A. DHR s Analysis of the Impact on State Employee Health Program and Other Benefit Programs

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1 Study of fiscal implications of inclusion of quasi-public and nonprofit organizations in the state health care program, the workers compensation program, and other state benefit programs Act 1 of the 2009 Special Session Sec. E. 107, provides for a study of the fiscal implications of inclusion of certain quasi-public and non-profit organizations in the state health care program, workers compensation program, and other state benefit programs. Specifically, the statute provides: Sec. E.107 HEALTH CARE AND WORKERS COMPENSATION INSURANCE FOR STATE FUNDED ENTITIES (a) The secretary of administration shall review the fiscal implications of inclusion of quasi-public organizations such as the Vermont center for crime victim services and nonprofit organizations that receive 65 percent or more of their funding from Vermont state sources in the state health care program, the state workers compensation program and other state benefit programs. Such analysis shall assume that these organizations pay 100 percent of the costs of any program inclusion. This study shall be submitted to the house and senate committees on government operations and appropriations on or before December 1, If the commissioner of human resources and the secretary of administration determine there would be no negative fiscal implications for the state, they are authorized to implement the process of including these entities as soon as practicable. The Department of Human Resources (DHR) has analyzed the potential impact that the inclusion of quasi-public and non-profit organizations may have on the state employee health program and other state employee benefit programs. The Department of Buildings and General Services (BGS) has analyzed the potential impact that the inclusion of these entities may have on the workers compensation program. A. DHR s Analysis of the Impact on State Employee Health Program and Other Benefit Programs This section of the report describes the steps taken by DHR to obtain the information necessary to address the question posed by the General Assembly, identifies the known fiscal implications of the proposal and addresses the types of information necessary to conduct a comprehensive study of the potential fiscal impact. In addition, the report will address two other issues that, while critical, have only an indirect fiscal impact. First, it will address the impact that this proposal may have on the state s exempt status under ERISA. It will also address the possibility that the state would need to engage in collective bargaining prior to the addition of these entities to the state medical plan. Survey A survey was performed by DHR to obtain the information necessary to prepare this report. DHR surveyed the following non-profit groupings: the Center for Crime Victims Services, the Community Mental Health, Developmental Services Agency Network, and the Vermont Private Non-Medical Institution Residential Child Care Facilities. The survey asked for the number of 1

2 employees in each organization and assessed whether those employees had medical, dental, and/or life insurance coverage. The survey results demonstrated that most of the employers provide medical and dental coverage to their employees, but some employers did not offer life insurance. The survey also revealed that the number of employees estimated to be eligible for medical benefits in some instances was fewer than the total number of employees in each organization, most likely because they include part-time or temporary staff that would not be eligible for benefits. Data developed from the survey estimates that 3,060 employees of these groups would be eligible for medical and other benefits. The estimated total number, including dependents, based on state employee ratios, is approximately 5,771 total lives. DHR estimates that if all employees of these groups were to participate in the plans, approximately 4,560 employees, and 8,600 total lives would be covered. The addition of the quasi-public and non-profit organizations identified in the proposal would significantly increase the total participants in the state plans. The current active employee membership in the state medical plans (as of October, 2009) is 10,927 employees and retirees, and 21,983 total lives. The non-profit groups would represent 28% of the current total employees/retirees, and 26% of the total lives. This would represent a huge influx of members to the plans. It is important to note, moreover, that the survey may not have included all groups contemplated by the statute, so the incoming group could be greater than the stated numbers from the survey. Fiscal Implications The state employee medical plans are self-insured, meaning that the state hires an administrator/vendor (currently CIGNA) to pay claims and manage provider networks, but liability for the cost of the claims resides with the state. The state also has an administrative staff to provide important administrative and employee services, and to manage the vendor. At present, we do not know whether the costs (primarily claims) of the potential new participants are on average more or less than the cost incurred for our currently covered population. We also cannot determine whether there would be significant savings to the quasi-public and nonprofit organizations if this proposal were adopted. To answer these questions would require a costly and exhaustive actuarial analysis of more than 30 separate groups, which is well beyond the scope of the current study. Such a study would include an extensive actuarial analysis of: (1) current medical plan data (claims, demographics, catastrophic claims, occupational groups, etc.) on all the possible participant groups (not just those groups surveyed); (2) contracts with the administrating company and the stop loss reinsurance company; and (3) increase in staffing requirements of the state Wellness program and the Benefits Unit of DHR. What we do know is that generally the addition of groups that have higher claims on average than the currently existing employees and retirees increases the premium for the existing employees and retirees in the plans, if the claims from all groups were counted in the same pool, as is the case in the state employee medical plans. The statutory language indicates that the analysis shall assume that these organizations pay 100 percent of the costs of any program inclusion. Yet, the amount of paid claims is a major factor in determining the appropriate amount of premium that the employee and employers must pay. If the quasi-governmental and non-profit organizations had higher claims on average than the current state employee plans ( adverse selection ), and if their claims were pooled together with state employee and retiree claims, it is likely this would adversely affect the premiums for current state payers. 2

