United Nations Educational, Scientific and Cultural Organization Executive Board

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1 ex United Nations Educational, Scientific and Cultural Organization Executive Board Hundred and fifty-ninth Session 159 EX/24 PARIS, 31 March 2000 Original: English Item 6.7 of the provisional agenda REPORT BY THE DIRECTOR-GENERAL ON THE OPTION OF OUTSOURCING HEALTH CARE INSURANCE SUMMARY In furtherance of paragraph 4 of 30 C/Resolution 74, document 159 EX/24 is submitted by the Director-General to provide to the Executive Board a report on the option of outsourcing health care, in particular, detailed information on offer bids from commercial enterprises. Decision required: paragraph The present report is submitted by the Director-General in furtherance of paragraph 4 of 30 C/Resolution 74 adopted in November 1999 whereby the General Conference invites the Director-General to provide to the Executive Board at its 159th session a report on the option of outsourcing health care insurance, in particular, detailed information on offer bids from commercial enterprises. 2. The Medical Benefits Fund (MBF) of UNESCO was created in 1948 by the General Conference at its 3rd session to provide for the medical care of the staff and their protected persons. The basic feature of the Fund is that it is a mutually financed, self-administered and self-insured health insurance scheme (similar to the health insurance schemes of WHO, ILO/ITU and United Nations Geneva), and is unlike the health coverage of some other organizations of the United Nations system which is underwritten by commercial insurance companies.

2 159 EX/24 - page 2 3. By virtue of Staff Regulation 6.2, the Director-General is required to operate a system of social security for the staff including provisions for the preservation of health. A viable medical scheme for serving and retired staff members and their protected persons with the guarantee of an adequate coverage is an important part of the system of social protection. 4. In UNESCO, the contributions to the Medical Benefits Fund are payable in equal shares by the participants and the Organization (i.e. half by insured persons and half by the Organization). However, the practice in several other organizations of the United Nations system is that the Organization pays twice the contribution paid by the staff member (United Nations) or at least a higher share for the retired staff members in order to compensate for their generally lower contribution (ILO/ITU, WHO). Past study in In 1991, further to 25 C/Resolution 42, the Director-General apprised the General Conference of the long-term measures proposed to maintain the financial equilibrium of the Fund. In this context, one of the many measures proposed by the Director-General in document 26 C/68 was the possibility of commercial underwriting as an alternative long-term arrangement. Four of the most well-known and experienced commercial insurance brokers were contacted to obtain quotations. 6. The General Conference examined the analysis of the various proposals submitted by the brokers which revealed that there were no significant financial advantages for the MBF to be run on a commercial basis. There would undoubtedly be some administrative advantages to be gained from commercial insurance schemes but no insurance company offered lower premiums than those practised by the MBF. They all proposed to keep the existing level of contributions for a limited time (two to three years) but then considered that adjustment of premiums would be necessary. Experience from other organizations of the United Nations system that have commercial insurance schemes showed that premiums tend to increase over time, and this at a considerably more rapid pace than the MBF had hitherto experienced. The General Conference agreed with the Director-General s recommendations that the UNESCO health scheme be continued as a mutual scheme. Current study 7. Within the framework of a general study in 1998 on continuing long-term measures to maintain the financial equilibrium of the MBF, the Fund s Board of Management felt that the option of outsourcing health care insurance should again be examined. The advantages and disadvantages of a recourse to commercial insurance, as compared to self-insurance, should be weighed. The Board explored the possibility of obtaining from a number of insurance brokers a quotation of the actual cost for the underwriting of the medical cover for UNESCO staff (active and retired and their protected persons) in place of the self-insured mutual society type of medical insurance.

