Health Insurance is More
Costly For EGI Participants

EGI participants pay more out-of-pocket costs than comparator plans we reviewed, especially for dependent coverage.  As a result, participantscan obtain dependent health insurance at lower cost on the private market or, if they are married, through a spouse’s plan.  This reduces premium income to the EGI plan from individuals least likely to incur costs, leaving those employees who are likely to incur higher claim costs.  We identified several reasons why EGI participants pay more for health insurance, including a low employer contribution, pool demographics, and inherent limitations in the plan’s decision-making structure. 

Out-of-Pocket Costs to EGI Participants
are Higher Than Comparators

We compared

EGI participant

costs to in-state and out-of-state plans.

EGI participants

are liable for about $6,400 annually before the plan

pays 100 percent.

With relatively few exceptions, we found EGI participants pay a greater share of costs than participants in thecomparator plans we reviewed.  We compared EGI participant premiums, deductibles, and annual co-insurance limits to those paid by participants in our eight comparators, some of which had more than one plan.  The four states (Alaska, Montana, North Dakota and South Dakota) offered a total of seven different plans,6 while the four public-sector plans in Wyoming (Laramie County, Laramie County School District #1, City of Casper, and City of Cheyenne) offered one plan each. 

All of the comparator plans are considered comprehensive major-medical plans and, based on our review, offer levels of coverage similar to EGI.  General differences in plan costs are discussed below and in Figure 5, but for specific details about costs in each of these plans, refer to Appendix D. 

We calculated the maximum obligation a participant would be expected to contribute annually for health insurance before the plan would pay 100 percent of covered services.  We found that EGI participants with family coverage would incur significantly higher costs than comparators before the plan pays at 100 percent.  An EGI participant would be liable for about $6,415 annually in out-of-pocket expenses, including premiums, deductibles, and co-insurance on services under the low-deductible plan.  This is substantially more than the totals paid by participants in all of our comparators.  The last column of Figure 5 shows the maximum out-of-pocket expenses for family coverage in each of the plans we reviewed.

Figure 5:  Out-of-Pocket Expenses for
Family Coverage in EGI and Comparator Plans

The annual liability for EGI participants is double that

of most of the comparator plans.

Source:  LSO analysis of EGI and comparator-plan data. 

The employee’s

share of the

family premium is significantly higher in the EGI plan.

EGI participants pay $1,000 more in family co-insurance than

in-state comparators.

All but one of the comparator plans offer a mail-order drug program.

EGI Participants Pay a Higher Share of
the Premium for Dependent Coverage

EGI participants pay the highest dollar amount for family premiums of all the plans we evaluated.  An EGI participant pays $226 per month for family coverage in the low-deductible plan; this is $123 or 119 percent more per month more than a participant pays for coverage in the next highest comparator plan, the City of Casper.  An EGI participant pays $144 or 176 percent more per month than a participant in the next highest out-of-state comparator, Alaska.

EGI Participants Pay
Higher Deductibles

Since most EGI participants are enrolled in the low-deductible plan, we compared deductibles paid in this plan with the four low-deductible options available in the out-of-state plans.  EGI participants pay higher individual and family deductibles than three of the four out-of-state, low-deductible plans.  Participants in the EGI plan pay at least $100 more for both the individual and family deductibles than participants in these plans.  The in-state comparators only offer one plan, and participants inall of these plans paid at least $50 less in individual deductibles than EGI; participants in three of the four also paid at least $200 less for the family deductibles than EGI participants.

EGI Participants Pay
More Co-Insurance

At $1,500,EGI participants pay at least $250 more in individual co-insurance before reaching the annual maximum than participants in four of the seven out-of-state plans, and the same amount as participants in two of the plans.  They pay at least $500 more family co-insurance than participants in three of the seven out-of-state plans.  Depending on family size, EGI participants may pay more than participants in three other out-of-state plans.  EGI participants also pay $500 more individual and $1,000 more family co-insurance than do participants in all of the in-state plans.

EGI Participants Have
Higher Prescription Costs

EGI participants pay more for prescription drugs than participants in two of the four states we reviewed.  Additionally, EGI participants pay more for prescriptions than participants who use a mail-order program for maintenance drugs in two of the in-state comparators.

