Employee Health Insurance Task Force report

              STATE OF ARIZONA
DEPARTMENT OF ADMINISTRATION
EMPLOYEE HEALTH INSURANCE
TASK FORCE REPORT
OCTOBER 1988
STATE OF ARIZONA
DEPARTMENT OF ADMINISTRATION
EMPLOYEE HEALTH INSURANCE
TASK FORCE REPORT
OCTOBER 1988
TABLE OF CONTENTS
STATE OF ARIZONA
EMPLOYEE HEALTH INSURANCE TASK FORCE REPORT
TASK FORCE OVERVIEW
P a g e
T a s k Force C h a r g e . . . . . . . . . . . . . . . . . . .
M e m b e r s h i p L i s t . . . . . . . . . . . . . . . . . . . .
M e t h o d o l o g y . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE SUMMARY
Maj or C o n c l u s i o n s and R e c o m m e n d a t i o n s of
T a s k Force:
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REPORTS
. . . . . . P l a n S t r u c t u r e , F u n d i n g and A d m i n i s t r a t i o n .
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B e n e f i t D e s i g n . . . . . . . . . . . . . . . . . . . . .
TASK FORCE OVERVIEW
STATE OF ARIZONA
EMPLOYEE HEALTH INSURANCE
In August 1988, Catherine R. Eden, Director of the Department of
Administration, e s t a b l i s h e d a task force t o study h e a l t h
insurance f o r S t a t e employees.
Appointed t o t h i s task force were benefits experts from the
public and p r i v a t e s e c t o r s and r e p r e s e n t - a t i v e s from the
l e g i s l a t u r e , the r e t i r e e ' s a s s o c i a t i o n , and the American
Federat.ion of County, S t a t e and Municipal Employees. The
members were:
Cathy McGonigle, Chairperson of the Task Force
Department of Administration
Assistant Director for Personnel
The Honorable James Meredith
State Representative
House of Representatives
Tom Donovan, Manager
Health Benefits Division
Allied-Signal/Garrett Corpora tion
Airline Products Division
Dick Palmatier, Coordinator
City of Tucson
Employee Benefits Division
Phil Kundin
Deputy Personnel Director
City of Phoenix
David Parker, Manager
Health Management Programs, Staffing and
Human Resource Development
Honeywell Bull
B i l l Hernandez
Senate Staff
Peter Fears, Executive Director
APEA/AFSCME
Noelle Carlier, Manager
Human Resource Development Benefits
Salt River Project
Benefits Division
Susan Gallinger, Director
Department of Insurance
Dave Hunt
Administrator/Clerk
Cochise County
Fred Lange
Associate Director for Human Resources
Arizona Board of Regents
B i l l Cook, Vice President
State Retirees Association
Four major issues were addressed by the task force as follows:
- Plan Structure, Funding and Administration
- Employer/Employee Cost Sharing - Medical Plan and Premiums for Retirees
- Benefit Design
Four subcommittees were formed, with each subcommittee assigned
one of the major issues to address. Each subcommittee was asked
to answer a specific s e t of questions relating to the issue it
was addressing.
Insurance c a r r i e r s were i n v i t e d t o make o r a l and w r i t t e n
presentations to the e n t i r e t.ask force. In advance of the
presentation, the c a r r i e r s were provided with a complete l i s t i n g
of t h e i s s u e s and questions the task force was going to address.
Insurance c a r r i e r s making presentations were:
CIGNA
EQUICOR
Blue Cross/Blue Shield
Intergroup
Maxicare
Prudential
Metropolitan
The remainder of t h i s report is devoted t o the conclusions and
recommendations of the task force. The report is divided into an
executive summary and four sections corresponding to the four
major issues addressed by the task force. The specific questions
r e l a t i n g t o each issue are l i s t e d along with the response of the
task force.
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
MAJOR CONCLUSIONS AND RECOMMENDATIONS
OF THE
EMPLOYEE HEALTH INSURANCE TASK FORCE
I. Plan Structure, Funding and Administration
- The present plan structure is not appropriate and does not
meet the objectives of reducing and controlling costs and
providing adequate and appropriate coverage t o employees.
- Indemnity type coverage, which provides freedom of choice of
doctors, should be maintained; however, it does not
necessarily need to be maintained in its present form.
- The number of plans is adversely affecting a b i l i t y to spread
r i s k over a l a r g e enough population and is adversely
affecting premiums, especially in the indemnity plan.
- The r e s u l t s of the competitive bidding process ultimately
w i l l d i c t a t e the most cost-effective plan structure and the
best course for the State of Arizona.
- The S t a t e should s o l i c i t b i d s f o r t h r e e g e n e r a l p l a n
structures and then compare these bids to determine which
meets the S t a t e ' s objectives.
These plan structures are:
1. A single c a r r i e r that is able to provide a t r i p l e
option plan or a dual choice plan. A t r i p l e option
plan would consist of indemnity coverage, a preferred
provider option and an HMO. A dual choice plan would
consist of an indemnity plan and an HMO. The single
c a r r i e r would have to:
a. combine claims and u t i l i z a t i o n experience of the
indemnity, HMO and p r e f e r r e d provider ( a s
a p p r o p r i a t e ) p l a n s , s o t h a t r i s k is spread
appropriately; and
b. charge one premium for the e n t i r e program; and
c. permit employees t o s e l e c t indemnity, HMO or
preferred provider coverage a t any time or on a
monthly or quarterly b a s i s .
2. Multiple HMOs, each with opt-out provisions permitting
employees a t any time t o receive indemnity coverage.
3 . Stand alone indemnity plan with several HMOs, which is
t h e current plan structure.
