may improve an organization's claims history
and result in lower insurance renewal rates.
Finally, for the combining of plans to have any chance to succeed both entities would need to fully
agree on insurance program elements including, but not limited to: plan structure, employee
contributions, plan administration, etc. This would require significant modification by either one or
both governmental entities in order to succeed.
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Health Insurance Consolidation Follow-Up
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I hope you find this information helpful. If desired by the governing bodies, staff would be happy to
further research the topic and provide additional information as requested.
Attachment: Charlesworth & Associates Letter dated June 28, 2006
cc: Rita Deister, Saline County Administrator
Mike Schrage, Deputy City Manager
.
CHARLESWORTH & ASSOCIATES, L.C.
P.O. BOX 23588
OVERLAND PARK, KANSAS 66283
(913) 851-4730
(913) 851-1993 (fax)
www.Charlesworth.net
June 28, 2006
Ms. Deb Demel
Assistant City Manager
City of Salina, Kansas
Re: Group Health Benefits
Consolidation of City/County Benefit Program
Dear Deb:
Pursuant to our discussion, it was requested that we offer an objective opinion as to the
possibility of combining the City and County group health benefit programs. While we
have no specific information on tre County's benefit program, the following observations
and opinions are offered for consiieration
A) It is my understanding that Multiple Employer Welfare Arrangement
(MEWA) plans :}re not allowed void of the U.S. Department of Labor
approval. Even if a public entity as an employer is NOT specifically subject
to ERISA, the regulatory and fiduciary obligations of ERISA would apply to
MEW A plans. Many MEW A plans were sold on the basis of savings but
failed because of inadequate claims reserves. There are strict operational and
financial controls over such programs.
B) To date, Congress has NOT passed the association health programs. These are
specifically designed for smaller employers (similar to the MEW A's). If
passed, we are confident that several Federal and State legislative issues must
be followed.
C) Passed in Missouri this year, HB 1827, sponsored by Representative Jay
Wasson, of Nix a, and was designed to allow more small employers to obtain
health insurance for their employees. The bill allows small businesses to pool
together to purchase health insurance for their employees. A small business is
one with fewer than 25 employees. Several similar house bills have been
proposed in Kansas, but even then the y have been geared to "small
employers".
D) Weare aware of at least one Associational Trust program of municipalities in
Kansas right now - MARCn. Our office has actually worked for this firm in
the past and, we understand that they will have a new health benefit claims
administrator located in Great Bend, KS. Last we knew, the Kansas Insurance
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Department reviews this with great interest each year and, the entity may have
limitations on areas to pursue further membership enrollment in Kansas (only
five counties in eastern Kansas currently).
E) A health insurer issues a policy to the Employer - not multiple employers.
Void of a common employee/employer relationship (a multi- group employer
with one entity having 51 %+ ownership in all entities we have seen
acceptable), most insurers (including stop-loss insurers for partially self-
funded plans) will not insure the group.
F) "Associations" are not viewed favorably by an insurer. What happered in the
past is that a group would be formed and an insurer picked. The
"Association" essentially just sponsored the plan and had no financial risk - in
fact, many were paid a small percentage as a marketing fee. Very little, if
any, underwriting was done, so the Association took all comers. As the plan
developed, the insurer's experience was that those that could find a better deal
left the association and those that could not find a better deal - stayed. The
poor risk continued to be poor and compounded the costs and the insurer was
on the risk for good. The insurers essentially had adversely selected against
themselves.
G) We do believe it is possible to form a Consortium - which is a contractual and
financial relationship. Everyone I have seen carry risk and responsibility by
the participants.
a. The program will have an assessment feature should funds be short in
paying claims or establishing enough reserves for the future - this is
generally based on the members' contribution to the overall plan.
b. A joint & several liability provision is common, that way the Entity (the
consortium itself) only has to go after one of the members to get the funds
and then could place the responsibility of collecting from the other
member(s).
c. The overhead cost of running the Consortium wo uld include legal,
auditing, general administration, liability insurance, etc. - much more than
what a single entity may have to incur as a partially self- insured entity.
Again, it is a separate and distinct legal entity.
d. The Consortium will generally have the same expenses to incur for
running the plan as would an entity that is partially self- funded (such as
the City). i.e., third party administrator, stop loss insurer, Rx. plan
administrator, network access fees, etc.
e. The members of the Consortium generally have one vote - regardless of
the number of employee membership. What the Consortium votes
regarding plan design, administrator, etc. is what the City and/or County
must accept - each will lose their ability to control their own program
(which includes funding, reserves, providers and plan design).
H) A move from the current partially self- funded program simply does not end on
a given date if a move is made. The City (as well as the County) would still
have "run-off' claims to fund and pay for administration for those claims
"incurred" (services rendered) when the plan was in operation- typically up
to 3-months (plus up to another 8-months for some straggling claims). It is
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not uncommon to see a "new insurer" come in the first year and show a 10%
savings to the program - as they technically could fund only 10 Yz months of
claims (remember, a medical service provided on January 1 st has to be filed by
the doctors office, submitted through payment channels and ultimately paid by
the insurer or claims administrator - about 30-45 days). This "lag time" must
ultimately be accounted for in both run-off of current claims as well as the
SECOND YEAR funding potential. Reserves would have to be built over the
years as well (for claim spikes and claim liability should the Consortium
terminate) .
I) Creditability of claim information - this is a term used in the industry to give
validity to claim numbers. One of the axioms of insurance is that it is built on
the law of large numbers. Based on the numbers, an insurer has a benchmark
that suggests once a group attains a certain size; their premiums will be self-
supporting of their claims and expenses. For life insurers, this is probably
50,000+; for disability insurers we believe it to be 5,000+; for health insurers
most believe it is at 1,000 members. So, in that light, it may be possible to
"predict" claims more accurately with a combination of employers - not
necessarily "save" on claims.
1) Insofar as potential savings, it remains our opinion that if both the City and
County are partially self- insured now - one only has to look at the
COMBINED expenses and claims to see the potential cost ofthe program.
We would find it very improbable that a large "savings" could be achieved
with the combination. Most administrators charge either a percentage of paid
claims or a flat fee per employee per month. The excess insurer will generally
base their charges on the census data and incurred claims. Bottom line - we
believe that it will just be a combination of the cost - not a cost savings move
at all.
K) Since we believe the claim dollars will be the claims dollars, no insurance
program is going to "save" the plan money void of other cost controls, i.e.,
disease management, large case management, Rx management, cost shifting
of cost to members, etc. - not always popular with employees - but a
necessary step regardless if a combined group is developed or not
Deb, in my opinion, a combined program with the City & County will simply "average"
the cost between the entities. Depending on each entity's current funding (based mostly
on claims), one will win, one will lose financially and, both must agree on the same plan,
carrier, etc.
Best regards,
CHARLESWORTH & ASSOCIATES, L. C.
Bob Charlesworth, ARM, ALCM, AIS
C&A/pc
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