It is more difficult to compare prescription costs in the other plans we evaluated because, in addition to a flat co-payment for prescriptions, these plans require the participant to pay co-insurance.  The out-of-pocket cost to the participant depends on the price of the prescription and may be more or less expensive than the co-pays required of EGI participants.  Nevertheless, the co-pays are lower in every comparator plan.  Furthermore, all of the comparator plans, except North Dakota, include a mail-order option for maintenance drugs with even lower co-payments.  Montana and South Dakota also have an out-of-pocket maximum on prescription co-pays. 

Higher Costs Lead Employees to Obtain Dependent Coverage Elsewhere

The effect of higher out-of-pocket costs on participants is that some then have a financial incentive to purchase dependent coverage on the private market or to obtain dependent insurance through a spouse’s plan.  When employees can purchase dependent coverage less expensively elsewhere, in theory, a vicious cycle results:  higher claim costs lead to higher premiums for the employees who remain, and more employees then purchase dependent coverage on the private market.  This issue will be discussed extensively in Chapter 3. 

EGI Has Implemented Cost-Containment
Efforts to Mitigate Rate Increases

Many factors that increase costs

are beyond an employer’s control.

Nevertheless, there are actions that can minimize the impact of rising costs.

The plan has

shifted more

costs for services

to participants.

This may help explain why EGI participants pay more for health care than comparators.

Additional measures may help to control claim costs.

However, the

current structure

is not equipped

to address

these issues.

Claim and member audits ensure proper payment of claims.

Targeted wellness and education programs attempt to change behaviors to reduce costs.

According to insurance experts, while many factors that affect health care costs are beyond an employer’s control, there are specific actions employers can take to minimize the impact of rising health care costs.  For example, they can work towards controlling or shifting the price of services, deterring unnecessary care, and reducing long-term costs by detecting and preventing illness.  EGI has used all three of these strategies to manage costs, and it is likely that these cost-control efforts have moderated plan and participant expenses. 

Negotiating with health care providers for discounts is one of the primary ways to control the price of services.  However, according to insurance experts and literature we consulted during our evaluation, Wyoming providers currently face very little competition and the state has an almost non-existent HMO market.  This makes it difficult to negotiate with providers for lower prices.  Nevertheless, EGI has attempted to influence provider costs by offering participants the option of using Great West’s PPO network.  Great West reported savings to the plan from the network of $2.4 million for the 1999 plan year.  Additionally, participants receive an incentive to use the network, in that they pay five percent less in co-insurance when using in-state network providers.

EGI has also shifted more costs for services to participants by requiring them to pay a larger portion of health care costs out of pocket.  According to experts, controlling the demand for services by passing costs on to participants provides a financial incentive to use services prudently.  In the past three years, EGI has raised the deductible under the low-deductible option, decreased the co-insurance paid for out-of-state, non-network providers, doubled the out-of-pocket maximum for individuals and families, required co-payments on prescription drugs, and established retiree premium rates that more closely reflect the risks they represent to the plan.  While cost sharing is a tool for the plan administrators to contain plan costs, this action may also help explain why EGI participants pay more for health care than do comparator plans we reviewed.  

EGI has contracted for utilization review services through Great West to help deter unnecessary use of care.  Services provided by Great West include pre-certification for hospitalization and surgery, case management for participants with chronic illness who need significant long-term medical supervision, and discharge planning to ensure hospital stays are only as long as medically necessary and to identify alternatives to extended hospital stays.  In 1999, Great West estimated savings of $3.7 million, after fees, from its utilization review services.

Finally, EGI has implemented programs to detect and prevent illness; many experts believe such programs are the key to long-term cost containment.  EGI provides discounted diagnostic testing and free health screening, two approaches to early detection, and has also implemented a voluntary disease management program.  It provides educational information to individuals with high-risk medical conditions, to help them manage their disease and control plan costs. 

Additional Efforts May Help
Minimize Cost Increases

In addition to the actions already undertaken by EGI to control claim costs, several other actions could further control plan costs:

·         Pre-funding retiree benefits

·         Contracting with a mail-order prescription program

·         Conducting claims audits

·         Implementing a member-audit program

·         Targeting wellness efforts

·         Implementing an employee education program 

However, as will be discussed in a later section and in Chapter 4, the plan may not have an optimal structure to implement further cost-containment programs.

Pre-Funding Retiree Benefits

Since 1995, EGI has increased retiree premiums to more accurately represent their actual costs and risks to the plan.  As a result, retirees have seen their premiums increase dramatically over the past five years.  The plan should consider alternatives to address retiree health care costs, especially since a large number of state employees are projected to retire in the next decade.  The plan consultant has recommended the board and the Wyoming Retirement System study the feasibility of establishing a pre-funded retiree health insuranceprogram.