- Of the three plan structures, the task force f e l t a single
c a r r i e r plan or a multiple HMO plan with indemnity opt-out
provisions were the two feasible options. However, it. was
d i f f i c u l t t o d e f i n i t i v e l y recommend the b e s t approach
without the benefit of bid results. I n regard to a single
c a r r i e r plan, there was much more of a preference for a dual
choice plan than a t r i p l e option plan.
- The State should not attempt to become self-insured next
f i s c a l year while the program is so unstable. The State
would be shouldering a l l of the r i s k of the indemnity plan
a t the worst possible time, that is, a t a time when the plan
is the weakest and is incurring losses. In addition, there
i s insufficient time to develop, implement and communicate a
self-insured plan.
- The State should s o l i c i t bids on both a f u l l y insured and
minimum premium plan. With a minimum premium plan, the
State would assume responsibility for funding most. benefits,
and t h e insurer assumes l i a b i l i t y for benefits above a
predetermined level.
- Self insurance should be studied further for the future.
- Utilization data should be required and obtained from HMOs.
11. Employee/Employer Cost Sharing
- The State should contribute a f l a t dollar amount toward
insurance coverage for employees and not a percentage of the
premium.
- In establishing the f l a t dollar amount, the State should
follow prevailing market practices. Large employers in
Maricopa County, as a prevailing practice, tend to pay 100%
of the premium for the single employee and up to 80% of the
premium for family coverage.
- To remain competitive with the marketplace, the State should
consider tot.al compensation including benefits.
111. Medical Plan and Premiums for Retirees
- Adequate and appropriate insurance benefits are provided t o
r e t i r e e s .
- A separate plan should not be established for State r e t i r e e s
currently participating in the plan and for newly r e t i r i n g
State employees. However, t h i s issue should be reviewed in
future years as more and more employees r e t i r e .
- A l l State r e t i r e e s , regardless of the retirement system to
which they belong, should receive the same subsidy toward
health insurance.
- Non-State r e t i r e e s from other p o l i t i c a l subdivisions and
State r e t i r e e s who waived insurance benefits upon retirement.
should not be able to p a r t i c i p a t e in t h e current plan
administered by the Department of Administration. Instead,
a separate plan with separate r a t e s should be established.
The Attorney General I s Of £ice already has provided advice
that a separate plan must be established.
IV. ~ e n e f i tD esign
- The State should consider eliminating or reducing those
b e n e f i t s where the d e d u c t i b l e does not apply and the
reimbursement is 100% of i n c u r r e d c h a r g e s ; i . e . ,
supplemen ta1 accident b e n e f i t and outpat.ient surgery.
Outpatient surgery charges should be reimbursed a t 80% or
90% rather than 100%.
- If a preferred prwider option continues as a part of the
program, b e t t e r contracts with fewer primary care physicians
should be negotiated.
- Mental, nervous and chemical dependency benefits should be
continued on a short term basis, but adding long term care
benefit riders should be explored. The S t a t e a l s o should
consider eliminating these benefits from the base plan and,
i n s t e a d , n e g o t i a t i n g a separate p r e f e r r e d provider
contract. The additional c o s t of these benefits w i l l have
to be carefully studied to determine e f f e c t on premiums.
- Mandatory second surgical opinions, for a l l but a few
surgeries, should be eliminated. With the majority of the
surgeries, the second opinion has merely upheld the f i r s t
opinion.
- The S t a t e ' s level of benefits generally is in l i n e with
other employers' level of benefits.
- The $600 maximum out-of-pocket expense to employees is too
low and should be raised t o $1,000.
- A prescription card service is not recommended.
- A longer waiting period for insurance coverage should not be
established for new employees.
REPORTS
I. Plan Structure, Funding and Administration
Objective: Determine how the S t a t e ' s health insurance plan
should be structured, administered and funded (self-funded versus
f u l l y insured) i n order t o reduce and control costs and t o
provide adequate and appropriate coverage to employees.
I.A. Is the present structure (indemnity plan and six HMO
plans) appropriate and does it meet the objective?
Response:
No. Multiple plans do not permit the S t a t e t o
consolidate r i s k s and spread risk over the e n t i r e
population. I f one plan absorbs the r i s k of a
generally older and l e s s healthy population, r i s k s
increase and premiums increase accordingly. The
premium increases drive employees to other plans since
employees tend to select insurance coverage on the
basis of out-of -pocket costs. The S t a t e ' s indemnity
plan has encountered t h i s "adverse selection" placing
its existence in jeopardy.
Further, with multiple plans, t.he State, as a major
employer, is unable to take f u l l advantage of its
purchasing power and negotiate premiums to the lowest
level.
F i n a l l y , m u l t i p l e p l a n s do not permit the most
effective administration.
I.B. Should an indemnity plan be retained i n some form?
Yes. Indemnity type coverage should be maintained;
however, it does not necessarily need to be maintained
in its same form. About 35% of the S t a t e ' s active
employees and about 90% of State r e t i r e e s currently
p a r t i c i p a t e in the indemnity plan. The indemnity plan,
unlike HMOs, provides freedom of choice of doctors,
which is important t o a l a r g e segment of the
population. Further, many employees do not l i k e an HMO
type of operation and would be unwilling to use these
s e r v i c e s a s designed. Full out-of-area medical
coverage is an important element of indemnity coverage
that is not provided by HMOs. This is especially
important to university personnel, r e t i r e e s , and other
employees who t r a v e l / r e s i d e o u t - o f - s t a t e or the
country.
I.C. If the indemnity plan should not be retained, what is
the impact on other HMOs and employees and how does the
State address these?
Response :
I.D.
As stated above, the indemnity plan should be retained
in some form, However, i f not retained, there would be
an impact on HMOs. The HMOs would have to absorb the
present indemnity population with its inherent r i s k .
