Response to State Comptroller s Report Regarding State Health Benefit Plan. Posi8on Document from MagnaCare

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1 Response to State Comptroller s Report Regarding State Health Benefit Plan Posi8on Document from MagnaCare

2 Response to New Jersey State Comptroller s Report Regarding State Health Benefit Plan Position Document from MagnaCare Introduction The New Jersey State Comptroller s Office issued a report on February 28, 2012, that alleges New Jersey local governmental units (LGUs) could save upwards of $100 million if they abandoned their private health insurance plans and joined the state-run state health benefit program. While the report offers solid comments for tighter procurement processes, it is fundamentally flawed in its analysis and conclusions. Healthcare costs represent the second largest non-capital expense for most LGUs. This important issue deserves clarification. The report ignores factual data and documentation offered by the audited municipalities, and entirely overlooks significant features related to proper, lawful health benefit management in the public sector. Statistically Insignificant Sample Size The report alleges that $100 million could be saved if all public entities not in the state plan joined. This logic and rationality is flawed and technically inaccurate on a number of levels. The conclusion is based upon extrapolating the results of only four selected LGUs out of nearly 1,200 municipalities, counties, boards, commissions, authorities, school districts and other governmental entities. This represents a tiny fraction of the entire group, and is not remotely statistically relevant or representative. Furthermore, the purported savings of $1,000 per employee is based upon the artificial results of the only four audited LGUs. It incorrectly assumes that the same alleged $1,000 savings would identically materialize in all other 1,196 entities. Such a hypothesis is fundamentally flawed because it fails to consider the impact of adding in such an enormous population to the state plan, and the 1

3 resulting changes in claim costs, demographics, utilization and other related factors. Overreaching Conclusions Benefits design and funding is a complex dynamic. The laws of actuarial and behavioral science are unique and can change so one can t simply use a single broad brush to paint an accurate picture of healthcare economics. That the report could make such unsupported statements speaks to a gross lack of understanding or appreciation for the technical processes related to healthcare usage and consumption. Simply put, the $100 million savings assertion is inaccurate, and not in any way credibly substantiated. The state plan is, in fact, an option for many public employers, but not all. The report fails to mention the number of public entities that would not benefit from a move to the state plan or how many have left and realized savings. Most recently, the Vineland School District exited the state educator s plan and realized a substantial savings because the state plan cost more. This is just one of a large number of such examples. We understand the report s intent was to illustrate that the state plan should be considered. However, it is neither the best nor only solution for New Jersey public entities. Furthermore, the report fails to acknowledge the robust and competitive private insurance market in New Jersey where the carrier competes for business. Carriers and administrators, like Aetna, AmeriHealth, CIGNA, Horizon BCBS of New Jersey, MagnaCare, United, QualCare and others, offer high quality products and services that are often of a higher quality and lesser cost than the state plan. Additionally, the report fails to mention the availability of the various Healthcare Joint Insurance Funds that are available in all areas of the state, offering yet another high-quality, low-cost option through effective shared services. 2

4 Ignoring the Unique Coverage Issues The premise of the $100 million in savings falsely presumes that every other LGU in New Jersey has benefits exactly equal to what the state plan offers. This ignores the primary structure of an effective plan the coverage. In many instances, the state plan s projected savings to a particular LGU would be completely undermined because the state plan s benefits are simply less generous that the LGU s current plan. While there is a strong case to be made for reductions in benefits, it is misleading to overlook the fact that the state coverage is often of a lesser value, hence the savings. In other instances, the state plan may be more costly because its benefits are more generous than what the LGU may have in place. Only when benefit levels are compared point for point to the state plan, can an LGU accurately assess cost. Biased Selection of the LGUs Although the report selected a single large, middle-sized and small group for the audit, it is limited and biased by geography and scope. By only reviewing LGUs from Essex, Ocean, Camden and Middlesex counties, the report is missing key LGUs that reflect the uniqueness of New Jersey. By relying primarily on suburban, heavily populated areas, the report completely overlooks huge portions of the state with completely different needs and issues. For example, rural areas like Sussex and Cumberland are not properly represented, nor are other unique areas like Cape May or Warren. The report also fails to consider the wide differences in the healthcare costs and utilization across the state. While the state plan may offer one rate that applies to all entities no matter their location, this does not mean that the report s approach is accurate. In fact, it has long been theorized that the higher healthcare costs in Northern New Jersey are often subsidized by the lower costs in Southern New Jersey or other rural regions of the state. Since the report neglects to include a 3