3 Consequently, the resulting required premium rates would not reflect 100% of the costs of any program inclusion, because the higher claims costs would be spread among all groups, thereby increasing costs to the current employee and retiree groups. On the other hand, if the new groups were pooled separately (separately rated ) from the state employee and retiree groups, then 100% of the costs for these participants could be separately calculated. They would probably have different premium rates, and perhaps different rates of premium increase, than the original group. If these organizations claims experience were pooled separately from the state employees and retirees, however, the resulting premium costs to them may be similar to what they are currently experiencing. Thus, it is unclear that either party serves to benefit from the separate pooling of the quasi-public and non-profit organizations in the state employees medical plans. Arguably, there could be some savings in administrative costs. This is far from certain, however, given that there is no standard definition of what comprises an administrative cost and no information currently available from private providers to make such an assessment. In addition, under the state s service contract with CIGNA any material changes in plan design, participation, or relevant laws or regulations will obligate both parties to negotiate reasonable relevant changes in fees. This is a standard provision in this type of agreement. It is unknown at this point whether the current fees charged by CIGNA would increase, and if so, the extent of that increase. Any incremental increase to fees would need to be charged to the quasi-public and non-profit organizations. Similarly, given the potentially sizeable increase in covered lives with the influx of the quasipublic and non-profit organizations, it is clear that administrative staff for DHR would need to be increased. The additional costs should also be charged to the quasi-public and non-profit organizations. The Need for Additional Information A complete analysis of the fiscal implications of the proposal is also difficult because the statutory language has not specified the exact parameters of the proposal. For example, it is unclear what is meant by other state benefit programs. Would members of the quasi-public and non-profit organizations be able to participate in the state employee retirement plans? If so, analyzing the fiscal impact would require considerable actuarial evaluation by the Treasurer s office. Would they be able to participate in the dental and life insurance plans, where many of the concerns expressed above would also be relevant? To the extent that individuals not currently covered by medical, dental or life insurance would be newly covered, there is a higher possibility of adverse risk (high claims experience), due to previously unmet need, among other reasons. Another question is whether retirees of the quasi-public and non-profit organizations would be able to continue their insurance into retirement. Retiree participation in the state medical insurance plans already puts a strain on the state budget. If this pool of retirees were to increase by the inclusion of these groups, analyzing the fiscal impact would require considerable professional/actuarial evaluation by the Treasurer s office, as well as by DHR. It is also important to know whether the quasi-public and non-profit organizations will be able to opt into and out of the state plans at will. The problem with opt-in/opt-out flexibility is that a group could opt out of the state employee plans for a more favorable premium rate in the private market if they happened to have a low claims year, and then if they had high claims later, they 3