Premiums f o r the HMOs probably would increase
accordingly. In a d d i t i o n , c e r t a i n HMOs may face
"adverse selection1' i f t h e i r premiums drive employees
to other HMOs. The impact on the financial a b i l i t y of
the HMOs also should be reviewed. I f an indemnity plan
was eliminated, it is possible that there are not
enough HMOs currently under contract with the State to
s e r v i c e t h e e n t i r e S t a t e population. It may be
necessary to contract with other HMOs. Employees and
r e t i r e e s in certain rural areas and out-of-state would
not have coverage a v a i l a b l e t o them i f indemnity
coverage in some form did not exist.
Finally, the State and the HMOs would have to deal with
a large segment of d i s s a t i s f i e d employees and r e t i r e e s
who are unable or unwilling to use HMO services.
Are the number of plans adversely affecting premiums,
and adversely a£ fec t i n g c a r r i e r s ' ( e s p e c i a l l y t h e
indemnity c a r r i e r ' s ) a b i l i t y to spread r i s k over a
large population?
Response :
A s indicated in I.A. above, the number of plans is
adversely affecting a b i l i t y to spread r i s k over a large
enough population and is adversely affecting premiums,
especially in the indemnity plan.
I.E. The following six questions were addressed. A combined
response t o these questions is appropriate.
Should a t r i p l e option plan be adopted?
Should a dual choice plan be adopted?
I f a t r i p l e option or dual choice plan should be
adopted, should only a single c a r r i e r provide coverage
for a l l Stat.e employees or should additional c a r r i e r s
be considered? Why?
What should be the general design of a t r i p l e option or
dual choice plan?
Should there be varying levels of an indemnity plan?
Is there some, more appropriate structure for the
S t a t e ' s health insurance plan? Identify the general
design.
Response:
Three general plan structures w i l l be discussed as
follows and w i l l be described in more d e t a i l l a t e r :
1. A single c a r r i e r , t r i p l e option or dual choice
plan with point of service, permitting employees
to select indemnity type, HMO, or PPO (preferred
provider) coverage a t any time. A variation of
t h i s structure would be to allow employees to
change coverage on a monthly or possibly quarterly
basis.
2. Multiple HMOs, each with indemnity opt-out
provisions, permitting employees a t any time t o
receive indemnity coverage.
3 . A stand-alone indemnity plan with several HMOs
(the S t a t e ' s current system).
Before proceeding further, although recommendations on
plan st.ructure are being made in t h i s report, the
r e s u l t s of the competitive bidding process ultimately
w i l l d i c t a t e the best course for the State of Arizona.
The S t a t e should s o l i c i t bids on a l l t h r e e plan
structures to enable it to compare coverage and costs
of the d i f f e r e n t structures and to determine what is
most cost effective for the State.
It also should be recognized that any major change in
p l a n s t r u c t u r e w i l l cause d i s r u p t i o n and
d i s s a t i s f a c t i o n of a certain segment of the employee
population. This w i l l be impossible to avoid i f the
State takes a major step to control its costs.
The components of the three general plan structures are
described below. Of t h e t h r e e s t r u c t u r e s , the task
force f e l t a single c a r r i e r plan or a multiple HMO plan
with indemnity opt-out provisions were the two feasible
options. However, it was d i f f i c u l t to d e f i n i t i v e l y
recommend the best approach without t h e b e n e f i t of bid
results. In regard to a single c a r r i e r plan, there was
much more of a preference for a dual choice plan than a
t r i p l e option plan.
1. TRIPLE OPTION/DUAL CHOICE PLAN WITH POINT OF SERVICE
A t r i p l e option or dual choice plan would have the
following components:
- A single c a r r i e r would provide service to the State
of Arizona.
- The single c a r r i e r must be able to provide coverage
through an indemnity plan, an HMO, and a preferred
provider option ( i f a t r i p l e option plan is selected),
I f a dual choice plan is selected, a single c a r r i e r
must be able to provide indemnity coverage and HMO
coverage.
- Experience from a l l parts of the program must be
combined, and only one premium charged accordingly for
the program. ~ombinng experience of the indemnity,
HMO and PPO plans w i l l enable the c a r r i e r t o spread its
r i s k a p p r o p r i a t e l y , and c o s t s should be b e t t e r
controlled.
- There must be strong u t i l i z a t i o n review of and
financial reporting from a l l portions of the program.
It should be a point of service plan p e r m i t t i n g
employees t o select indemnity, HMO or PPO coverage a t
any time. This provision eliminates the need for an
annual open enrollment. A variation of t h i s structure
would be to allow employees to change coverage on a
monthly or possibly quarterly b a s i s .
-General plan design:
It generally is recognized t h a t c o s t s are managed best
in an HMO environment; therefore, the intent of a
t r i p l e option or dual choice plan is to encourage
employees to use an HMO network in order t o control
costs. An indemnity plan is made available to those
employees who r e a l l y want t o use it, however, a t
a d d i t i o n a l c o s t t o the employees i n the form of
deduc t i b l e s and co-insurance since an indemnity plan is
the more costly program. Accordingly, the following
general plan design is recommended for the indemnity
plan.
Annual deductible $200 per person and $400 per family
(non-PPO and PPO) . Presently: No deductibles for PPO
and $150 per person and $300 per family for non-PPO.
Co-insurance for off ice v i s i t s , lab charges, hospital
and doctor charges, etc.
a. Triwle Owtion Plan
90% paid by insurance c a r r i e r and 10% by employee
i f a preferred provider is used and 80% paid by
insurance c a r r i e r i f a preferred provider is not
used. This is present b e n e f i t l e v e l ,
b. Dual Choice Plan
80% paid by insurance c a r r i e r and 20% by
employee. This is present benefit level.
The S t a t e may wish t o s o l i c i t bids a t a lower
co-insurance level to determine impact on premiums.
