SR-602-004 (5)
-
I
.
.
11-:8
J\lt! 2 5 19B~
6t? 2--- t? tJ ~
PE:SEM:GY
Council MeetIng:
Santa MonIca, CalifornIa
To: Mayor and City CounCIl
From: City Staff
SubJect: RecommendatIon Regarding A Change In The City's
Fee-For-Servlce MedIcal And Dental Insurance CarrIer
IntroductIon
Th I S report presents the results of an analys I s by the CI ty 's
heal th Insurance consul tant, the recommendatlons of the
Insurance CommIttee composed of bargaInIng unIt representatives,
and staff recommendatIons regardIng al ternatl ves to the Ci ty' s
current fee-for-servce medIcal and dental Insurance.
Background
FollOWIng a 56% rate Increase In Blue Cross premiums In July
1984, and an IncreaSing number of administrative and claims
problems, staff agreed In the contex:t of negotla tI ons WI th the
MuniCIpal Employees AssociatIon that professional serVIces should
be sought to analyze our eXIstIng program and make
recommendatIons to control future costs and reduce admInIstrative
and claims problems.
Cal-Surance, was selected as the consultant on the bas I s of an
RFP process. Cal-Surance analyzed paid claIms by type of serVice
and medIcal procedure rendered. ThIS resulted In a set of
recommendatIons for changes In coverage levels and
cost-contaInment features. Cal-Surance also found that the CIty's
fInancIng methods with Blue Cross were dls-advantageous s 1 nce
surpluses In paId premiums over paId claIms were retained by Blue
Cross.
The Insurance CommIttee revlewed coverage and plan deslgn WIth
the consultant. A model plan design was defIned and Cal-Surance
II-~
J'. Z 5 f98S
- 1 -
.
.
then surveyed the 1nsurance market for alternat1ve carr1erS to
determIne If Blue Cross provIded the best serV1ce and cost
controls for the prernlum charged. Formal bId specifIcatIons were
1ssued and four maJor 1nsurance carrIers, PrudentIal, The
EqUItable, TransamerIca and Massachusetts Mutual, responded. The
proposals were generally conSIstent WI th the baSIC plan deSIgn
specI f Icat1 ons the Insurance Commi ttee preferred and provIded
improved benefIts, cost control measures, and adm1nlstrat1ve
Improvements at a lower cost than Blue Cross. The proposals
Included effect1ve cost contaInment provisions wh1le maIntainIng
the employees' freedom of chOIce assocIated WIth fee-for-servlce
medIcal Insurance. Mass Mutual and The EqUItable were unable to
prOVIde a fully-functIonal preferred-provIder optIon or to quote
rates for other opt1onal coverage elements. Therefore, the
consul tant-broker recommenda t 1 on to the Insurance CommI ttee was
that they choose between TransamerIca and prudential whose
proposals were substantIally equal. A summary of prem1um changes
under Blue Cross, TransarnerIca and PrudentIal 1S appended.
DISCUSSIon
The CommIttee agreed W1 th staff and the consultant-broker that
serVIce and fInanCIal conslderat1ons dIctated a change of
carrIer. The chOIces centered on Prudential and Transamer Ica,
who submItted bIds, and the PERS Health plan, which several
bargaInIng unIts were Interested In because It reqUIres CIty
SUbSIdy of retIrees and offers many optIonal plans. Staff
recommends strongly agaInst PERS because the CIty loses control
of costs has no latItude in the matter of retIree SUbSIdIzation
and would have an increased adminIstrative burden. The CommIttee
maJorIty ultImately IndIcated that looking at benefIt levels
only, separate from ret I ree subs Id 1 zat 1 on, PrudentIal would be
the better cho Ice. Transamer Ica was less favored because the
consultant and the CommIttee felt the proposed rates were too low
to be accurate In lIght of the CIty'S claIms experIence and that
there was potential for large Increases In future years. Four
bargaInIng unIts stIll preferred PER8, regardless of ItS benefIt
levels, because 1 t mandates retl ree subs IdI zatl on. WhIle the
- 2 -
i
.