4 might be able to seek protection by opting into the larger state employee plans. This is contradictory to the very premise of group insurance that the good years balance out the bad years. Past history demonstrates that this is not an academic question. The Vermont State Employees Credit Union, which was allowed by statute to participate in the state employee medical plans, opted out, but at that time there was no provision to exclude them from participating again in the future. Finally, how and how often would the 65% state funding eligibility threshold for participation be evaluated? If a group were to suddenly lose enough state funds to go below the 65% threshold, would they at that point need to immediately cease participation in the plans? Conversely, if an organization newly obtained enough state funds to just reach the 65% level, could they join immediately? These issues could have profound effects on the enrollment in the plans and the costs of administering the plans. Critical implications beyond fiscal concerns While the General Assembly requested an analysis of the fiscal implications raised by the inclusion of quasi-public and non-profit organizations in the state medical plans and other benefit programs, the inclusion of these entities raises serious concerns in areas beyond the fiscal arena. To alert the General Assembly to these concerns, this report will address: (1) the potential loss of the state s ERISA-exempt status if this proposal is adopted; and (2) the possibility that the state would need to engage in collective bargaining if these entities were included in the medical plans. Of course, this latter concern could have an indirect fiscal impact, given the expenditures of time and resources necessary to engage in collective bargaining. Medical Benefits Plan Could Lose ERISA-exempt Status The state employee medical benefits plans are exempt from the requirements of the federal Employee Retirement Income Security Act (ERISA) law because they are plans for governmental employees of the state. Specifically, ERISA section 4(b)(1) provides that Title I of ERISA does not apply to any employee benefit plan that is a governmental plan, which is defined to include a plan established or maintained for its employees by the government of any State or political subdivision thereof. This is important because ERISA preempts any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. Because the state is exempt from ERISA, federal law does not trump state law that is different or more expansive than federal law. For example, under state law, the state employee plan covers same sex marriage partners, civil unions partners, and by labor agreement, domestic partners. If the state lost its ERISA exemption, the state would not be able to enforce benefits laws relating to domestic partnership/civil union/same sex marriage. This would undermine the public policy of the State of Vermont. In addition, the state plans must now comply with state statutes, including mental health parity, as well as mandates for coverage of certain dependents, diabetes, certain clinical treatments for cancer, chiropractic services, naturopathic services and other services. If the state lost its ERISA exemption, the state employee medical benefit plans would not be required to comply with state law including the mandates. Thus, a significant concern is whether the participation of additional non-state government employee participants in the state employees health care plan jeopardizes the plans governmental plan exemption from ERISA. The Department of Labor (DOL) has consistently maintained that a plan s governmental status would not be adversely affected by participation of a de minimus number of private sector employees and has indicated that private sector employee participation in the percent range is de minimus. DOL Advisory Opinions

5 17A, A, A, A 95-27A. Unfortunately, DOL has not provided guidance on the maximum number of non-governmental employees that may participate in a plan before it is no longer considered a governmental plan Hall v. Maine Municipal Employees Health Trust, 93 F.Supp.2d 73 (D. Me. 2000). The State of Vermont s current health plans received judicial scrutiny in 1999 and were found to be properly exempt from ERISA as governmental plans. Kirkpatrick v. Merit Behavioral Care Corporation, 70 F.Supp.2d 443 (D. Vt. 1999). The Court reached this decision even though approximately one percent of the employees covered by the State Plan were employed by outside groups. Id. at 446. The Kirkpatrick Court also assessed the ERISA status of the Vermont School Boards Insurance Trust, Inc. ( VSBIT ), which was organized as a non-profit corporation to provide various forms of insurance for members of the Vermont School Boards Association, Inc. ( VSBA ) and their employees. Despite the fact that approximately 7.6 percent of the VSBIT members were from the private sector, the Court held that VSBIT was properly exempted from ERISA as a governmental plan. Id. at 448. Thus, based upon the Kirkpatrick case, there is evidence that a court could find that the inclusion of an additional number of private sector employees between 1 and 7.6 percent is de minimus and has no effect on the state s ERISA status. As indicated above, however, the quasi-public and non-profit organizations that could participate in the plans represent more than 25% (and possibly considerably more) of the current participants in the state employee plans. It seems unlikely that a Court would find that this number of non-state employee participants is de minimus. It is therefore probable that the plans would not retain their ERISA-exempt status, subjecting them to federal, not state, law and standards. The Proposal Could Require Collective Bargaining Under the VSEA Contract The state s current labor contract with the Vermont State Employees Association (VSEA) (nonmanagement bargaining unit) may prohibit the inclusion of these organizations, without negotiation between the State and the VSEA. Specifically, Section 3 of Article 49 states: If the State of Vermont is required by the Vermont Legislature to institute any insurance plan or pool, and the state employees health plans are required to participate in such plan or pool, and the plan or pool: (1) Includes a membership larger than the groups currently covered by the state employees health plans; or (2) Alters the structure of the state s current health plan offerings or their operating foundations; or (3) Has an impact on plan benefits; or (4) Increases premium rates; the State and VSEA agree to a limited contract reopener for the purpose of negotiating the impacts of such change. Both parties shall retain all statutory impasse rights. Re-opening negotiations imposes additional costs of time and human resources upon the state and its employees. More importantly, there is no way of knowing what the outcome of any such 5