5 broader representation of New Jersey, it is inaccurate to suggest that the patterns of these four entities are representative of the state in total. False Comparisons to Other State-Run or Sponsored Plans Lacking representative data, the report supports its conclusions by referencing the alleged popularity of other state plans with LGUs. However, the evidence would suggest the contrary. Florida, Texas, Pennsylvania, New Mexico, New Hampshire, Idaho and Arizona are just a few of the states that limit their state-run plans to only state workers excluding local municipal workers. And there are many more. In fact, no data or evidence exists that suggests that open state plans are any more effective than restrictive ones. It is probably more accurate to consider healthcare as a local issue with variations in cost and quality across the nation. Comparisons to Other States Additionally, the report made a specific reference to Massachusetts as a state where local units have joined the statewide plan and realized savings. However, the report fails to call out the distinctions between the New Jersey state plan and the Massachusetts state plan. The Massachusetts model allows local entities to buy into insurance deals the state has arranged, but it s not a subsidized pool that takes the losses like New Jersey. In Massachusetts, the LGU may enjoy reduced fixed costs, but the local entity pays premiums that have a direct correlation to their specific experience. In the New Jersey state plan, an LGU s claim experience is irrelevant and is never considered. The New Jersey state plan takes all comers and charges them all the same price. As a result, this means that some LGUs are paying more in the state plan to subsidize others who may not be paying their fair share. If New Jersey was to subscribe to any other state plan model, they may wish to consider the state of Washington. In that state, the plan is designed for state workers, but they allow local units to participate. However different than in New 4

6 Jersey, they have a rigorous application process to ensure proper underwriting selection. LGUs in Washington State must complete an application and provide three years of claims data so that the state may properly underwrite the LGU and ensure that everyone pays their fair share. The Role of the Broker / Benefits Consultant Selecting and managing a health plan is a rigorous and complex process that includes weighing and factoring thousands of individual data points. Just as LGUs require the expertise and insights of a lawyer, accountant auditor and engineer, they also rely upon the professional services of an insurance broker / benefits consultant to advise them in a number of key areas. It would be irresponsible for an LGU to make complex healthcare decisions without the help of a professional. Brokers and consultants deliver services over a broad spectrum of areas, including assistance with collective bargaining, financial and claim analysis, carrier negotiations, assistance with compliance (Note: federal healthcare reform applied to LGUs required significant additional assistance from LGU brokers and consultants), claims advocacy, enrollment, COBRA, retiree billing and other related items. The notion of not having professional representation for what is the second largest expense for most LGU budgets is flawed. For the same reason that other prominent employers in New Jersey, like Merck, J&J, PSEG and others, use brokers/consultants for benefits consulting services, so too should New Jersey public entities. Getting the best, most expert advice on health benefits issues is fundamental to public employers so they may make the best decisions in order to properly manage and control rising healthcare costs. Why should public entities be denied the same level of professional advice that large successful private businesses have? 5

7 The State of New Jersey uses Brokers/Consultants It should be noted that the State of New Jersey and the State Health Benefit plan use a benefits broker/consultant. In their cases, they use Aon Hewitt, who over the next five years will earn $10 million for such services. In some recent years, the state paid Aon Hewitt as much as $5 million in one year for such services. If the state plan needs these services, how can one suggest others do not? Broker Compensation On the issue of compensation transparency, LGUs should absolutely know what they are paying their broker/consultant, and should dutifully follow all of the rules and laws related to procurement. Most know and most do. But, pointing to the elimination or reduction of brokerage fees as a panacea to deal with the rising cost of healthcare is naive and misleading. The average brokerage fee in New Jersey is between1 to 3 percent of the premium. More importantly, most public entities have already moved to fee-based arrangements that generate less compensation. This is the same average across the country. Rather than targeting the professional service costs, which make up only a small fraction of healthcare costs, government regulators may be better served in reviewing the massive costs and waste related to bureaucracy and inefficiencies in delivering healthcare in New Jersey. Issues like medical error rates, an excess capacity of hospital beds, fraud and a lack of evidence-based medical care offer a more significant and practical opportunity to manage and reduce costs. The claim that brokers are disincented to recommend the state plan based upon a single comment from a single broker is misleading and shows an obvious bias. New LGUs are joining the state plan regularly at the advice of their broker. And further, to think that elected officials and administrators are ignorant to the availability of the state plan is not just wrong, but potentially offensive. The state s rates are publicly available and recent publicity related to PL Chapter 78 has put 6

