Use the Group Insurance Fund Surplus to Reduce the State s Share of Health Insurance Costs

The state should use its portion of the surplus in the Group Insurance Fund to help pay the employer s share of employees health insurance premiums.


Background
The cost of health insurance continues to rise substantially each year. The average cost of state health insurance plans nationwide increased 13 percent for the year ended January 1991. This double-digit increase is less than the previous two years, when the average cost of state plans increased by 15 and 20 percent, respectively. 1

The state spent about $140 million in the 1982-83 biennium for group insurance for state employees. The estimated expenditur e for the 1992-93 biennium is $780 million. The reason for the increase is twofold: premium increases and growth in state employee work force. These figures do not include the cost of group insurance for higher education employees, many of whom were enr olled in the uniform group insurance plan (UGIP) beginning in fiscal 1993.

With skyrocketing health insurance costs, it is virtually impossible for the state to reduce premium expenditures without reducing benefits. A more realistic state goal is to implement innovative cost containment solutions.

To control costs, several groups, including Alexander & Alexander Consulting Group, the Texas Performance Review, the Group Insurance Advisory Committee, the Legislative Budget Office and the Joint Select Committee on Employee Benefits, recommended that th e Employees Retirement System (ERS) incorporate the concept of managed care into the UGIP. In response to these recommendations, ERS implemented a self-insured, managed-care plan in fiscal 1993 called HealthSelect of Texas.

HealthSelect is a Preferred Provider Organization (PPO) network that requires participants to designate a primary care physician, or a gatekeeper, who is responsible for managing and directing the participant s health care. Incentives and disincentives ar e provided to participants to encourage the use of network providers. The plan allows participants to choose between in-network or out-of-network providers at the time service is needed. HealthSelect is available to state employees and emplo yees of institutions of higher education, excluding the University of Texas and Texas A&M University systems.

The network covers Austin, Dallas/Fort Worth, Houston and San Antonio. Currently, about 37 percent of the participants live in network areas. The network is scheduled to expand to cover about 53 percent of participants in fiscal 1994, and 70 percent by fis cal 1995. Participants who live outside network areas have the same benefit structure as under the fiscal 1992 health plan. 2

Under HealthSelect, ERS estimates health insurance premiums will increase 14 percent per year during the 1994-95 biennium, rather than the historical rate increases of 18-20 percent. 3

The Group Insurance Trust Fund
The Employees Life, Accident, and Health Insurance and Benefits Fund 973 contains the contributions of employees, retirees and the state plus earned investment income. The fund pays employee health insurance claims for Health Select and premiums to health maintenance organizations (HMOs). The fund also pays the operating expenses incurred by ERS to maintain the group insurance program. Life and disability insurance premiums paid by employees are also deposited into the fund to pay these claims as needed.


ERS uses the investment income to pay ERS operating expenses and reduce premiums. During fiscal 1993, ERS estimates that $15.8 million will be earned and will be used to pay for $6.6 million in ERS operating expenses, with the remainder used to lower premi ums. In fiscal 1993, investment income reduced the required HealthSelect premium rates by 1.4 percent. 4

Article 3.50-2, Section 5(f), V.A.C.S., requires ERS to estimate the fund balance in excess of state and employee premiums required to pay estimated health insurance claims and other expenses. This unrestricted balance must equal at least 10 percent of the total benefits expected to be provided directly from the fund as a result of claims incurred during the fiscal year. If the unrestricted balance falls short of the 10 percent requirement, the stat ute requires ERS to request additional state contributions to restore the balance to 10 percent. The unrestricted balance is held in the fund as a contingency reserve to provide for adverse fluctuations in future charges, claims or program expenses.

ERS estimates the contingency fund balance at the end of fiscal 1993 will be $63.6 million. The balance is projected at $71.7 million in fiscal 1994-95. 5 The following table compares the contingency fund balance to the projected total HealthSelect of Texas expenses (the dollar figures are expressed in millions):

FY93 FY94 FY95

Projected Total HealthSelect Expenses $ 479.4 $ 563.6 $ 661.8
Contingency Fund Balance $ 63.6 $ 71.7 $ 71.7
Contingency Fund Balance as % of Expenses 13.3% 12.7% 10.8%
Source: The Employees Retirement System


In fiscal 1991, the Legislature appropriated $22.2 million of the contingency reserve fund balances to be spent in place of general revenue for the month of July 1993 for the state s group insurance contribution. This amount represented the state s share of health insurance premiums contributed to the fund. During fiscal 1990-91, the state contributed about 70 percent and employees contributed 30 percent of the total premiums deposited in the group insurance fund.

Other States Practices
TPR surveyed all 35 self-insured states, as reported by the Segal Company in a 1991 survey, to find out how much is held in contingency reserves for bad claims experience and if the reserve amount is determined by statute or at the plan administrator s discretion. 6 Of the 22 states that responded, TPR found that 13 states do not maintain contingency fund balances in excess of the amount of premium contributions required to fund estimated claims in a given fiscal year. Of the nine states that do maintain contingency reserves, the amount is determined at the discretion of the plan a dministrator in six states (Wisconsin, Virginia, Utah, Washington, Minnesota and California). Only three states, Texas, South Carolina and Kentucky, statutorily require reserve fund balances.