.
PrudentIal program IS most attractI ve to the Comml ttee If the
questIon of retIree SUbSIdIzatIon IS set aside, PrudentIal WIll
requIre the CIty to buy $l0,000 of lIfe Insurance coverage on all
permanent employees In order to offer the preferred medIcal plan.
ThIS would cost the CIty an addItIonal $65,000 or more per year.
Staff concurs WIth the Insurance CommIttee and the consultant
that PrudentIal's plan and premIum rates are advantageous to the
CIty and to actIve employees, and to retIrees even WIthout
subsidIzatIon. Staff supports a change to PrudentIal. However,
there was general agreement on the part of the CommI ttee that
retIree premIum rates are too hIgh.
The proposals also Include a fee-far-serVIce dental plan to
replace the Blue Cross fee-for-servlce dental which IS only
offered In conJunction WIth Blue Cross MedIcal serVIce. Proposed
benefIts Include lncreased deductlbles, but the plan offers
preventI ve dental care (x-rays and cleanIngs) at no charge. The
proposed plans cost approxImately $l9.00 per month, an Increase
of about $3.00 over Blue Cross. The Insurance CommIttee supports
thIS change as well. Our group dental plan, DentalNet, Will
remaIn in place.
!
ImplIcatIons Of A Change To PrudentIal
A change to PrudentIal would prOVIde Improved benefIts, Improved
admInIstratIon and clalms proceSSIng, Improved reportIng to the
CIty to aSSIst In analYZIng and contaInIng costs, a PPO optIon,
cost contaInment features and reduced rates ($189.23 compOSIte).
RetIree coverage IS avaIlable at $126.31 for one party, $293.31
for two-party and $391.87 for full famIly If retIree experIence
IS combIned WIth actIve employee experience, a reductIon to the
rates retI ree' s currently pay. The program of benef1 ts offered
In response to the CIty'S speCIfIcatIons IS appended to thIS
report. PrudentIal reqUIres a mandatory lIfe Insurance POlICY,
at a premIum of $4.20 per month on all permanent employees of the
CIty, for an addItIonal cost of approXImately $65,000 per year.
- 3 -
.
.
LIfe Insurance IS a CIty paId benefIt not currently provIded to
all bargaInIng unIts.
WhIle the CommIttee lIkes the PrudentIal plan and the lIfe
1 nsurance 1 t prov Ides, the CI ty has an obllga tI on to meet and
confer wIth each bargaInIng unIt prior to Implementing the
change. PrelImInary meetIngs WIth each unIt are scheduled during
the week of June 24.
RetIree SUbSIdIzatIon
The Insurance CommIttee felt that the CIty should use any saVIngs
resultIng from a change In carrIer to dIrectly SUbSIdIze retIree
Insurance coverage by making contrIbutIons towards theIr
premIums. DependIng upon the CIty'S experIence and health
Industry cost Increase trends, the saVIngs proJected from the
change In carrIer mayor may not be long term. WhIle this IS a
benefIt the CIty may want to address, staff recommends that It be
treated as a bargaining item as current MOD's expIre SInce It IS
clearly a cost Item and SInce each bargaIning unIt has somewhat
dIfferent Interests.
An alternatIve method of "SUbSIdIZIng" retIrees would be to
cons Ider a lower tI er of benef 1 ts for them that would Increase
the deductIble to $200, and elImInate out-patIent psychiatrIC
coverage and the aCCIdent rider. Staff IS concerned that the
change In deductIble could result 10 lItIgation by retIrees who
mIght claIm a "vestedll benefI t In the current coverage levels.
Such a change would reduce the three tIer retIree rates to $l20
SIngle, $280 employee plus spouse and $374 employee plus famIly,
a very modest premium saVIng.