3 159 EX/24 - page 3 8. In this respect, five insurers (AGF, AXA, CNP, SMI and Société Suisse) and three brokers/administrators (Van Breda, European Benefits Administrators, Willis Corroon/Gras Savoye) 1 responded to UNESCO. AGF with Van Breda & Co International AXA with European Benefits Administrators CNP with European Benefits Administrators SMI with Willis Corroon/Gras Savoye Société Suisse (Swiss Life) with European Benefits Administrators These proposals may be analysed under two aspects: Financial and Administrative Financial aspects (a) Quotation of insurance premium 9. The study asked each insurer to provide an annual premium rate which would be maintained unchanged for a three-year initial period (except for the adjustment for inflation based on the INSEE overall price index for Paris). The premium should cover the cost and the quality of services to be obtained for underwriting commercially the health protection scheme now operated in UNESCO for active and retired staff and their dependants under the prevailing MBF Rules. The contribution rates which have not changed since 1 January 1996 are: Number of protected persons Contributions % or more AGF, AXA, CNP and the Société Suisse, all agreed to take on the same coverage as MBF through 31 December 2001 on the basis of the 1998 MBF contribution rates per participant. The above premium rates accepted by the three insurers would include all 1 The financial viability of each company is: AGF Major French insurer which is now part of the Allianz Group, the largest insurer in Europe. AXA Major French insurer (30,000 employees in France and 112 billion French Francs of annual business) and the second largest insurer in the world (110,000 employees). AXA Assistance is one of the three largest assistance networks in the world. CNP Largest French life insurer owned principally by the Caisse des dépôts et consignations (111 billion French Francs of annual business). France Secours Assistance is part of the Mondial Assistance group. SMI A mutuelle subject to the Code de la Mutualité (code of standards for mutual funds). Société Suisse The French subsidiary of Swiss Life (Rentenanstalt) with 69 billion French Francs of business in France in 1997, wholly owned or partner insurers in 50 countries, and multinational pooling contracts with 500 of the 1,000 largest corporations in the world.

4 159 EX/24 - page 4 internal costs of the insurers for administrating the medical scheme (payment of claims, statistical reporting, participant brochures and insurance cards, etc.). In the case of AXA and CNP these rates would include also the cost of the assistance benefits such as medical evacuations, proposed by the insurer. 11. SMI offered to take on the full risk of the MBF at rates which are 8% lower than the 1998 MBF rates, but these rates are only valid for one year. The premium rates for the second and third year would depend on the amount of claims in the previous year according to a formula which has not been communicated. 12. Société Suisse made a second proposal outside of the present MBF benefits in which the insurer proposed a three-year guaranteed contribution rate at 60% of the 1998 MBF rates for a package of benefits made up of the major risks costs of the MBF, plus a Dread Disease lump sum benefit. These rates include the assistance benefits and administrative charges mentioned above. (b) Reserves and the sharing of operational surplus 13. Under the MBF, the excess of income over expenditures is credited to the reserves and retained 100% in the Fund. All cumulative operational surpluses are immediately transferred to the Fund s reserves which currently amount to US $18 million. Interest on the full amount of the reserves is also credited to the Fund. The proposals of the insurers are: AGF AXA CNP SMI No sharing of operational surplus. All surpluses go to AGF and the current reserves remain in the MBF. Sharing operational surplus is not explicitly discussed in the proposal, but the gist of the actuarial and insurance report is that the excess of income over expenditure is credited to the reserves which are invested by AXA s financial experts at a rate of return higher than the investment rates achieved by the MBF to date. Reserves belong to the MBF. Sharing of operational surplus in the proportion of 70% for the MBF and 30% for CNP. The arrangement is that the reserves would be invested by CNP s financial department mainly in the form of equities. No sharing of operational surplus, but the first year 8% reduction in premiums would be credited to the MBF, if the MBF continues to collect premiums on the prevailing rates. The accumulated surplus in the Fund would then be distributed among the participants and the Organization on a pro rata basis. There would no longer be any reserves. Société Suisse The insurer proposes full sharing of the operational surplus, but the formula needs to be determined in an agreement between the insurer and the MBF. The MBF keeps the reserves which are credited or debited on the basis of the claims experience. Administrative aspects 14. The table below compares the various services provided by the MBF (at present) and those offered by European Benefits Administrators, Van Breda and Gras Savoye:

