Report to the General Assembly (Published)

Document Title

A Review of the Efficacy and Administration of the Commonwealth's Employee Benefits Program

Author

Department of Personnel and Training

Enabling Authority

HJR 421 (1991)

Executive Summary

I. INTRODUCTION

House Joint Resolution (HJR) 421 directed the
Department of Personnel and Training (DPT) to study the
administration and efficacy of the state's health
benefits program. Specifically, HJR 421 required the
Department to: 1) review the health insurance options
currently available to state employees: 2) assess the
advantages and disadvantages of the health insurance
options; 3) examine the recent increases in premiums:
and 4) evaluate the effectiveness of the program's
administration.

To respond to the issues presented in HJR 421, DPT
employed several major study methods. DPT analyzed
historical data regarding premiums, procurement
practices and program administration; surveyed state
employees; surveyed other states and local employers;
and requested its independent benefits consultant and
actuary, William M. Mercer, Inc. (Mercer), to analyze
and comment on various aspects of the program.

11. FINDINGS

A. Health Plan Options

1. Active Employees (see page 111-1)

* The health benefits program is designed to
provide every state employee, regardless of
geographic location, a choice of at least
two health plan options. The Basic plan is
available statewide to all employees, at no
cost to them.

* In addition to the Basic Plan, optional
plans (KeyCare and Cost Awareness), which
provide a higher level of benefits, also are
made available to employees.

* In the Richmond, Tidewater, and Northern
Virginia areas of the state, employees also
have the option of obtaining coverage from
private Health Maintenance Organizations
(HMO's).

2. Retired Employees (see page 111-6)

* Retirees under the age of 65, or who
otherwise are not eligible for Medicare, may
continue to participate in any of the
options available to active employees.

* Retirees who are eligible for Medicare may
enroll in an HMO, if they reside within the
HMO's service area. DPT also provides two
other Medicare complementary plans, Option I
and Option 11, on a statewide basis.

B. Relative Advantages and Disadvantages of Health
Plan Options (see page IV-1)

* In any health benefits program, employees'
views on the advantages and disadvantages of
a particular benefit plan vary according to
the medical needs of each employee.

* An analysis of the relative advantages and
disadvantages of the state's health benefits
plan options is presented on page IV-2.

C. Comparison of Virginia's Health Benefits With Other

Employers

1. Comparison of Virginia's Health Benefits With
Other Virginia Employers (see page IV-1)

* Mercer advised DPT that, overall, the
Commonwealth's health benefits are
comparable to other large Virginia
employers.

* Mercer concluded that the structure of the
program, which incorporates a variety of
health plan options, is equal to or better
than most large Virginia employers.

2.Comparison of Virginia's Health Benefits With
Other States (see page IV-3)

* Unlike the Commonwealth's health benefits
plan options, many states have instituted
lower cost "comprehensive" benefit plans
(i.e. plans that require employees to pay a
$100-$300 deductible and 20% co-insurance)
as a means of holding down health insurance
costs.

* In its 1991 Survey of State Employee Health
Benefits Plans, the Martin E. Segal Company
reported that 28 states had adopted
comprehensive benefit plans. Virginia is
one of 22 states which has retained a higher
level of benefits as its statewide standard
plan for employees.

3. Employees' Views About the State's Health
Benefits Plans (see page IV-7)

* Based on a survey of state employees, 43% of
the Commonwealth's employees are "very
satisfied" with their health benefits, and
an additional 43% are If somewhat satisfied."
Only 10% of employees reported being
If somewhat dissatisfied with their benefits,
and 2% reported being "very dissatisfied. It

D. Health Benefits Premiums

1. Premium-Setting Process (see page V-1)

* For the Basic, KeyCare, and Cost Awareness
plans offered to state employees, the
premiums are based on two actuarial
estimates, one by Mercer (DPT's independent
consultant) and the other by Blue Cross and
Blue Shield of Virginia (BCBSVA).