A thIrd alternatIve would be to offer all retIrees the
"composI ten rate. SIng le employees would pay more under thI s
alternatIve whIle those WIth spouses and famIlies would realIze
SIgnIfIcant saVIngs. AgaIn, there IS a potential for suit by
SIngle employees. In addItIon, the compOSIte rate IS a strong
IncentIve to retIrees to stay WIth CIty coverage and would
probably Increase the retIree populatIon optIng Into the plan
- 4 -
J
.
.
dramatIcally.
affected more
steeply.
The CI ty' s exper Ience rate would be negatI vely
rapIdly under thIS plan and premIums would climb
Budget/FInanCIal Impact
If there contInue to be 71313 actIve IndemnIty partICIpants, and
If retIree experIence IS combIned with that of actIve employees,
the total costs to the CIty assocIated WIth a change to
PrudentIal for FIscal Year 1985-86 would be as follows:
Current Blue Cross ActIve
$l,797,600
Prudential ActIve
Plus LIfe Ins.
l,589,532
+ 65,000
Total Cost
1,654,532
As thIS comparIson shows, the CIty could save $143,068 over
curren t costs by select 1 ng Prudent 1 al. Suff lC Ien t funds are
proposed In the 1985-86 Budget to cover the PrudentIal plan and
lIfe Insurance.
There are, however, no protectIons against subsequent rate
increases although the cost containment elements descrIbed In the
attached descrIptIon of benefIts should help to control the
experIence rate. Rates would be subJect to Increases after
fiscal year 1985-86. A fIve-year prOJectIon USIng the above
combIned experIence rates, and estImatIng only a 15% rate
Increase factor for medIcal cost trends, would IndIcate the
follOWIng:
ActIve Employee RetIree Rates/
Rates/Month Annual Total Month
1985-86 $189.23 $1,589,532 $126-293-392
1986-87 2l7.6l l,827,924 145-337-451
1987-88 2513.26 2,1132,184 l67-388-519
- 5 -
, .
J
.
.
1988-89
2,417,520
192-446-597
287.80
1989-90
2,780,064
221-5l3-687
330.96
In effect, by 1986 the CIty would be paYIng approxImately
today's Blue Cross rates. The $214 cap negotIated WI th several
employee groups could be exceeded In one year.
In regard to dental Insurance, the cost Increase to the CIty for
the PrudentIal fee-for-servlce plan is $15,420 for 1985-86.
However, staff antICIpated a l0% Increase In the current plans
and, therefore, the 1985-86 budget prOJectIon for dental
Insurance IS suffICIent to cover thIS Increase.
RecommendatIon
It IS recommended that CIty CounCIl authorIze the CIty Manager to
execute a contract WIth PrudentIal as the CIty'S fee-for-serVlce
medIcal and dental Insurance carrIer, absorbIng the lIfe
Insurance reqUIrement and combInIng retIree experIence WIth
actIve experIence to prOVIde lower rates for retirees and
prOVIdIng for the most advantageous arrangement regardIng
premIums versus paId claIm saVIngs, prOVIded that the Ci ty. s
obllgatlon to meet and confer on the change IS satIsfied.
Prepared by: Susan McCarthy
Gordon Youngs
- 6 -
~ .
F~ ,
Experienced CombIned
Current BenefIt Levels
*- ActI ve
RetIred
ExperIence Separated
Active
Retired
Expe~Ience CombIned
RetIrees At Lower
BenefIt Level
RetIred
ExperIence Combined
Lower BenefIt Levels
For RetIrees Only
ActIve & RetIrees on
CompOSIte Rate
ActIve & RetIree
Annual Costs
~ Active (700)
ReqUIred LIfe
Total
SaVIngs
.
BLUE CROSS
214
144-335-449
203
209-487-651
Not AvaIlable
.
COSTS
TRANSAMERICA
18l
1l9-277-369
l72
19l-444-593
ll4-265-355
Not AvaIlable Not AvaIlable
1,797,600 l,520,400
l,797,600 1,520,400
277,200
PRUDENTIAL
l89
126-293-392
l83
178-413-552
l20-280-374
l8B
1,589,532
65,000
1,654,532
143,068