6 bargaining might be or if the outcome of bargaining might result in any additional costs to the state, state employees or medical plan members. Conclusions With Respect to Health Plans and Other Benefit Programs The inclusion of quasi-public and non-governmental organizations receiving at least 65% of their funding from state sources into state benefits plans raises the following concerns: (1) The medical plans would likely come under federal ERISA law, not state law and therefore: a. have negative implications regarding coverage for current and future domestic partners, civil union partners, and same sex marriage partners and their dependents; groups which are currently covered by the state employee plans; and b. Not require compliance with various state health mandates. (2) There is a clear possibility that if the organizations were included in the experience (claims) pool with the current participants, that there would be an increase in per participant costs directly attributable to these groups, which would be spread among all payers, increasing premium to current payers (employees, retirees, and the state). (3) There is a clear possibility that if the organizations were not included in the experience pool with current participants, (separately rated) that the costs for these organizations might not vary significantly from what they are currently paying. (4) The state and the VSEA may need to re-open negotiations on the medical plan. Additional negotiations in themselves will cost the state more money, and could end up costing the State and/or the plan members, including state employees and retirees, additional money. (5) Statutory language is lacking in specificity with regard to what other benefit programs are included, and other crucial details. B. BGS s Analysis of the Impact on the Workers Compensation Program This section of the report will describe the steps taken by BGS to obtain information necessary to address the question posed by the General Assembly, will identify the known fiscal implications of the proposal and will address the types of information necessary to conduct a comprehensive study of the potential fiscal impact. Survey BGS s Office of Risk Management, working with Administration of Human Services staff, solicited information from the 17 designated agencies and specialized service agencies and DCF group homes (there is some overlapping between these two groups). Risk management has also requested information from the center for crime victims, which is representative of a quasi-governmental/public organization. To date, only three agencies and the crime victims group have responded to the survey. While this group is sufficiently representative to draw certain conclusions, BGS s analysis could be subject to change upon receipt of additional information from the surveyed groups. 6

7 Fiscal Implications Inclusion of quasi-public and non-profit organizations in the state system would have minimal impact on the cost to most of the organizations. The greatest difference under the state selfinsured workers compensation program is the absence of provision for profit. The larger members of the non-profit organizations already are under programs that are loss responsive (reward good experience, penalize poor experience). The state program follows a similar model. The cost of claims, claims administration and some program overhead would be common to both commercial coverage and the state program. The savings would come from the allowance for profit. Historically, under workers compensation, the target loss ratio is 65% i.e., 65% of every premium dollar is applied to the cost of claims. The remaining 35% covers the cost of overhead and administration, claims handling, acquisition, tax, fees and profit. Consequently, the only significant opportunity for savings would be in the provision for profit, and that is slight less than 10% by BGS s calculation. As discussed above, the General Assembly has stated that the quasi-governmental and nonprofit organizations must pay 100% of the costs of program inclusion. However, given the nature of workers compensation, particularly the long duration and ultimate development of claims over multiple years, the only way to meet this condition would be to create a parallel but isolated program of coverage. This would require statutory change to allow combining individual group members under a single program of coverage because combinations are normally permissible only where there is a commonality of ownership. Given the anticipated size of the group, authorization would also permit the group to self-insure. A minimum combined premium size of $2,500,000 to $3,000,000 would be necessary to support the latter option. By adopting this approach savings may be created. Again, individual loss assessments would be necessary within the program to guard against adverse selection with only the least desirable joining the group. Actuarial analysis establishing projected losses would be required and all operating costs would be in addition. In sum, given the size and sophistication of several of the members of the target population only marginal savings would be anticipated by the adoption of this proposal. It is also extremely difficult to determine whether there would be a real and significant savings to the quasi-public and non-profit organizations. Need for Additional Information There are a number of specific details that would need to be developed (such as the cost for claims administration and loss prevention services should the self-insured model be adopted) so any estimate at this stage will necessarily be rough. Risk management and AHS staff are following up with the groups who were surveyed to ascertain their interest in participating in this study and to obtain the information that is needed to put together a comprehensive estimate of the cost to provide workers compensation coverage for the groups. If that information is provided, risk management will develop a more specific estimate of the cost of a consolidated program. Overall Conclusion We hope that this report has been useful in conducting a preliminary assessment of the fiscal implications of the inclusion of quasi-public and non-profit organizations in the state s medical plans, workers compensation program and other benefit programs. As noted, significant additional information and analysis would be required to conduct a comprehensive study that would answer fully the question that has been posed. Significant resources would need to be allocated to conduct such a comprehensive analysis. Of course, any commitment of such 7

8 resources would be premature without a full assessment by the Legislature of the risks posed to the state s ERISA-exempt status and the potential that this proposal might have to require bargaining with the VSEA. 8