Health Insurance is Primarily
Provided by Employers

Health insurance has become an expected benefit in employee compensation packages.

The original intent of health insurance was to spread risk broadly and to protect against catastrophic losses.  Corporations began offering health insurance as a tool to recruit and retain workers during a World War II wage freeze.  Over time, this benefit has become an expected benefit in employee compensation packages.  According to the U.S. General Accounting Office, more than 90 percent of people with private health insurance coverage have access to insurance through their employer.  Large employers are more likely to offer coverage than smaller employers, and public employers are more likely than private employers to offer health insurance.  Individuals who do not have access to employer-provided group plans can purchase individual coverage on the private market. 

Employees’ and Officials’
Group Insurance

Statutes assign health insurance program administration to an autonomous board.

About 24,000 individuals are insured in the plan.

State and participant contributions fund the health insurance plan.

W.S. 9-3-204 through W.S. 9-3-213 established the state group insurance plan in 1967 by creating the State Employees’ and Officials’ Group Health Insurance Board of Administration (EGI) and giving it authority to administer and manage a group insurance program.  The state program now includes life insurance, dental insurance anda flexible-benefits plan, as well as health insurance.  This report focuses solely on the health insurance benefit and how its costs affect active employees.

EGI refers to itself as a comprehensive major-medical plan[1], covering most medical expenses and providing wellness benefits.  Under these kinds of plans,all expenses are subject to a deductible, then a co-insurance percentage, and finally, an out-of-pocket maximum.  Few benefits are payable at 100 percent. 

EGI health benefits are available to active employees and their dependents from the executive, judicial, and legislative branches of Wyoming state government, from the University of Wyoming (UW) and the state’s seven community colleges, from the Wyoming Community Development Authority (WCDA), and to COBRA (Consolidated Omnibus Budget Reconciliation Act[2]) participants.  Retirees from these entities and their dependents are also eligible for plan coverage.  Currently, an estimated23,700 employees, retirees, and dependents are insured in the plan.  A breakdown of participants by entity, plan option, and subgroup follows on page 8.

EGI insurance benefits are funded with a combination of state and plan participant contributions.  Currently, the state contributes $225 for each active employee; this amount is sufficient to cover that employee’s premiums for health, preventive dental and, depending on age, life insurance benefits.  Employees contribute additional amounts to insure their dependents, while retirees pay the full premium established by the board for any coverage they elect for themselves and their dependents.

Insuring the Plan

It is common for

large employers

to self-insure

their plans.

The EGI plan is self-funded, meaning the plan essentially acts as its own insurance company and bears the financial risk of participant health care costs.  Employer and employee contributions go into a trust fund from which claims and plan administrative costs are paid. 

Self-funding of health insurance plans is commonplace for employers of more than 1,000 employees.  W.S. 9-3-201(d) gives the state and any political subdivision authority to self-insure, providing proper funding is adopted and the cost of the plan is included in the annual budget.  Public sector self-insured plans within Wyoming are generally within the jurisdiction of the state insurance commissioner, and include any coverage mandated by the Wyoming insurance law.

As a completely self-funded program, EGI does not purchase stop-loss insurance for protection against extremely large claims or annual losses in excess of a specified maximum amount of dollars.  Although the plan carried this insurance in years past, the EGI board now maintains a claims fluctuation reserve to cover claims in excess of premium income.

Plan Administration

The autonomous board consists

of designated,

appointed, and

elected members.

Over time, changes have been made to board membership and organizational location.

EGI contracts out claims processing, which accounts for most of the plan’s administrative expenses.

The plan also contracts with a benefit consultant to provide technical assistance.

The EGI plan has four different administrative aspects:  a policy board, administrative staff, a third party claims processor, and the services of a consultant.

Policy Board

EGI is a seven-member autonomous board charged with administering the group health plan.  The Governor appoints two members, one to represent retirees and the other to represent the insurance industry.  Statute requires that the State Treasurer and the administrator of the Department Administration and Information (A&I) Human Resources Division serve on the board.  Every other year, state employees covered by the plan elect the final three members to represent their interests.  Board terms are two years, and appointed members may be reappointed. 