Mail-Order Prescription Plans

Of all the in- and out-of-state comparators we reviewed, North Dakota is the only other plan besides Wyoming that does not offer a mail-order service for maintenance prescriptions.  EGI officials stated the board is hesitant to implement such a plan because of the impact on local pharmacies.  Although the board may have been keeping in mind the greater interests of the state, this is a decision that may mean higher prescription costs than could be obtained through a mail-order program.

Changing Premium Structures to
Reflect Risk/Increase Accountability

Changing premiums to reflect risk could serve two purposes:  it may control costs by giving participants a financial incentive to take better care of themselves; and it may reduce the amount of subsidization that exists in group plans by accounting for costs based on risk.  South Dakota’s plan age-rates its premiums, and includes lifestyle penalties such as an increased premium for smokers.

Claims Audits

According to literature we reviewed, plan administrators should conduct periodic claims audits to assess the level and accuracy of the claims administration services provided by the TPA.  These audits help a plan ensure the TPA is neither under-paying nor over-paying claims.  The plan consultant has recommended that the board conduct a comprehensive claims audit, as this has not been done since 1991 when Great West was selected as the TPA. 

Member Audits

Experts also recommend member-initiated hospital bill audits as a method to reduce health care costs.  Essentially, this program provides cash awards to participants who find errors on provider bills. All the out-of-state comparator state plans have implemented these programs.

Targeted Wellness Programs

As noted earlier, the plan demonstrated foresight by establishing wellness programs to control long-term costs.  However, other than the disease management program, the plan’s efforts have not been targeted to the greatest users of services.  An insurance industry axiom is that 20 percent of health plan members use 80 percent of the services, so targeted efforts such as a disease management program are actually more cost-effective than generic wellness programs.  Nevertheless, the plan increased its general wellness benefits to participants for the 2001 plan year.  EGI might obtain better results for its investment by targeting certain risks and behaviors that drive up plan costs, perhaps implementing smoking cessation and employee assistance programs.

Participant Education

Experts we consulted and literature we reviewed note that the insulation of consumers from the direct costs of medical services is one of the primary causes of rising medical costs, and that employers do not adequately communicate with employees about how to control costs.  EGI’s main form of communication with employees is through a quarterly newsletter and annual employee benefit meetings.  These efforts alone appear to be insufficient tools to communicate with plan participants.  Other plans we reviewed send out wellness newsletters, have online wellness information, nurse help lines, and other educational aides to continually reinforce the message that unhealthy lifestyles lead to increased plan costs. 

Factors Contributing to
Higher Participant Costs

A lower contribution for family coverage is the primary reason participant costs are higher than comparators.

EGI has an

older pool than comparators, which increases costs.

The current structure limits

the plan’s ability

to control costs.

When we began our research, many plan observers speculated about the factors contributing to perceived high participant costs.  We tested these theories, and identified three primary reasons why EGI participants pay higher out-of-pocket costs than do participants in the comparator plans. 

The State Contributes Less to Family

Premiums Than Comparators

The state’s contribution to the family premium is significantly lower than the comparators we reviewed.  EGI participants pay a higher percentage and a higher dollar amount for their share of the family premium than do employees in any of the other plans we reviewed.  The state’s contribution of $225 for each employee covers 50 percent of family coverage under the low-deductible option and 58 percent under the high-deductible option.  The next lowest employer contribution is 71 percent that the City of Casper pays toward its employees’ dependent coverage.  All of the other comparators pay more than 80 percent of the family premium.

Demographics of Plan
Participants Affect Cost

The effect of higher costs is that employees may not insure dependents through EGI, creating an older pool, as discussed in Chapter 3 and shown in the graph on page 32.  This older pool helps explain why EGI has higher costs than the comparators we reviewed, since older individuals tend to incur higher claim costs.  Because of the state’s relatively low contribution toward family coverage, employees may look for other options to insure their dependents.  This issue will be explained in Chapter 3. 

Need for Additional Direction and
Resources to Actively Manage Plan

Although EGI has taken steps to control plan costs, limited policy direction, resources, and expertise have made it difficult for EGI board members and staff to aggressively manage the plan to control participant costs.  Since costs are predicted to continue to escalate, actions taken by any individual employer are not likely to produce an actual reduction in costs.  However, proactive measures taken by plan administrators may help control the magnitude of future increases.  We explain the impact of this issue in Chapter 4.   