5 Services from the participants perspective 159 EX/24 - page 5 MBF EBA Van Breda Gras Savoye Claim settling 30 days 2 days 15 days 2 days Direct billing for hospitalization Yes Yes Yes Yes Preferred providers No 2 Yes No Yes Affiliation cards Yes for retirees Yes Yes Yes 24-hour access No Yes Yes Yes Paris offices Yes Yes No Yes Services from the Organizations perspective Cost containment Yes Yes Yes Yes Statistical analyses Yes Yes Yes Yes Messenger service N/A Yes Yes Yes Handling past claims Yes Yes No No Recommendation for improving services Yes Yes Yes Yes Medical advisers Yes Yes Yes Yes Collection of premiums Yes Yes Yes No Actuarial reports Yes Yes Yes Yes Mutual scheme compared to commercial underwriting (i) Mutual scheme 15. The arguments for maintaining the MBF as a mutual scheme are: it is the least costly to Member States among the health insurance schemes of the organizations of the United Nations system (refer CCAQ/FB study in annex); the administrative costs are totally borne by the regular budget and are considerably lower than in a commercial scheme; the Organization has full control of the cost, scope of cover, data and confidentiality. 16. However, services provided to participants are limited by austerity measures taken by the Organization (e.g. reduced number of posts in the administration of the Fund, claim settling takes at least 30 days, limited computerized procedures). (ii) Commercial underwriting 17. According to the underwriters, a commercial scheme presents some advantages: professional administration of claims would ensure more rapid reimbursements, extensive services would be provided to the participants (e.g. affiliation cards, 24-hour access, etc.); the Fund will have a higher return on investments of its reserves. 2 Article 13 of the MBF Rules gives all participants the free choice of medical treatment, subject to the application of ceilings for reimbursements of medical costs.

6 159 EX/24 - page However, its weaknesses are: the administrative costs which are considerably higher are fully reflected in the premiums; schemes are profit motivated and underwriters will always seek to cover their full costs (risks, reinsurance, administrative costs and profit margin); in the short-term perspective, full risk transferred to third parties during the terms of contract. However as soon as a deficitary situation approaches, there will be a request for higher premiums. 19. In a medical health scheme, it is necessary to distinguish between two distinct and separate functions: (i) the insurance of the risk; and (ii) the management of the scheme. These two different functions can be carried out by different organisms or by one and the same organism. Externalization of insuring the risk (i) Present situation 20. The underwriting of the risk can be assumed by an outside insurance company. Since the creation of the MBF in 1948 up to now, the Organization is its own insurer. 21. The insured population in 1999 amounted to 8,100 persons. With the ageing population and the rising costs of medical care, the reimbursements will inevitably increase with time. In 1998, the average yearly reimbursement was US $949 for each participant under 60 years of age and three times more for participants over 60 years of age. The reserves of the Fund makes it possible to absorb occasional deficits. However, every 6 or 7 years, the rates of contribution have to be increased in order to keep the Fund in balance. (ii) In case of externalization 22. The coverage of the risk with an outside carrier will have the following consequences: the insurers cannot guarantee the same premiums in case of losses (i.e. if reimbursements exceed the premiums); the Member States, through the Organization s budget, finance the insurance on an equal-sharing basis with the Fund s participants. Eventual increases in contribution rates cannot be effected without prior negotiations with the insurers; a decision to externalize will be irreversible. If and when the Medical Benefits Fund is abolished, it will be difficult to recreate it. Externalization of administrative operations (i) Present situation 23. Over the past 50 years, the management of the Fund has been fully assumed by the Organization. Before 1990, the administrative costs of running the Fund were charged to the Fund. However, the General Conference at its 25th session intervened in 1989 (25 C/Resolution 42) to transfer gradually over three biennia, all the Fund s administrative