Over the years, the Legislature has made changes in board membership as well as in plan organizational status.  Since 1990, the Legislature has increased voting members from five to seven, and changed the board composition.  Prior to its creation as a separate and independent agency in 1987, the plan had been housed in the state personnel division and then in the Insurance Department. 

As part of state government reorganization in 1991, a recommendation was made to consolidate the plan back into A&I’s personnel division.  However, this was not accomplished and the plan remained autonomous.  Instead, statute “assigned” the plan to A&I.  By statute (W. S. 9-2-2008), A&I is to provide administrative assistance and oversight, guidance on budget matters, and function as a liaison between the board and other agencies.  A&I can review EGI practices and make recommendations, but is not empowered to affect the board’s authority.

EGI Administrative Staff

Since 1987, the EGI board has had statutory authority to employ a director and other personnel.  Currently, EGI has a staff of seven full-time positions:  an executive director, a deputy director, a data base manager, and specialists in the areas of the flexible-benefits plan, direct billing, and fiscal operations.  Administering the flexible-benefits program requires half of the EGI staff time.  In addition, benefit specialists in all the agencies and entities participating in group insurance handle employee enrollment in the plan, and also field some participant questions.  EGI’s share of administrative expenses totaled about $250,000 in 1999, including board expenses.

Third-Party Claims Processor

EGI has traditionally hired a third-party administrator (TPA) to process its claims, and since 1990, has contracted with Great West Life and Annuity Insurance Company (Great West) for claims processing services.  In addition, the board contracts with Great West to manage a prescription drug plan, provide medical services utilization review, and operate a disease management program.  Further, as part of its contract, Great West provides EGI plan participants access to in-state and out-of-state provider networks with which the company has negotiated reduced fees.  The board could unbundle some of these contracted services, but in recent years has voted to combine them under Great West.

EGI pays approximately $2 million per year for Great West services, which adds approximately 5 percent to the plan’s overall claims expense.  EGI payments to Great West are based upon a per-employee (defined as active employee or retiree) basis, with set fees for claims administration, utilization review, network access, and disease management services.

Consultant Services

In addition to claims processing assistance, the board also contracts with a benefits consultant for technical assistance.  EGI has contracted with The Segal Company since 1990 to advise the board at meetings about common practices and latest developments in the industry, and to assist the board in obtaining and evaluating contractor bid proposals and in negotiating with providers.  The consultant also provides an annual evaluation of the plans offered by EGI.  Annual consultant expenses were $84,538 in 1999.

Plan Funding

The state and
its employees paid about $63 million in health insurance costs in FY00.

Claims totaled

94 percent of the

plan costs, while about 6 percent were administrative costs.

Health benefits have grown into a major component of labor costs, and now, providing a health insurance program to employees represents a substantial investment on the part of an employer.  Employees also share in the medical expenses they incur by paying deductibles, co-insurance, and co-payments on prescriptions.  Additionally, employees who insure their dependents through the plan pay a family premium.

For the FY01-02 biennium, the Legislature authorized approximately $98 million for the health insurance portion of EGI’s budget.  This includes anticipated payroll deductions for both the employer’s contribution of $225 per employee per month ($54 million) and the estimated payroll deductions from employees who purchase family coverage through the plan ($40 million), authorization to spend investment income ($3.5 million), and an appropriation from plan revenue for administrative services ($860,000).

In FY00, the state paid about $26 million in premium contributions and employees paid about $23 million toward premiums.  In addition to the monthly family premiums, the plan requires all employees to share in the costs of medical expenses they incur through cost-sharing features, such as deductibles and co-insurance.  In 1999, employees paid almost $14 million in deductibles and co-insurance. 

The plan held about $18 million in reserves at the end of 1999.  EGI holds reserves for three main purposes.  Reserves are held for incurred claims that have not been submitted, or for those that have been submitted but not paid.  Reserves are also maintained for contingencies, because the plan does not purchase stop-loss insurance to protect against unexpected claims fluctuations.  Finally, some reserves are discretionary and can be used by the board to fund its priorities, such as temporarily offsetting premium increases.

Claims totaled about $38 million in 1999 and have remained relatively constant since 1997.  Administrative expenses represent less than six percent of the claims cost, or about $2.3 million.  Of this amount, about $1.9 million was paid to Great West, for its TPA services.  The remaining $350,000 in administrative expenses covered the costs of consultant services, temporary staff services, and all in-house office expenses, including EGI staff salaries and board expenses.       