* Premiums for HMO coverage are determined as
part of the competitive procurement process
used to select the HMO plans. Annual
increases in the premiums charged by each
HMO are limited to the percentage increase
which the HMO files with the State
Corporation Commission's Bureau of Insurance
each year.

2. State and Employee Premium Contributions (see
page V-2)

* Section 2.1-20.1 of the Code of Virginia
mandates that the Commonwealth pay the cost
of employee-only coverage under the
statewide plan (Basic). This same amount is
paid toward the cost of the optional
coverages (i.e. KeyCare, Cost Awareness, and
the HMO's).

* In addition to paying 100% of the cost of
the employee's coverage, the Commonwealth
also pays 52% of the cost of dependent
coverage under the Basic plan.

* Overall, the Commonwealth pays approximately
758 of the total cost of the health benefits
program.

E. Recent Premium Increases

1. General (see page V-6)

* The total amount paid by the Commonwealth
for employee health insurance has increased
from approximately $121.5 million in fiscal
year (FY) 1988, to $228.9 million in FY
1991, an increase of $107.4 million.

* The total amount paid by employees has
increased from approximately $26.3 million
in FY 1988, to $62.6 million in FY 1991, an
increase of $36.3 million.

* In 1990, the premium for employee-only
coverage under the Basic plan increased 20%.
In 1991, this premium increased another 30%.
Premiums for family coverage and the
optional plans also increased significantly
in 1990 and 1991.

2. Reasons for Premium Increases (see page V-8)

* Two key reasons for the Commonwealth's
premium increases in 1990 and 1991 were
medical cost inflation, and increases in the
utilization of health care services by
employees.
interest earnings on the balance of the
health insurance fund. The health insurance
fund earned approximately $11.2 million in
interest income during fiscal years (FY)
1990 and 1991.

3. Managing Claims and Supplying Provider Networks
for the Self-Insured Health Plans (see page
VI-7)

* DPT pays an administrative fee to its
current program administrator, Blue Cross
and Blue Shield of Virginia (BCBSVA), to
manage claims and supply provider networks
for the self-insured health plans.

* The administrative fee paid to BCBSVA for
these services is a fixed price per contract
unit administered each month, and is not
related to the number of claims processed,
the amount of the claims, or the premiums
charged to employees.

* Approximately 97% of the premiums paid by
the Commonwealth and employees are used to
pay medical claims incurred by employees.
Only 3% of the premiums are used to pay for
administrative expenses.

111. RECOMMENDATIONS

A. Program Design and Cost Containment

1. DPT should continue to evaluate and implement
effective cost containment programs to help
control the rising cost of health insurance.

2. As required by Item 61 of the 1991
Appropriation Act, DPT will present a plan to
the Governor and the 1992 General Assembly to
revise the design of the health benefits
program.

B. Program Administration

1. Prior to establishing new provider networks,
particularly in rural areas, DPT should verify
that BCBSVA has met all of its criteria for
ensuring that employees have adequate access to
network providers.

2. DPT should implement the recommendations made
by the Auditor of Public Accounts following its
review of the health benefits program's
financial controls and accounting procedures.

3. DPT should ensure that BCBSVA implements the
necessary modifications to its claims
processing systems such that all contractual
performance standards are being met.

4. DPT should work with its consultant, William M.
Mercer, Inc., and BCBSVA to revise the
financial performance standards contained in
its contract with BCBSVA to reflect more
competitive performance levels.

5. The Commonwealth should increase the state's
contribution to family coverage €or those
families with two state employees such that the
contribution represents 100% of the cost of
each employees' coverage plus 52% of the cost
of the dependents' coverage.

C.Communications and Education

1. DPT should make available more information
regarding the health benefits program so that
employees and others understand the
administration of the program, the procurement
process, the premium-setting process, and other
critical aspects of the program.

2. DPT should conduct an annual survey of
employees to determine their views and
satisfaction with the benefits and services
provided through the program. DPT should give
careful consideration to the results of the
survey when changes to the program are being
contemplated.