Out-of-pocket c o s t s t o employees $ 1 , 0 0 0 plus
deductibles, and $3,000 for families. Presently $600
and $1,800, respectively.
MULTIPLE HMOs WITH INDEMNITY OPT-OUT PROVISIONS
This plan structure would provide for a number of HMOs
to provide insurance coverage to State employees and
would require each HMO t o offer an indemnity opt-out
provision. That is, employees would be able to opt a t
any time to go outside the HMO network and receive
indemnity coverage. Again, since costs are managed
best in an HMO environment, the intent is t o encourage
employees to use the HMO network.
With t h i s plan structure, it is mandatory that the HMOs
contracting with the State provide the same indemnity
type provisions. The indemnity plan design should be
the same as l i s t e d above for a t r i p l e option or dual
choice plan.
3. STAND-ALO-NE INDEMNITY PLAN WITH SEVERAL HMOs
The S t a t e ' s c u r r e n t plan s t r u c t u r e c o n s i s t s of a
stand-alone indemnity plan with several HMOs. This is
not a recommended option in that premium costs are
expected to be much higher with t h i s type of structure.
However, the State should s o l i c i t bids again t h i s year
for a stand-alone indemnity plan and several HMOs t o
determine i f t h i s would be a feasible option.
Varying l e v e l s of an indemnit.~ plan a r e not
recommended. This complicates benefit administration
and communication. In addition, t h i s encourages more
usage of an indemnity plan, which is more costly than
usage of HMOs.
I.F. Should the State become self-insured or maintain a
f u l l y insured health insurance plan? Identify the
advantages and disadvantages of each approach and
substan t i a t e how the advantages of recommended approach
outweigh disadvantages.
The State should not attempt to become self -insured
next f i s c a l year while the program is so unstable. The
State would be shouldering a11 of the risk of the
indemnity plan a t the worst possible time. That is, it
would be the risk bearer a t the time when the indemnity
I . G .
plan is a t it.s weakest and is incurring losses. In
a d d i t i o n , t h e r e is i n s u f f i c i e n t time t o develop,
implement and communicate a self-insured plan for next.
f i s c a l year. Significant lead time is required to
opera tionally s e t up and comrnunica t e a self-insured
plan. This would include negotiations with providers,
selection of a third party administrator or awarding of
an administrative services only contract, completion of
actuarial work to establish premiums, establishment of
benefits, development of forms, communication with
employees and a myriad of other a c t i v i t i e s . Without
adequate lead time, implementation of a proper
self -insured program would be unsuccessful. It is
important. to note that self-insurance does not solve
the S t a t e ' s problems. Implementing a new plan
structure such as a t r i p l e option or dual choice plan
w i l l begin to solve the problems. Self-insurance
basically w i l l address how the plan w i l l be funded.
However, t.here a r e c e r t a i n advantages to self -insurance
including more f l e x i b i l i t y in plan design, cash flow
advantages, and elimination of premium taxes. In
regard t o premium taxes, State governments do not reap
the same benefit as the private sector in that the
taxes accrue back to the State when paid. Therefore,
t h i s is a debatable advantage to s t a t e government.
Self -insurance is a subject which deserves further
study since it may be beneficial to the State over the
long term. The S t a t e ' s current and past insurance
c o n s u l t a n t s have advised the S t a t e t o ensure the
program is s t a b l e before going s e l f - i n s u r e d .
Accordingly, s t a b i l i t y of the program should be
considered during any study of self-insurance. A t the
present, the State should consider a f u l l y insured plan
or a minimum premium plan which w i l l be described
below.
Is t h e r e a combined approach whereby the State and the
c a r r i e r ( s ) assume a proportionate share of the risk?
Response :
In addition to a f u l l y insured plan, the State should
consider a minimum premium plan which, i n essence, is a
p a r t i a l l y self-insured plan. With a minimum premium
plan, the State would assume responsibility for funding
most benefits, and the insurer assumes l i a b i l i t y for
benefits above a pre-determined level.
The State should s o l i c i t bids on both a f u l l y insured
and minimum premium basis. In considering a minimum
premium plan, the State should carefully determine the
share of the risk it wishes to absorb and prudently
establish the level at. which it would accept l i a b i l i t y .
I . H . What are the pros and cons of the minimum premium
payment? What consideration should be given t o t h i s
concept in the plan design?
Response:
Minimum premium plan
Pros: - Cash flow advantages i n establishing reserves and
u t i l i z i n g float..
- Annual l i a b i l i t y l i m i t for the State.
- Eliminat.ion of premium taxes; however, t h i s is a
debatable advantage f o r S t a t e government i n that these
taxes accrue back t o the Stat.e. Further, there have
been recent court d e c i s i o n s in o t h e r S t a t e s t h a t
minimum premium plans are subject t o premium taxes.
Cons: - State may shoulder a significant amount of r i s k
depending upon the point a t which the insurance c a r r i e r
assumes l i a b i l i t y for claims. In the S t a t e ' s current
s i t u a t . i o n , r i s k is s i g n i f i c a n t since claims a r e
significantly exceeding premiums.
- I f the insurance c a r r i e r has a d e f i c i t i n one year,
it w i l l carry forward to the next year.
- Unless a l t e r n a t e arrangements are made, the State
would bear the l i a b i l i t y for claims runout a f t e r a
termination of a contract with an insurance c a r r i e r .
1.1. Is it possible to reduce administrative claims cost?
If so, how can t h i s be best accomplished?
Response :
Performance c r i t e r i a in claims administration should be
a part of the contract. In addition, the State should
review the performance of the c a r r i e r .
I.J. What consideration should be given t o changing the
current r a t i n g structure? Should only family and
single r a t e s (2 tiered structure) be provided? Why?