7 159 EX/24 - page 7 costs to the regular budget of the Organization. The cost of administrative services corresponds to 2.85% of the total contributions and is one of the lowest within the United Nations system. The average delay in the reimbursement of medical claims is one month. (ii) In case of externalization 24. The outsourcing of the administration of the health scheme will have the following results: increase administrative costs: the proposals received for externalization do not explicitly mention the administrative costs but the normal practice is that these costs represent up to 8% of the total premiums and never less than 5%; contracting out the management of the Fund does not completely suppress certain tasks which will still have to be performed by the Organization. These are recovery for third party liability, collection and payment of premiums to the outside company, transmitting all changes pertaining to the insured staff, such as arrival of new affiliates, departures, deceased affiliates, protected persons to be removed since they are no longer entitled to coverage, etc., analyses of services, renegotiation of contracts and maintaining of administrative and commercial relations with the company. Conclusion 25. The major contributing factors to the deficits in most health care schemes including MBF are the ageing insured population, increased longevity and rapidly rising costs of health care due to the miraculous triumph of modern medicine. The rate of inflation in health care costs is three times the rate of average economic inflation. The ratio of retired staff to serving staff over the years has doubled from 1 to 4 (in 1983) to 1 to 2 (in 1993). Irrespective of whether it remains as a mutual scheme or is outsourced, the health insurance scheme of UNESCO will always need to cope with these factors. 26. An externalization of the MBF would not in itself yield any savings for the Organization. If such a solution is being envisaged, it is important to remember that the basic actuarial situation of the insurance will not change: as long as the principles of a mutual system are maintained it is the characteristics of the insured population that determines the costs of medical coverage and hence the level of contributions. No insurance company would accept to assimilate the MBF population into a much greater population, and thereby spread the risks. The contract would be based on the actuarial features of the MBF population only. As long as the contributions cover the reimbursements and the administrative costs, and as long as they produce a reasonable profit, they will be maintained at that level. But as soon as a deficitary situation arises, UNESCO would be requested to increase the contributions, or else the contractual arrangement would be terminated. 27. The advantages that could follow from an external insurance arrangement therefore lie in more rapid reimbursements. It could also improve some of the services to the affiliated members and their dependants (such as affiliation cards for everybody, 24-hour access, etc.). In view of the present fragile administrative support for the MBF in UNESCO (staff reductions have made the reimbursement chain in UNESCO - from the Medical Service over the Computer services to the Bureau of the Comptroller - most vulnerable), this would of course mean an improvement from the point of view of the users.

8 159 EX/24 - page The Board of Management of the Medical Benefits Fund have been kept continuously informed about the Secretariat s study of the various externalization options in 1998 and A working group set up within the Board of Management has been directly involved in the considerations related to a possible outsourcing of the medical insurance. At the last General Assembly of the MBF, held on 31 January 2000, the Assembly was informed about the ongoing work and the fact that the Director-General was requested to present a report to the 159th session of the Executive Board. 29. As was the case at the end of the study initiated in 1990, the Board of Management has arrived at the conclusion that there appears to be no evident advantages in abandoning the present medical insurance system for UNESCO staff members in favour of a contractual arrangement with a private insurance company. The Director-General therefore considers that the existing Medical Benefits Fund should be allowed to continue, particularly in view of the fact that no financial advantages seem to be gained from an outsourcing arrangement, and due account taken of the preferences by the staff concerned. Draft decision 30. In view of the foregoing, the Executive Board may wish to adopt the following decision: The Executive Board, 1. Having examined the report by the Director-General on the option of outsourcing health care insurance (159 EX/24), 2. Takes note of the information provided therein.

9 159 EX/24 Annex ANNEX AVERAGE CONTRIBUTIONS PAID BY THE ORGANIZATION IN 1997 FOR EACH PARTICIPANT Organization Average Member States contribution per participant Share of contribution paid by organization US $ % Type of scheme WHO 2, Mutual UNIDO 2,486 * Commercial ILO/ITU 2,271 ** Mutual United Nations 2, Mixture of commercial and mutual (two mutual and nine commercial schemes) IAEA 1,862 *** Commercial FAO 1, Commercial UNESCO 1, Mutual * UNIDO Staff members 50% - Retired contributors 75% ** ILO/ITU Staff members 50% - Retired contributors 67% *** IAEA Staff members 50% - Retired contributors 45% The above table shows that, in comparison with other major organizations, the UNESCO health care scheme is the least costly to Member States. In UNESCO, the average annual cost per contributor incurred by the Organization in 1997 was US $1,569.