8 the state plan front and center. Any brokers not suggesting every option will quickly lose their credibility, as well as the confidence of their clients. Complexities with Collective Bargaining The report also dismisses the need to comply with collective bargaining obligations, arbitration rulings and even New Jersey Supreme Court decisions that mandate certain more generous benefit levels be offered. In many cases, public employers could enjoy the same or greater savings if they merely matched the benefit levels offered by the state plan. However, such changes need to be done at the bargaining table and cannot be unilaterally imposed. Concerns with the State Plan s Financial Stability The report largely dismisses concerns raised related to the financial stability of the state plan. It suggests that the department that runs the state plan stands by its financial soundness. However, there are valid reasons for public employers to question the soundness of the state plan. For example, according to the KPMG Audit of the state plan as of June 30, 2010, the State Plan for Local entities lost $21.4 million in net assets. As of June 30, 2010, the State Plan for Educational entities lost $9.6 million in net Assets. In their report to the state for 2011, Aon Hewitt further suggested, the higher enrollment has resulted in unfavorable claim experience. The same report paints a chilling story related to the state plan s unfunded actuarial accrued liability for post employment benefits under the GASB Statement No. 43. As of the end June 30, 2010, the unfunded liability was $56.8 billion. As recent as 2008, the state plan artificially reduced rates to increase market share. As a result of that move, in 2010 the state plan then needed to raise rates by 20 percent. The state plan s financial track record has been inconsistent at best leaving many LGUs vulnerable to wide fluctuations in cost, year over year. 7

9 Since no claims data or individual results are shared or easily available from the state plan (the state charges LGUs to buy the data), LGUs are often caught off guard without an ability to better predict future costs. Concerns with Market Volatility Finally, the report suggests that entities could simply enter or leave the state plan whenever it suits their needs. While this may seem simple enough, the adverse underwriting impact has a destabilizing and debilitating impact on the state plan pool, and is highly inadvisable. Such actions defy the principles of actuarial science and accepted underwriting, and would hurt not help the stability of the state plan. Other Comments In addition to pointing out the inaccuracies or omissions of the Comptroller s report, it should also be noted that there are a number of well-known challenges and weaknesses related to the state plan: A lack of transparency; limited to no access to claims data for evaluation purposes. In the state plan, some LGUs pay more and subsidize others who don t pay their fair share. Flawed management controls that delayed the installation of tens of millions in Medicare pharmacy savings for months. An enormous unfunded retiree liability that could destabilize the plan. An inability to allow LGUs to negotiate for benefit designs that may be more cost effective than the state plan. Wide fluctuations in rate changes from one year to the next. For example, increases of 20 percent in 2002 and 2010; 17 percent in 2007; 23.5 percent in 2003 and so on. The fact that the new 2012 state plan low cost options garnered only a 1 percent enrollment. 8

10 The fact that the state plan offers inducements to enter by allowing entities the ability to take premium holidays and not pay bills until later periods at a far greater cost. Pursuant to PL Chapter 78, the state is to evaluate whether it should continue to allow LGUs to be in the state plan. The purpose of the report is a valid one. Public entities must consider every option available to reduce costs and improve the quality of healthcare for their workers and their taxpayers. The report properly calls for better procurement procedures, transparency in broker and commissions and a need to secure concessions related to plan reductions. However, many of the extrapolated assertions and claims are invalid since they are based upon a limited sample size that is not representative of what is actually happening on a statewide basis. We hope that future reviews will offer a more balanced, objective and valid accounting of the health benefits market in New Jersey. 9