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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