Response :
A t t h i s time, a three or more t i e r e d r a t i n g should not
be pursued. Changing plan structure w i l l be enough of
a change for next f i s c a l year without complicating it
with a tiered rating structure.
I.K.
Response :
What types of u t i l i z a t i o n data should be requested from
HMOs?
I.L.
The same u t i l i z a t i o n data required by indemnity plans
should be required and obtained from HMOs. Requested
data should include:
- capitation r a t e s - types of surgery - waiting time for appointments - admissions per 1,000
- surgeries per 1,000 - waiting time for s p e c i a l i s t s
- a l l services provided - prescriptions
Are there any other overall ways t.o reduce and/or
control costs?
Response :
For a long term goal, the State may wish to study and
consider the p o s s i b i l i t y of joining forces with other
p u b l i c j u r i s d i c t i o n s t o determine i f a more
cost-effective plan can be obtained for a l l e n t i t i e s
involved.
In regard to r e t i r e e s , the State may wish to consider
terminating el i g i b i l i ty for health insurance i f the
r e t i r e e obtains employment el sewhere and can obtain
continuing and a p p r o p r i a t e coverage from the new
employer.
11. Employee/Employer Cost Sharing
Objective: Determine whether the current premium cost
sharing plan is r e a l i s t i c and feasible in view of both
the State revenue and rising health care costs. The
following questions should be addressed. Conclusions
should be substantiated.
1 I . A . Should the S t a t e pay a f l a t d o l l a r amount toward
insurance coverage regardless of the plan selected or
should the State pay a percentage toward the premium?
What method is most cost effective and why?
Response :
This question can only be answered based upon the basic
plan design f i n a l l y chosen. I f the State would go to a
single c a r r i e r and there is only one premium for a l l
employees, then t h i s question is moot. Whether it is a
flat. d o l l a r amount or based in percent, there is really
no difference with only one premium involved. I f the
State would have a multiple HMO plan with the provision
t o opt-out of each HMO network for indemnity coverage,
the Stat.e should establish a f l a t dollar amount and
should follow the prevailing market practice in setting
t h i s amount.
I f the State would continue with i t s existing plan
structure, before setting e i t h e r a f l a t d o l l a r amount
or a percentage, the State should f i r s t consider the
impact the S t a t e ' s c o n t r i b u t i o n w i l l have on the
plans. That is, t.he State must consider whether the
s t a t e ' s contribut.ion r a t e w i l l drive employee away from
certain plans to other plans and whether t h i s "adverse
s e l e c t i o n 1 ' a g a i n s t c e r t a i n plans is t o l e r a b l e or
desirable. Adverse selection may not make it possible
to offer a wide range of plans.
1 I . B . Should the single and/or family premium contribution by
both State and employees be changed? Why and how?
Response :
It is recommended that the Stat.e keep in l i n e with the
p r e v a i l i n g p r a c t i c e s in the marketplace f o r c o s t
sharing. Staff should keep reviewing t h i s issue as
plan design changes in the future. It appears that. the
percent of cost shared by the employee for family
coverage is a t the upper end of the marketplace, and
therefore should not be seen as a source of increased
revenue for next year.
Should premiums be indexed to a three t i e r or more
rating structure?
Response :
A t t h i s point, the State should not go to a three or
more tiered rating structure. A tiered rate plan is a
plan with separate r a t e s f o r the single employee,
employee and spouse, employee and one c h i l d , e t c . , with
the premiums dependent upon experience i n each group.
To create a tiered r a t e plan a t t h i s point would create
confusion and communicat.ion problems for implementation
for the first year. It should be noted that no matter
how you t i e r the r a t e s the cost to the State does not
change. Tiered r a t e s a r e only a matter of distribution
of employee premiums among employee groups and could
put an economic burden on employees with large families
who may l e a s t be able to afford it. It is recommended
that no action in t h i s area be taken u n t i l a f t e r a new
plan design is in place and implemented and the program
is stable.
It also should be noted, however, that i f the State has
a two-tier plan, when other employers have multi-tier
plans, it could cause adverse selection in that large
families with two working parents who have the option
of joining the insurance plan of e i t h e r company may
tend t o join the S t a t e ' s insurance plan i f the State
does not t i e r r a t e s since t h e i r r a t e s would be lower.
However, the S t a t e should continue t o study the
multi-tier rating structure for future years. Other
cost-sharing i s s u e s t h a t would cause s e r i o u s
communication problems and provide few or no cost
savings such as the tiered method should be deferred
for further study.
1 I . D . Is there a prevailing practice in premium cost sharing
among large employers i n Arizona? Identify various
practices. What should the State adopt?
Response :
The industrial model for large employers in Maricopa
County shows that, as a prevailing practice, these
employers tend to pick up 100% of the premium for the
single employee and up to 80% of the premium for family
coverage. The State should study the cost sharing as
it r e l a t e s to the present plan and again as it r e l a t e s
to the new plan design. In setting the contribution
r a t e , the State should attempt t o meet the prevailing
practice as much as economically feasible. A t present,
the S t a t e c o n t r i b u t e s 99% of the employees' c o s t
(single coverage) for both the indemnity and HMO. For
family coverage, the State contributes 83% for the
indemnity c a r r i e r , and from 70% t o 84% for the HMOs.
Increasing the employee's premium cost could lead t o an
increased u t i l i z a t i o n of the plan based upon the
thought "1 have to get my money's worth".
It also is recommended that the State look a t a t o t a l
compensation philosophy t o remain competitive. T h i s
means that not only should s a l a r i e s be competitive but
t o t a l compensat.ion, i. e., the non-direc t s a l a r y
benefits should also remain competitive. Theref ore,
health insurance costs t o employees should not be out
of l i n e with the market especially when State s a l a r i e s
currently are below the average market wage.
