- Report Published -
|Review of the State Employees Health Insurance Fund - October 2011|
|Auditor of Public Accounts|
|Appropriation Act - Item 2 D. (Regular Session, 2011)|
|The Commonwealth receives sound actuarial information to set employee health care premiums and reserves. Best practices indicate that the Commonwealth should, at a minimum, fund an actuarially determined “incurred but not paid” reserve. While there is no consensus on the funding of a contingency reserve, there does appear sound support for some actuarially determined funding of this reserve to prevent the reoccurrence of the funding issues from the late 1990’s and early 2000’s.|
From 2007 to 2010, the State Health Insurance Fund (HIF) net assets exceeded 100 percent of the actuarially recommended reserve level, known as “overfunding.” To eliminate this overfunding, the Commonwealth has been providing a premium subsidy on behalf of active state employees, thereby allowing these employees and their agencies to pay less than the required monthly premium and using HIF net assets to make up the difference. Because the Commonwealth has no formal reserve funding policy, nothing prohibits Commonwealth management from taking actions that could drop net assets below the actuarially recommended level, and this occurred as of June 30, 2011.
Since the HIF reserves have fallen below the actuarially recommended amounts, the Departments of Human Resource Management, Planning and Budget, and the Governor will need to consider this as part of their analysis when proposing the fiscal year 2013 state health insurance premium rates and deciding whether to continue the current premium subsidy. The General Assembly will also need to consider this when reviewing the proposed rates and any subsidy during the legislative session.
The General Assembly may wish to consider establishing a reserve funding policy during the 2012 legislative session, before adopting the 2013 health insurance premium rates and choosing to continue other actions related to the HIF. Premium subsidies, withholding of interest, and low premiums all reduce state agency expenses and are attractive as a short-term fix to balance the Commonwealth’s budget during tight budgetary times. However, failure to set a reserve funding policy will likely end with the HIF net assets dropping too low, requiring additional General Fund support in the future to make it actuarially sound, similar to conditions that occurred in fiscal year 1997.
We performed this audit pursuant to the Appropriations Act Chapter 890 Item 1.2, 2-D, requiring the Auditor of Public Accounts to complete a financial review of the state employee health insurance fund and address the rate setting process and projected expenses compared to actual expenses. In addition to establishing a reserve funding policy, our report includes several recommendations to improve the HIF’s management.