Why Waterford's Medical Costs Are Increasing

Last week I wrote about the cost of retirement benefits.  This week, I will explain the next largest increase in the FY2012 budget, Health Care Costs.  Before we get too deeply into the subject there are a few definitions that need to be explained.

Self Insurance – An organization sets aside a fixed amount to cover potential insurance claims.  Waterford has a modified Self Insurance Plan.  It sets aside the fixed amount but has a major medical policy that will “take over” when a patient or the program reaches the pre agreed upon stop loss limit.

IBNR – Incurred but not reported – These are claims for medical services that have been used but not yet submitted to the Insurance Administrator.

Risk Corridor – A financial arrangement between a payer of health care services and a provider that spreads the risk of providing health care services.  The Risk Corridor protects the provider from excessive care costs for individual beneficiaries by instituting a stop loss protection and protects the payer by limiting the profits that the provider may earn.

Stop Loss – A category of coverage that provides insurance protection (reinsurance) to an employer for a self insured plan.

The Town introduced self insurance with Anthem Blue Cross as the Administrator in FY1999 (November 1998) and established the Insurance Fund in FY2003 by removing all insurance costs from individual department, board, or agency budgets and placing these costs into one accounting group.  We will only be considering health insurance in this article although the Insurance Fund does cover other insurances.  In FY2003 the Town ended the year with $1,075,194 in the Health Insurance Fund and appropriated $1,504,826 to cover health care costs in FY2004.  Over the next five years, health care costs were essentially stable costing around $1,500,000 per year.  The BOE had a similar experience with BOE costs around $3,598,000 in the same period.  The shift to self insurance had the desired effect of keeping health care costs at a reasonable level for the number of contracts (individual or family) in each group.

The Insurance fund is also supported by the insurance premiums paid by employees as specified in their individual Union Contracts:  Teachers – paying 18% in FY2012; School Administrators – paying 17% in FY2012; General Government Administrators – paying 9% in FY2012; Police – paying 11% in FY2012; Firefighters – paying 12% in FY2012.  Local 1303 – 6.5% in last contract which expires on June 30, 2011; Board of Education Secretaries, Custodians, and Food Service (Three different contracts) – 15% in FY2012; and Education Paraprofessionals – 13% in FY2012.

Receipts and expenses were within reasonable balance through FY2007.  In FY2008, according to the Comprehensive Annual Financial Report (CAFR) for that year, health care expenditures exceeded receipts by $1,485,289 due to increase in health benefit claims by town and BOE employees .  According to the FY2009 CAFR health care expenditures exceeded receipts by $586,606 and the End of Year (EOY) Fund Balance was a -$658,248.  In the last audited year (FY2010) the health care expenditures reached $9,780,685 and were $814,086 greater than receipts. The Health Care Fund Balance at the end of FY2010 was a -$2,257,184. This balance was despite a General Government appropriation of $1,874,671 and a BOE appropriation of $4,111,425 for the fiscal year.

The reason for the increase was an unexpected (at that time) of client claims.  These claims have continued to rise.  Unfortunately, there are a number of insured who have chronic and expensive to treat illnesses.

Last May the Representative Town Meeting (RTM) approve a General Government appropriation of $2,332,020 for Health Insurance and the BOE appropriated $4,926,515 for the current FY2011.  In January, 2011, the First Selectman informed all department and agency heads that “…health insurance rates will increase approximately 50% effective July 1, 2011….The rates are what our cost share is based on so …employees will see varying changes based upon their plan and their affiliations.”   As of February 28, 2011, general government Health Care expenses have been $2,330,635 and there are five months to go in the fiscal year.

According to the information provided with the Insurance Account budget, in order to control the budgetary increases, the administration “eliminated the redundancy of holding both Individual and Aggregate Stop Losses in FY2010.”  Working with the Insurance Administrator, Managed Benefit cost are up slightly and the Network Access Fees declined by six percent.

So, just how was the requested budget figure for FY2012, $2,623,108 for general government and $6,453,039 for the BOE, determined?  The number of Contracts is 637 (217 for town and 420 for the BOE).  The contract split is based on the number of participants for each group (34% for the town and 66% for the BOE).  Expected paid claims figure for FY2012 is $9,000,012 with a risk corridor funding of $1,800,003.  Stop Loss total for individual is $406,123 based on $53.13/contract/month.    Run-out claims (IBNR) as determined by the plan administrator is $799,550.  Administrative fees are 2.445% of cost of claims or $220,087.  The Managed benefit charge is $4.17/contract/month totaling $31,875 and the Medical Network Access Fee is $32.48/contract/month for a total of $248,277.  This gives a gross total to be funded of $12,505,930. 

There are some funding offsets that reduce the amount that must be appropriated by general government and the BOE.  These include the insurance premiums from the employee cost share noted above and from investment earnings.  The total funding offset considered for FY2012 is $3,480,813.

The most significant increase in the FY2012 budget outside of claims is the Individual Stop Loss which is up 20%.  As noted in the budget backup material, “..The reason for this huge increase is the level of claims over projections for the last two and one-half years which has exhausted fund balance reserves.”  The backup continues that the FY2011 Risk Corridor will not be sufficient to meet projected claims through FY2011 since only one third was funded of the required amount was funded.  Generally Accepted Accounting Principles (GAAP) permits the refunding of a Risk Corridor over a three year period.  Based on current claims, the administration estimates that the fund operating cash deficit at June 30, 2011 will be in the area of $730,153.  This means that the Risk Corridor and the IBNR must be funded by budget rather than by Insurance Fund Balance.  There will be no fund balance on July 1, 2011.  Clams recognition must also be increased by $500.012 based on the last several months’ claims average.  The appropriation also continues the phased in approach for restoring the IBNR and the 20% Risk Corridor by a  higher than average funding request.

The gross total to be funded noted above is $12,505,930.  This is reduced by the funding offsets of $3,480,813 noted above and the amount designated for the risk corridor and IBNR of $2,599,553 to a total of $6,425,564.  The Projected Fund Balance as of July 1, 2011 is -$3,229,703.  A difference adjustment of -$34,266 because the Difference figure is greater than one third of the value of the risk corridor is added  so the total adjustment is $3,263,969 which when added to the required appropriation of $6,425,564 leads to a net appropriation required of $9,689,533.  An additional “Payments in lieu of Insurance” of $23,125 leads to a total Health Insurance Appropriation of $9,712,658 ($2,623,108 for the Town and $6,522,618 for the Board of Education prior to recent layoffs).

Town staff has been working to bring down the health care costs and reviewing other plans.  To their credit, the officers of the various unions in the town have been meeting to review the expenses and try to come up with an alternative to the current plan.  For the sake of the town employees and for the taxpayers, I hope they are successful in finding an alternative to the ever increasing costs of health insurance due to the steady increase in claims.

Editor’s Note: Patch asked First Selectman Dan Steward why health insurance costs are up, and he put some of the blame on the Obama administration. The administration's new health care law has increased the cost of healthcare, Steward said. Also, congress and the administration’s inability to address tort reform continues to keep the cost of healthcare up, Steward said.