Medical Plan and Premiums for Retirees
Objective: Determine whether r e t i r e e s should continue
participation in the active employee insurance plan or
whether a separate p l a n w i t h separate r a t e s f o r
r e t i r e e s should be established. Determine appropriate
and adequate benefits for r e t i r e e s . The following
questions should be answered. Conclusions should be
substantiated.
1 I I . A . Are r e t i r e e s provided with adequate and appropriate
benefits? If not, identify changes and how premiums
would be af fected.
Response:
The present plan does provide appropriate and adequate
benefits for our r e t i r e e s . Long-term care would be an
additional benefit that would be helpful to the r e t i r e e
population; however, the c o s t s a r e prohibitive. The
S t a t e may wish t o consider making a v a i l a b l e a
supplemental long-term care plan for r e t i r e e s , of which
the premiums would be paid by r e t i r e e s .
1 I I . B . Does r e t i r e e participation in the health plan adversely
af fect the premiums for active employees?
Response :
Yes, r e t i r e e participation i n the health insurance plan
does r a i s e t h e overall group premiums. Equicor, our
indemnity c a r r i e r , has advised the S t a t e t h a t they
estimate t h a t a c t i v e employee r a t e s a r e c u r r e n t l y
approximately 2% higher due to the presence of the
current r e t i r e e s in the plan.
1 I I . C . Should a separate plan w i t h s e p a r a t e r a t e s be
established for r e t i r e e s ? Why or why not?
Response :
It is strongly recommended that current State r e t i r e e s
and newly r e t i r i n g State employees continue to be a
part of the DOA plan. Based on Equicor's estimates,
premiums in the indemnity plan are 2% higher with
r e t i r e e s i n the plan. Keeping in mind that the Stat.e
pays the majority of insurance costs, active employees
are not paying significantly more with r e t i r e e s i n the
plan. It should be noted that the Social Security
system works under the concept of working employees
contributing to the benefits of those who have r e t i r e d ;
t h i s concept is a part of a basic American philosophy,
and no reason is seen a t t h i s point t o change that i n
regard t o r e t i r e e insurance as long as there is not an
unreasonable level of support. It should be kept in
mind that current r e t i r e e s once were active employees
who were paying t h e i r f a i r share of premiums that were
somewhat higher as a r e s u l t of r e t i r e e p a r t i c i p a t i o n i n
the plan. This issue should be reviewed i n future
years as more and more employees r e t i r e and become a
part of the plan to determine i f the premiums for
act.ive employees are being significantly af fected,
1 I I . D . I f a separate plan should be established, should the
design p l a n i n c l u d e a s i n g l e c a r r i e r o r multiple
c a r r i e r s ? I f multiple c a r r i e r s are determined, what is
the adequate number of c a r r i e r s and why?
Response :
It is f e l t t h a t a separate plan should not be
established for r e t i r e e s a t t h i s time. However, i f a
separate plan is established, it should be a t r i p l e
option or a dual choice plan.
1 I I . E . Should the r e t i r e e health plan remain the single option
or dual or t r i p l e option plan?
It should be the same as for active employees except
f o r those employees with Medicare supplement.
1 I I . F . What deductibles and benefits should be made available
to r e t i r e e s ?
Response :
Retirees should be offered the same plan (s) as active
employees . Additionally, a catastrophic plan w i t h
higher deductibles, higher co-payments, and higher stop
l o s s a t a lower premium l e v e l should a l s o be
considered.
Tiered r a t e s f o r r e t i r e e s a r e not recommended.
l I I . G . Determine which method of claim payment. is most cost
effective for the State: Diagnostic related groups or
premiums?
Response:
The answer depends on t h e p l a n d e s i g n . A
recommendation is unable t o be made u n t i l plan design
is s o l i d i f i e d ,
1 I I . H . What incentives can be introduced to encourage r e t i r e e s
t o use plan services more prudently?
Response :
With a t r i p l e option or dual choice plan geared toward
encouraging participation in an HMO, that issue would
take care of i t s e l f . Prudent use of plan services is
an issue for a l l plan participants.
111.1. What elements are required with the new integrated
State plan with the Medicare plan that is effective
January 1, 1989?
Re spon se :
The new long-term care p r o v i s i o n s and maximum
out-of -pocket expense provisions need to be integrated
with the Medicare supplement plan offered.
11I.J. Should the State contribute to i t s r e t i r e e s health
insurance? A t what r a t e and how?
Response :
The l e g i s l a t u r e is already taking care of that issue by
a u t h o r i z i n g s u b s i d i e s f o r r e t i r e d members of the
Arizona State Retirement System and the Public Safety
Retirement System; however, d i f f e r e n t subsidies are
being provided. It is f e l t that a l l r e t i r e e s of the
State of Arizona should receive an equal subsidy. It
is noted that over 3,000 r e t i r e e s of the university
system receive no subsidy. There should be some type
of subsidy to cover a l l employees whether they are in
the Public Safety System, Arizona S t a t e Employees
Retirement System, or i n the University Optional
Retirement Plan.
1 I I . K . What, if any, l e g a l i s s u e s e x i s t i n providing health
benefits for r e t i r e e s ?
Response:
One l e g a l i s s u e e x i s t s as to whether non-State r e t i r e e s
can be members of the current DOA-administered plan,
and whether these people, in essence, should be further
subsidized by higher premiums f o r a c t i v e S t a t e
employees and S t a t e r e t i r e e s . This issue surfaced due
to recent l e g i s l a t i o n which authorized r e t i r e e s of the
Arizona State Retirement System, previously employed by
other p o l i t i c a l subdivisions of the State, to be a part
of the DOA-administered r e t i r e e h e a l t h insurance
benefit plan. It is f e l t that non-State r e t i r e e s and
S t a t e r e t i r e e s who waived insurance b e n e f i t s upon
retirement should not be a part of the larger group.