Plan Participation

About 40 percent of the individuals in the plan are dependents.

The majority of primary insureds in the plan work for state government branches.

At the end of 1999, the EGI plan had an estimated 23,700 insured participants; of them, about 60 percent were active employees and retirees, while approximately 40 percent were their dependents.  Since the actual number of dependents was not available from EGI, the remainder of our demographic discussion is based only on employees and retirees, the primary insureds, in the EGI plan.  We divided them according to whether they elect individual coverage (only for themselves), or purchase a family contract (includes themselves plus a dependent spouse and/or child(ren)).  Between 1999 and 2000, the number of primary insureds decreased from 14,012 to approximately 13,626.[3]

Participating Entities

Seven entities participate in the EGI plan (see Figure 1 below):  community colleges; WCDA; Auditor’s Office (referring to all state employees paid through the State Auditor’s Office); UW; Pre-65 Retirees; Medicare Retirees, and COBRA participants.  The majority of primary insureds, 52 percent, are in the Auditor’s Office group.

Figure 1:  EGI Entities

Source: LSO analysis of EGI-reported data.

Most participants

are enrolled in the low-deductible plan.

Plan Options

EGI has two plan options:  a low-deductible plan ($350 for individuals; $700 for families), and a high-deductible plan ($750 for individuals;  $1,500 for families). The overwhelming majority of primary insureds, 82 percent, participate in the low-deductible plan; of them, 77 percent have individual coverage, while 23 percent have family contracts.  The high-deductible plan has a more even spread:  54 percent are individual contracts, and 46 percent are family (see Figure 2).

Figure 2:  EGI Plan Options

 Source: LSO analysis of EGI-reported data, March 2000.

Both active and retired employees participate in the plan.

EGI Sub-Groups

EGI has four sub-groups:  active employees; pre-65 retirees; Medicare retirees; and COBRA participants.  Figure 3 shows the percentage of primary insureds by sub-group for a representative month in 2000, the percentage of the totalpremium income each sub-group brings into the plan, and what percentage of claims each is responsible for. 

This data indicates that active employees cost the plan proportionately less than other sub-groups.  They accounted for 80 percent of the premium income, but incurred only 78 percent of total claims costs.  Medicare retirees generated slightly more premium income than their claims costs during the reported month; both were about 9 percent of the totals.  For the 2000 plan year, the board increased Medicare retirees’ premiums to more accurately reflect their claims.  However, early retirees’ premium income (10 percent) does not cover their claims cost (12 percent).  Thus, actives are subsidizing early retirees in the plan.

Figure 3:  Subsidization in Sub-Groups

For a Representative Month in the EGI Plan

The majority of the premium income is paid by active employees.

 Source: LSO analysis of EGI-reported data, March 2000.

EGI Offers a Conventional Fee-For-Service
Plan With an Integrated PPO Network

Under a fee-for-service plan, participants are free to choose any provider.

PPOs contract with

a group of providers who offer discounted rates to the plan.

Insurance is traditionally provided under a “fee-for-service” model, meaning participants are free to choose any provider to provide medical services.  Participants either pay providers directly and are reimbursed by their health plan, or the provider submits a claim to the patient’s insurance company for reimbursement. 

As plans faced increasing health care costs, many employers implemented “managed care” plans.  Managed care plans offer financial incentives for participants to use the providers who belong to the plan.  There are two common types of managed care plans:  preferred-provider organizations (PPOs), which offer discounted rates with a group of providers; and health-maintenance organizations (HMOs), which contract for a set fee paid to providers to deliver medical services to members. 

Figure 4 shows the differences between these three basic types of plans.  According to insurance literature, fee-for-service plans allow more provider choice, but at higher costs to the plan.  The EGI plan could be considered a conventional fee-for-service plan with an integrated PPO network.  This approach allows participants the option of using managed care providers within the traditional fee-for-service plan.  Participants can move fluidly between network and non-network providers, and receive more or less reimbursement from the plan, depending on whether or not they use the network. 

Figure 4:  Level of Choice and Cost
Along the Continuum of Provider Types

         Source:  LSO analysis of insurance industry literature.

Changes in Plan Costs

Cost-sharing

features reduce

plan costs and encourage cost consciousness.