Other Factors Do Not Play a Significant
Role in Higher Costs to EGI Participants

Additional administrative resources may be needed to better control claims.

Claims represent

the bulk of the

costs, not plan administration.

Although

self-funding

saves money, it requires proactive plan management.

Increasing the

pool would not

reduce plan costs.

The way to improve claims experience is to bring in healthy individuals or improve the health of the existing pool.

Increasing the pool at this time would likely compound the problems currently facing the plan.

There may be opportunities

to reduce discretionary reserves.

Due to its

autonomy and fiduciary charge,

the board has

been conservative with reserves.

We considered other theories that participants and observers of the plan believed might be contributing to higher costs in the EGI plan.  Our research revealed that taking the following actions would likely not produce significant cost savings to the plan:

·         Reducing administrative costs

·         Increasing managed care in the plan

·         Purchasing insurance rather than self insuring

·         Expanding the membership to other public entities

·         Reducing reserves 

Reducing Administrative Costs

We believe it is unlikely there are administrative efficiencies the plan could undertake to further reduce plan costs.  Chapter 4 presents evidence that the plan may not currently have sufficient administrative resources available to it for effective management.  In fact, EGI may actually need additional resources to help it better control claim costs. 

Total administrative expenses for the health insurance portion of the plan in 1999 were under six percent.  This amount includes all services provided by Great West (claims administration, access to the PPO networks, and utilization review), consultant services, temporary services, and all in-house costs.  Experts we contacted stated that, by industry standards, this is extremely low.  Claim costs represent the bulk of plan costs and that is where health care plans can truly hope to control costs, not by further reducing marginal administrative expenses.

Increasing Managed Care

According to insurance experts we interviewed, Wyoming does not have a significant managed care market that would allow the plan to negotiate more aggressively with providers to reduce plan costs.  The plan has implemented a PPO network, as a voluntary option within its fee-for-service plan.  Although EGI could consider offering the PPO option as a separate plan for employees willing to give up some provider choice for lower costs, it does not appear there is significant room for reduced fees, given Wyoming’s current provider network. 

Purchasing Insurance
Rather Than Self-Insuring

Several observers suggested that purchasing coverage through an insurance company, rather than self-insuring, would reduce plan costs.  However, all of the literature and experts we consulted recommend self-funding as the preferred approach for large plans because it saves money and allows the greatest flexibility in plan design.  Nevertheless, coupled with that flexibility, self-funding requires proactive plan management, as is discussed in Chapter 4.

In a self-funded plan, the employer pays the employee health care claims directly, rather than paying a set premium to an insurance company to provide coverage to employees.  Large employers can self-insure because they are considered “credible” by insurance industry standards.  Credibility means the pool has enough members to adequately spread the risk and accurately project costs based on plan experience.

Experts we contacted stated that if EGI were to purchase insurance, its rates would still be determined by the experience of its pool; moreover,  it would face additional costs charged by the insurance company.  Insurers include a profit margin and retention and risk fees in the premiums they charge employers.  Another consideration is that as a self-insured plan, EGI generates interest income from its claims reserve and, until benefits are paid out, from invested contributions.  Over the past five fiscal years, interest income has averaged $1.6 million per year to the plan; this is a revenue stream that would not exist if the state were to purchase insurance. 

Expanding Plan Membership
to Other Public Entities

We reviewed whether increasing the size of the EGI pool to include other public employers in the state would create economies of scale and increase negotiating power with providers.  Experts we interviewed believed that the administrative savings created from economies of scale would be immaterial, and in fact, more resources might be needed to administer a larger plan.  Further, these experts indicated Wyoming is a high medical-cost state and providers have little incentive to negotiate rates with insurance plans. From a public policy perspective, there may be interest in allowing groups that need to improve their costs to join the EGI pool.  However, this action is not likely to reduce EGI plan costs. 

Since the EGI plan is considered credible, adding additional members to the pool would not change the claims experience for the plan.  Claims, not administrative expenses, make up the bulk of plan costs.  The way to improve the claims experience of the plan is by bringing in large numbers of very healthy people or by improving the health of current participants, not just by bringing in more people.  As one insurance expert put it, “bigger is bigger, better is better.” 