We understand t h a t the Attorney General's Off i c e
a l r e a d y h a s i n d i c a t e d t h a t a s e p a r a t e p l a n w i t h
separate r a t e s must be established by DOA. No other
l e g a l i s s u e s were found a t t h i s time.
Benefit Design
Objective: Determine what benefit designs are needed
which are cost effective and provide for adequate
coverage to employees. The following questions should
be addressed taking into consideration that the State
w i l l be considering t r i p l e option and dual choice plans
and self-insurance as well as f u l l y insured options.
Are current benefits provided by the indemnity and HMO
plan c o s t effective? Why or why not?
Response :
Relative to the indemnity plan, there are some benefits
that are cost effective and some b e n e f i t s t h a t are not
cost effective. From the employee's perspective, the
present $150 per person/$300 per family calendar year
d e d u c t i b l e is a good b e n e f i t . The same is t r u e
r e l a t i v e t o the 80/20 co-insurance level in which the
c a r r i e r pays 80% of the e l i g i b l e charges and the
employee pays 20%. However, from a premium reduction
standpoint, consideration should be given to changing
deduc t i b l e s , out-of -pocket expenses, and co-insurance
to correspond with any new plan structure. Further,
the State should consider eliminating or reducing those
benefits where the deductible does not apply and the
reimbursement is 100% of incurred charges, i . e . , the
$300 supplemental accident b e n e f i t and o u t p a t i e n t
surgery. Outpatient surgery should no l o n g e r b e
reimbursed a t 100% since hospitals have shifted t h e i r
costs from inpatient to outpatient t o o f f s e t the l o s t
revenues when companies encouraged use of outpatient
surgery. Outpatient charges should be reimbursed a t
80% or 90%- I n the HMOs, the State should o f f e r
well-baby care and annual physicals. The b e n e f i t s i n
the current mini-wellness prwisions (blood pressure
checks, hemocults, urine analysis, and blood glucose
screenings) would then be included in the annual
physical.
If a preferred provider option (PPO) continues to be a
part of the insurance plan, c o s t effectiveness may be
improved by renegotiating PPO contracts, Currently,
there are 2,600 preferred providers under contract out
of 6 , 4 0 0 in p r a c t i c e , which means about 40% of
available providers p a r t i c i p a t e in the S t a t e ' s PPO
program. To be more competitive and to achieve lower
discounted r a t e s , the c a r r i e r should negotiate with
fewer primary care physicians (PCPs) but screen for the
b e t t e r ones. Good contracts w i l l include incentives
f o r t h e s e p r o v i d e r s t o change t h e i r p a t t e r n s of
behavior and become more cost effective,
The State should continue the mental, nervous, and
chemical dependency benefit on a short-term basis, but
explore adding long- term care benefit riders. These
riders should have caps in e i t h e r dollars to be paid
out or in a maximum number of days that coverage would
be provided or a combination of both. The cost of
these should be c a r e f u l l y studied since increased
coverage means increased premiums. The State should
also consider eliminating the mental, nervous, and
chemical dependency benefit from the base plan and,
i n s t e a d , n e g o t i a t e i t s own PPO arrangement, which
should include an employee assistance program (EAP) , a
tight u t i l i z a t i o n review ( U R ) , and a good medical case
management (MCbf) program. A gatekeeper concept should
be considered. The PPO arrangement should also include
an i n p a t i e n t / o u t p a t i e n t treatment program and an
outpatient detoxification program. However, it should
be kept i n mind that the negotiated PPO costs could
have higher premium costs and caps. Such caps could be
set a t $50,000 lifetime benefit, with a $4,000 annual
l i m i t for outpatient care. Negotiated r a t e s can have
d i f f e r e n t arrangements, one such arrangement could be
per capita, on a monthly basis, plus, a s p e c i f i c c o s t
per treatment .
I f a separate mental, nervous and chemical dependency
PPO c o n t r a c t is arranged, an 80/20 or 70/30
co-insurance level should be established for u s i n g a
preferred provider and a 50/50 co-insurance level i f a
preferred provider is not used. This type of copayment
arrangement d e f i n i t e l y would provide an incentive to
use the PPO.
Pre-admission review (PAR) and u t i l i z a t i o n review (UR)
can be most cost effective by controlling admission t o
the hospital and the length of hospital stays per
admission.
The mandatory second surgical opinion (MSSO) for a l l
s u r g e r i e s s h o u l d b e e l i m i n a t e d , e x c e p t f o r
hysterectomies, tonsillectomies, and appendectomies.
For hysterectomies, tonsillectomies and appendectomies,
second surgical opinions have been helpful and the
second opinion has frequently varied from the f i r s t
opinion. However, with good UR it is possible to
reduce even t h o s e f r e q u e n t procedures. With the
majority of other surgeries, the second opinion has
merely upheld the f i r s t opinion. Therefore, continuing
to require second opinions for other surgeries is not
cost effective. I n regard t o maternity claims, every
consideration should be given to the hospital packages
and birthing center arrangements which are more cost
effective.
1V.B. Is an appropriate level of benefits provided to State
employees? If not, identify changes.
Response :
Yes. The St.at.ets level of benefits generally is i n
l i n e with other employers' level of benefits. The
mental, nervous, and chemical dependency benefit should
be reviewed t o determine i f it is cost effective to
increase. Recommendations for changes to benefit
levels a r e i l l u s t r a t e d i n response t o Question 1V.A.
1V.C. What l e v e l of benef i t.s ( i n c l u d i n g d e d u c t i b l e s ,
co-insurance and stop loss) should be incorporated into
the indemnity plan?
Response :
The current. d e d u c t i b l e and copayment a r e c l o s e l y
aligned with what other employer plans are offering.