Premiums for active employees have increased by 36 percent since 1996.

The Legislature

has increased the state contribution by 29 percent since 1996.

Since 1996, the employee share

of the dependent premium has gone

up 44 percent.

According to health insurance literature, employers design plans with “cost sharing” features such as premium contributions, deductibles, and co-insurance to reduce plan costs and to encourage employee cost consciousness.  Since 1996, EGI plan costs have increased for both the state and for employees.  See Appendix C for more information on changes to participant costs over the past five years. 

Health Insurance Premiums

In group plans, premiums are generally based on the average risk of the entire insured group.  In other words, since individuals do not pay according to their specific risk, a degree of subsidization is built into traditional group plans.  The extent of subsidization can vary from one group plan to another.

Employers who provide health insurance to employees determine how much of the premium cost the employer will absorb.  In a noncontributory plan,the employer pays for the entire cost of the plan, while in a contributory plan,the employee shares in the cost of the plan.  The state currently offers a noncontributory plan to individual employees and a contributory plan for employees who elect dependent coverage. 

For the year 2000, the individual premium under the low-deductible option is $195 per month and $170 under the high-deductible plan.[5]  Premiums for family coverage under the low-deductible plan are $451 per month and $391 under the high-deductible plan.  Premiums for active employees have increased by 36 percent since 1996 for both individual and family coverage.  Retirees pay higher monthly premiums, reflecting their increased risk to the plan.  (See Appendix C for details.)

The Legislature currently contributes $225 per month for each active employee, but does not contribute toward retiree premiums.  Since 1996, the Legislature has increased the employer contribution to active employee premiums by 29 percent.  Some community colleges contribute additional amounts to the family premium above the $225 contributed by the Legislature.

Employees who purchase dependent coverage through EGI can apply the employer’s contribution toward the cost of the family premium.  If they elect family coverage, employees pay $226 per month for their share of the family premium under the low-deductible plan; under the high-deductible plan, they pay $165 per month.  Since 1996, the employee’s share of the premium for dependent coverage has increased by 44 percent in the low-deductible plan and by 47 percent in the high-deductible plan.

Co-insurance

varies depending

on the provider.

Deductibles

Individuals who select the low-deductible option pay a $350 deductible, before the plan begins reimbursing expenses[6]; they pay $750 under the high-deductible plan.  Families pay a $700 deductible under the low-deductible plan and $1,500 under the high-deductible plan.  In 1999, deductibles under the low-deductible plan increased from $250 to $350 for individuals, and from $500 to $700 for families.  The deductibles in the high-deductible plan haveremained constant since 1996. 

Co-Insurance Rates

Co-insurance is the portion of medical expenses that the participant pays, after which the plan pays the remaining portion of the expenses.  The plan pays 85 percent of the costs of services if participants use in-state network providers, or pays 80 percent on services if they use in-state non-network providers.  The plan also pays 80 percent for out-of-state network providers.  The plan pays only 60 percent of the services if a participant uses an out-of-state non-network provider in a network area.  Co-insurance rates paid by the state decreased from 70 to 60 percent in 1997 for out-of-state non-network providers.  In 1999, the board added an incentive to use in-state network providers by increasing the co-insurance paid for network providers from 80 to 85 percent. 

Co-Insurance Maximums

The plan has a co-insurance out-of-pocket limit, above which the plan pays 100 percent of covered expenses. Individuals must pay co-insurance on the first$10,000 of covered services, or up to $15,000 of services if using out-of-state non-network providers.  This means participants using in-state network providers have a maximum obligation of $1,500 annually in co-insurance.  For family coverage, the service limit is $20,000 and $30,000 for out-of-state non-network providers.  Therefore, using in-state network providers, families are liable for $3,000 in co-insurance annually.  The total annual co-insurance obligation for individuals and families doubled in 1997.

The prescription benefit has been “carved out” of the medical plan.

Prescription Co-Payments

The prescription drug program has changed three times during the past five years.  From 1996 to 1998, participants paid 80 percent co-insurance on prescription drugs, with these costs contributing toward the annual out-of-pocket maximum.  In 1999, the board moved to a separate $250 deductible for prescription drugs with prescription costs still contributing toward the out-of-pocket maximum. 