We found that other public entities in the state offer insurance to their employees through a variety of mechanisms.  Some self-insure, others purchase insurance from an insurance company, and yet others join in a multi-employer trust plan.  Several insurance experts stated that only those public employers who could get lower costs with the EGI plan would want to join; if the objective were to lower premium costs, these would not be the groups EGI would want to include.   

Given that EGI participants pay higher costs than other in-state public comparators, increasing the number of employers in the EGI plan would likely only compound the problems already faced in the plan.  This is because the new employers would include employees with families, and those families could also likely purchase dependent coverage cheaper on the private market.  By the same token, those who would have a financial incentive to participate in the EGI plan would probably be higher cost individuals. 

To reduce EGI plan costs, the state needs to focus on ensuring that the healthiest potential members of the existing pool have incentives to participate in the state’s plan.  It is harmful to the plan when employees purchase dependent coverage on the private market or through a spouse’s employer, thus foregoing premium income to the EGI plan. 

Although increasing the EGI pool is not advisable, there may be opportunities for EGI to work with other public plans in Wyoming to negotiate provider discounts for services for each plan.  Experts and literature we consulted noted that when individual plans band together to form purchasing alliances, they can increase negotiating power with providers.  However, it is difficult to determine whether a purchasing alliance in Wyoming could affect provider rates, given the lack of competition among the state’s medical providers.

Reducing Reserves

Another issue that some speculate is increasing costs to EGI participants is the level of reserves held by EGI.  A majority of the reserves are retained for incurred but unreported and unpaid claims and to protect against claim fluctuations.  However, there may be opportunities to reduce a portion of the reserves that is discretionary. 

The plan consultant recommends that the plan maintain 20 percent of medical claims for claims that have been submitted but not paid, and for incurred claims that have not been submitted.  EGI maintains about 15percent of claims inreserves for this liability.  Additionally, the consultant recommends a minimum reserve equal to 10 percent of the medical claims for contingencies such as claims fluctuations, negating the need for stop-loss insurance.  However, the board maintains approximately 16 percent of claims for unexpected fluctuations. 

Finally, EGI also maintains a discretionary operating reserve, totaling just over $4 million in FY99.  These monies are available to the board to use at its discretion to decrease premiums or enhance benefits.  The EGI director stated that this portion of the reserves does not affect the financial stability of the plan, so this may be an area where the plan could consider reductions.

The EGI board has consciously drawn down its operating reserves in the last few years:  in FY96-97, this category averaged $9.3 million.  Because the board’s focus and primary responsibility is fiduciary, we believe members have been conservative with these monies.  Additionally, because of the autonomous position of the plan, the board may feel it is necessary to keep a higher level of reserves than would otherwise be necessary.  Revisiting the structure of the plan, as discussed in Chapter 4, may lead policy makers to consider whether or not this level of reserves is needed. 

Actions Needed to Actively
Manage Overall Plan Costs

A lower employer contribution accounts for higher  costs, but analysis is needed before increasing it.

It is critical to address structural limitations in the plan before taking specific actions to manage costs.

Costs to EGI participants are significantly higher than those paid by participants in other public-sector plans in Wyoming and in other state government plans we reviewed.  Consequently, it is not surprising that EGI participants have expressed dissatisfaction with the current plan and may be electing to purchase dependent coverage on the private market or through a spouse’s employer, or perhaps may be leaving their dependents uninsured.

A lower employer contribution for dependent coverage largely accounts for higher participant costs.  Nevertheless, before requesting an increase in the contribution from the Legislature, plan administrators should analyze the level at which the contribution needs to be set to attract employees who are currently not purchasing dependent coverage through EGI. 

More active plan management is necessary to rectify the problems identified in this and previous reports.  However, as we explain in the remainder of this report, there are limitations in the current administrative structure that make it difficult to take such steps.  It will be important to address the fundamental structural limitations in the plan before taking specific actions to manage long-term plan costs. 

In the next chapter, we examine the financial disincentives in the EGI plan that discourage employees from purchasing dependent coverage through EGI.  The board has not addressed issues of plan design that create such disincentives.  Consequently, in Chapter 4, we contend that a new decision making structure is needed to most effectively manage costs in this difficult arena.

In this chapter, however, we make no direct recommendation regarding how to reduce participant out-of-pocket costs.  We believe the best way to ultimately affect these costs is to implement the recommendation in Chapter 4 that deals with structural issues that affect plan management.