However, t h i s question needs to be answered a f t e r a
plan structure is s o l i d i f i e d . Regardless of plan
structure, it is f e l t the $600 maximum out-of-pocket
expense t o employees is too low.
What additional options should be included which w i l l
provide adequate coverage r e l a t i v e t o both the needs
and financial resources of the various salary levels of
employees? (Consider co-insurance r a t e s , deductibles
and stop loss.)
Response:
There does not appear to be any need to add options to
the plan connected with the various salary levels of
employees.
1V.E. Is t h e r e a way t o counteract the h o s p i t a l ' s c o s t
s h i f t i n g from inpatient to outpatient benefits?
Response :
The State may be able to counteract t h i s by eliminating
the 100% reimbursement f o r o u t p a t i e n t surgery and
reimbursing a t 80% or 90%.
1V.F. What role, expanded or diminished, should the PPO
feature play in the design? Is current PPO coverage
structured properly?
Response :
As stated in the response to question IV.A, there
should be some changes i f a preferred provider option
continues as a part of any new plan structure.
If so, possibly the basic structure of the PPO could be
renegotiated with b e t t e r contracts t o fewer preferred
case providers ( P C P s ) , with more incentives to be more
c o s t e f f e c t i v e . However, with c a r r i e r s negotiating
these PPO contracts, it could be more d i f f i c u l t to
change the physicians ' behavior patterns. Employees
also need incentives to change t h e i r behavior patterns
by lowering co-insurance levels i f a preferred provider
is not used. The S t a t e ' s consultant should be used
more t o review c a r r i e r r a t e s r e l a t i v e t o
cost-effectiveness. Regarding the mental, nervous, and
chemical dependency benefit, as indicat.ed e a r l i e r , the
State should consider removing these benefits from the
base plan and establishing a separate PPO provider
arrangement, with t i g h t u t i l i z a t i o n review (UR)
controls. Included would be an employee assistance
program ( E A P ) , an i n p a t i e n t / o u t p a t i e n t treatment
program, and outpatient detoxification program. To be
cost e f f e c t i v e , there must be medical case management
(MCM) involved on each case.
Determine which method of claim payment is the most
cost effective for the State: Diagnostic Related Group
(DRG) or per diem?
Response :
There is not enough experience or data with capitated
rate to determine whether DRGs or per diems are most
c o s t e f f e c t i v e .
Response :
Should mental health and substance abuse coverage be
increased or decreased and how w i l l t h i s a f f e c t
premiums?
This issue has been addressed in response to Question
1V.A.
IV.1. Should the State consider adding long-term care (LTC)
to the substance abuse and ment.al health coverage?
Presently, LTC (treatment beyond 60 days) is not
provided. How w i l l t h i s a f f e c t premiums?
Response :
As indicated in response to Question IV.A., long-term
care should d e f i n i t e l y be considered; however, adding
r i d e r s to extend the care beyond 60 days w i l l do
nothing more than r a i s e premium costs. The State
should consider removing the mental heath and substance
abuse benefits from the base plan and negotiating a
properly controlled long-term care (LTC) PPO plan.
This change may or may not increase premium costs.
IV. J. Should we develop an employee prescription drug program
which establishes c o s t based on prescription volume
rather than individual prescriptions? How w i l l t h i s
af f ec t premiums?
Response :
It is not recommended t h a t the S t a t e put in a
prescription card service that. charges per employee,
per card issued, per month. Most prescription drug
plans cost the employee a fee of $3 out-of-pocket, per
prescription. However, i t costs the employer about
$6.75, per prescription, to break even. A wholesale,
catalog prescription drug plan for r e t i r e e s could be
considered. There may be enough discount in the drug
prices and a large enough volume purchased to be cost
effective.
1V.K.
Response :
What i n c e n t i v e s can be introduced which encourage
employees to use plan services more prudently?
Since current claim charges include a cost per claim
check issued, employees need to be educated in proper
f i l i n g of claims. Simplifying the claims f i l i n g and
claim r e p o r t i n g p r o c e s s s h o u l d b e e x p l o r e d ,
Consideration should be given to using "claims k i t s , "
which many c a r r i e r s provide f o r d i s t r i b u t i o n t o
employees. It has been noted by some employers that
the greatest misuse of f i l i n g claims comes from the
more highly compensated employees than from the lower
paid employees.
Does the proposed b e n e f i t design accommodate
non-discrimination testing which is effective July 1,
19 89.
Response :
Non-discrimination testing is regulated under Section
89 of t h e I n t e r n a l Revenue Code. It is designed t o
check every employer/employee benefit plan t o see if it.
discriminates in favor of the highly compensated. If
it does, the value of the benefit is considered income
t o a l l highly compensated employees. It is unknown, a t
present, what problems the non-discrimina tion testing
w i l l cause u n t i l f i n a l regulations are released. There
a r e several t e s t s which can be done i n order t o
determine whether the plans discriminate or not.
Are there any other cost containment features that can
be introduced in the indemnity/HMO plans?
Response:
Yes. Premiums negotiated for HMOs should be based on
demographics and experience t o r e f l e c t r i s k assumed by
the HMOs. The State should contribute more toward the
p l a n s w i t h the higher r i s k population. Also,
consideration should be given t o e s t a b l i s h i n g a
coordination of b e n e f i t s (COB) carveouts, i . e . , a
policy t h a t does not permit coverage under two
d i f f e r e n t p o l i c i e s for dependents.
1V.N. Should a longer waiting period be introduced before
coverage is effective for new employees?
Response :
From a r e c r u i t i n g standpoint, coverage should not
change from the S t a t e ' s current. practices. Although
delaying coverage for 60 or 90 days w i l l save the State
premium dollars, t h i s action w i l l a f f e c t recruiting of .
employees, adversely impact lower-paid employees to a
g r e a t e r degree, and adversely impact employee
relations.