In 2000, the board “carved out” the prescription program from the medical plan, requiring participants to make co-payments on each prescription purchased.  Participants pay $10 for generic prescriptions, $20 for preferred prescriptions, or $40 for non-preferred prescriptions.  The plan covers 100 percent of the costs of the prescription beyond the co-payment.  Currently,prescription drug expenses do not apply to either the deductible or the annual out-of-pocket maximums.  Additionally, EGI sets no maximum out-of-pocket limits for prescription costs.

Health Care Costs Predicted to
Continue to Increase Nationally

Rising health

costs are not

unique to the

EGI plan or to Wyoming.

Rising health care costs are not an isolated phenomenon in either the EGI plan or in Wyoming.  Nationally, health costs are a concern to employers and employees alike, as costs are expected to continue to increase. 

After remaining relatively stable and low since 1994, health care costs started rising again in 1998.  Further, they are predicted to rise more dramatically in the future:  the U.S. Health Care Financing Admin-istration predicts that health care costs will grow at an average rate of 6.5 percent through 2008.  Other sources indicate that insurance premiums will increase at an even greater rate.  Experts have identified several factors that sparked increases in 1998 and will continue to increase costs in the coming decade:

·         Dwindling managed care savings:  Savings from managed care programs appear to be dwindling, as insurance plans become less restrictive in response to a managed care backlash.  In a tight labor market, employers are willing to pay more for employee satisfaction.

·         Prescription drug costs:  Increases in prescription costs in insurance plans have been in the double digits since 1995, with pharma-ceutical cost increases reaching 17 percent in recent years.  Experts attribute part of these increases to pharmaceutical manufacturers’ increased use of direct-to-consumer advertising.

·         Aging population:  Health care costs increase as the population ages because the elderly generally require more health care. 

·         Regulations and Technology:  State and federal mandates, high-cost medical technologies, and increased use of diagnostic testing are other factors that have increased costs. 

The Current Plan Structure is Not Equipped
to Address Rising Health Insurance Costs

Many factors that increase health costs are beyond the control of any one employer.

However, limitations in the current plan structure make it difficult to effectively manage costs.

High participant

costs identified

a decade ago,

continue today.

EGI does not have sufficient policy direction and resources to

manage the plan.

The EGI health insurance program represents a substantial cost to both the state and participants.  The cost of insurance continues to increase for all employers, not just the state of Wyoming, and analysts predict these costs will continue to rise dramatically in the future. 

It is critical to recognize that many factors that increase health costs are beyond the control of any one individual employer.  Thus, employers need to anticipate that health insurance costs will likely represent an ever-increasing share of labor costs.  To some degree, a plan can impact health costs through cost-containment programs, and EGI has taken such steps. 

However, the plan’s ability to effectively manage costs in this complicated arena has been reduced by inherent limitations in its decision making structure.  The individuals who administer the plan appear to be hard-working and dedicated to providing the best benefit to employees.  Nevertheless, the staff and board have been given a very difficult task, due to the structural limitations we identify in the report.  Plan observers noted that the EGI plan could be considered one of the largest insurance companies in the state, and yet we found little policy direction, few resources, and a lack of expertise dedicated to this major endeavor.  This set of circumstances has constrained the ability of those administering the plan in their attempts to control costs. 

Two major studies have been conducted of the EGI plan in the past decade.  The themes we identify in this report are consistent with problems identified in a 1991 report prepared by the State Auditor’s Office, and a 1994 LSO program evaluation.  Both studies noted that EGI participants paid more for health insurance than participants in other plans.  We identified the same circumstances today, leading us to conclude that the current plan structure is not adequately designed to address the factors that increase costs to participants.

This report contains three findings about the cost-effectiveness of the plan and primarily focuses on the costs to employees who purchase dependent coverage through the EGI plan.  In our first finding, we note that costs for EGI participants are higher than for participants in other plans.  In our second finding, we note that the EGI pool is older and has fewer dependents than other plans.  Our third finding discusses that EGI does not have sufficient policy direction or resources to proactively manage the plan. 

These three chapters have causal relationships:  when insurance costs are high, the effect is that younger participants will opt out and purchase lower-cost coverage elsewhere.  We believe EGI has not been able to more effectively control costs because of limitations within its current structure.