Surpluses, or contingency reserves, accumulate when premiums paid by the state and employees exceed the amount of claims and expenses incurred during a plan year. Some states, like Texas, are required by statute to keep surpluses in the group insurance fu nd to protect against adverse fluctuation in claims experience. The State of Delaware refunds surpluses to both the state and its employees. To make the refunds, Delaware offers contribution holidays, where the state and its employees do not have to pay group insurance premiums for a temporary period of time.

On the other hand, if premiums are not sufficient to pay claims, states without contingency reserves are usually forced to request supplemental appropriations from the legislature to cover the deficit. This is why contingency reserves are useful to protec t against adverse fluctuation in claims experience.

The majority of states that responded to the TPR survey reserve a portion of the state and employee contributi ons for claims incurred but not reported (IBNR). The IBNR consists of claims incurred during a plan year that are not yet paid as of the end of the fiscal year. The amount needed for the IBNR is usually determined by an actuary and is based on Actuarial Standards Board (ASB) guidelines and Generally Accepted Accounting Principles (GAAP). The IBNR can be used for contingencies to pay claims, if necessary, until the premiums are set for the next plan year to make up the difference.

Compared to other states, TPR found that Texas holds larger contingency reserve fund balances. The reserve is held in addition to the IBNR. Texas is one of few self-insured states that required contingency reserves to be held by statute.

In general, the larger the plan group, the more stable the claims experience will be. 7 Even though enrollment in the UGIP is increasing with the inclusion of higher education employees, ERS actuary, Rudd and Wisdom, Inc., says that there is more uncertainty involved in projecting claims for the health plan in fiscal 1993 than at any time since the inception of the UGIP. The actuary attributes this uncertainty to: (1) the addition of about 50,000 higher education employees and retirees in fiscal 1993 for whom no reliable data is available re garding health care use; (2) the implementation of managed care with greater benefits for using network providers; (3) the open enrollment period and (4) the conversion to self funding which places all the risk on the plan. 8 Because of these uncertainties, the 1993 premium rates include adjustment factors for higher education, benefit changes and open enrollment.


Recommendations
A. The Legislature should eliminate the statutory requirement to maintain contingency reserves of 10 percent of claims.

B. The state should use its share $50.2 million of contingency balances in the Employees Life, Accident and Health Insurance and Benefits Fund 973 instead of general revenue to pay for group insurance contributions in fiscal 1995.

The contingency fund balances should be spent during the last two months of fiscal 1995 to allow interest earnings to be retained in the fund d uring the 1994-95 biennium and to protect the fund from adverse claims experience that may occur during the first two years of implementation for HealthSelect. TPR recommends that this policy be continued after the 1994-95 biennium.

C. The employees share of the contingency reserve should be retained in the group insurance fund to protect against adverse claims fluctuation, reduce premium rates or provide contribution holidays to state employees, at the discretion of the board of directors of the Employees Retirement System (ERS).

The statute should be modified to specifically authorize ERS to use contingency fund balances for the above purposes. If ERS determines that a portion of the contingency fund balances can be used to provide rate supplements or contribution holidays for employees, these balances should not be expended until the last two months of fiscal 1995.


Implications
The recommendation will reduce the amount of interest earned on the contingency fund balances expended in place of general revenue funds. Since the fund balances will be expended during the last two months of fiscal 1995, the reduction in interest earnings wi ll occur primarily in the 1996-97 biennium.

Depending on the level of interest rates, the recommendation may reduce the interest rate supplement used to reduce the premium rates established in fiscal 1996. However, the recommendation will allow ERS to us e a portion of the contingency fund balances to benefit state and higher education employees in the form of premium supplements or contribution holidays.

The recommendation will reduce the size of the contingency reserve fund to protect against adverse fluctuation in claims. However, by the time the contingency fund balances are spent late in fiscal 1995, over a year of claims experience will be available.

Fiscal Impact

Fiscal Gain to the General Loss to the Group Change
Year Revenue Fund 001 Insurance Fund 973 in FTEs

1994 $ 0 $ 0 0
1995 50,200,000 (50,790,000) 0
1996 0 (3,600,000) 0
1997 0 (3,600,000) 0
1998 0 (3,500,000) 0

The gain to the General Revenue Fund represents the state s share (70 percent) of the estimated contingency fund balances in the group insurance fund to be spent in place of general revenue funds in fiscal 1995. The state s share of contingency fund balances after fiscal 1995 cannot be estimated at this time.



Endnotes
1 The Segal Company, Survey of State Employee Health Benefit Plans 1991 (Atlanta, Georgia, 1991), p. 1.
2 Letter from Charles D. Travis, Employees Retirement System of Texas, to Governor Ann W. Richards, July 24, 1992, pp. 5-6.
3 Employees Retirement System of Texas, Requests for Legislative Appropriations, Fiscal Year 1994 and 1995 (Austin, Texas, September, 1992), p. 29.
4 Letter from Charles D. Travis, July 24, 1992, p. 11.
5 Letter from Charles D. Travis, Employees Retirement System of Texas, to Terri Salvaggio, Texas Performance Review, November 6, 1992.
6 The Segal Company, Survey, p. 5.
7 Telephone interview with Dave Wilson, A. Foster Higgins & Co., Inc., Princeton, New Jersey, October 27, 1992.
8 Letter from Philip S. Dial, Rudd & Wisdom, Inc., to the Board of Trustees of the Employees Retirement System of Texas, April 21, 1992, pp. 4-5.