The Committee on Government Affairs was called to order at 8:07 a.m., on Tuesday, February 2, 1999. Chairman Douglas Bache presided in Room 3143 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All Exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Mr. Douglas Bache, Chairman

Mr. John Jay Lee, Vice Chairman

Ms. Merle Berman

Mrs. Vivian Freeman

Ms. Dawn Gibbons

Mr. David Humke

Mr. Harry Mortenson

Mr. Roy Neighbors

Ms. Bonnie Parnell

Ms. Gene Segerblom

Mr. Kelly Thomas

Ms. Sandra Tiffany

Ms. Kathy Von Tobel

Mr. Wendell Williams

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

Chairman Bache stated he would like the committee to review the standing rules for the Government Affairs Committee (Exhibit C), and added the only revision from last session was in section IV where there was a requirement for committee introduction would now be a majority vote of eight members. Chairman Bache said he would accept a motion to adopt the committee rules.

********

Chairman Bache then introduced the support staff for the committee from the Legislative Counsel Bureau and the three committee secretaries.

Ms. Segerblom pointed out in number XII of the standing rules, it was presumed the committee members would vote on the floor as they had in the committee meeting. She emphasized that if for any reason a member was changing his/her vote, the chairman must be notified in advance.

Dave Ziegler, Research Division of Legislative Counsel Bureau (LCB), indicated he had passed out two handouts; a Committee Brief for Government Affairs (Exhibit D), and a brief overview of the titles and chapters for referral to the committee (Exhibit E). He stated he would be covering the jurisdiction of the committee, a review of 1997 issues, a quick review of issues that might arise in 1999, and comments about the schedule and contacts.

The handout on titles and chapters had the main message that there were an incredible number of chapters of Nevada Revised Statutes (NRS) assigned to the Government Affairs Committee. Those included everything from local government finance to utilities. The source of the information was the recommendations for referral of assembly bills and resolutions that came from the office of the speaker. Jurisdiction in the Senate Government Affairs was slightly different. As an example, ethics and elections went to the Senate committee, but not the assembly committee, whereas Public Employees Retirement System (PERS) issues were heard by Assembly Government Affairs not the Senate committee.

Mrs. Freeman questioned what committee heard PERS discussions when in the Senate if not in Government Affairs.

Mr. Ziegler replied it was his understanding Senate Finance Committee heard PERS issues.

Mr. Ziegler pointed out, in Rule 12.7, P. 166 of the overview, two specific items needed to be addressed; they were regional land use planning and electric restructuring in the Public Utility Commission of Nevada (PUCN). Mr. Ziegler remarked there were two regional land use planning entities in the state; the Tahoe Regional Planning Agency since 1969 and, in the Truckee meadows counties between 100,000 and 400,000, The Regional Planning Commission and the Regional Planning Governing Board since 1989. Last session there was interest in southern Nevada and two measures related to it did not pass. One measure, S.B. 383, which created the southern Nevada Strategic Planning Authority (NSPA) did pass. That created a 21-member authority to identify and evaluate the needs of Clark County regarding growth and to make recommendations to the Seventieth Legislative Session. A southern Nevada regional planning coalition had been formed by inter-local agreement indicating the NSPA had a legislative agenda and had asked for a briefing, but to date nothing has been confirmed. On the agenda was a Community Bond Bank, some additional air pollution regulations, expanding the role of the Convention and Visitors Authority in the area of economic development, streamlining road financing, and creation of a school construction oversight board.

On restructuring of the PUCN, AB 366 of the 1997 Legislative Session was a major measure of the last session and made changes to the Public Utility Commission (PUC), changing the number of commissioners from five to three, and splitting off the Transportation Services Committee Authority. One major item was allowing customers to begin obtaining competitive electric service from alternative sellers after December 31, 1999, unless the PUC determined a different date was necessary. In a recent press release, PUC stated a different date was necessary, but wanted to work with the present legislature to determine what the date should be. Mr. Ziegler added he would provide copies of the press release to the committee members to review before the Friday meeting when Chairman Sheldrew of the PUC would be briefing the committee.

Mr. Ziegler then apprised the committee of some of the issues which would be visited in the Seventieth Session, such as the interim study on city charters: distribution of tax revenues; group health insurance for state employees; utilities; Public Employees Retirement System (PERS); public records; public works and infrastructure which addressed the whole complex of growth, housing, land use planning, zoning, and redevelopment. He added there was a long list of people who addressed the committee on issues last session and he was in the process of updating the list. Although it was extremely long, he would provide a copy to the committee when it was complete.

Chairman Bache noted he had a Bill Draft Request (BDR) requesting a 2-month delay of the start date of the PUC deregulation because of the year 2000 compliance issue.

Elana Marton, Senior Research Analyst, with LCB, stated she would be addressing the "Staff Study of City Charters in Nevada" (Exhibit F) conducted by staff in evaluating the existing 13 city charters. She explained although there were not enough copies made for the committee, she would make additional copies available when copying was completed. The study was requested by the 1997 Assembly Committee on Elections, Procedures and Ethics and was presented to the Legislative Commission in December 1998. The report addressed what should be included in city charters and what should be included in general law. One point raised was the addressing of individual needs of the city. Another issue addressed; in many areas the general statutes clearly and thoroughly articulated local government operations. The study looked at the organization of the legislative, judicial, executive departments in Nevada’s cities. In addition it examined divisions governing city budgeting, financial reporting, and tax limitations. One area to be looked at closely for restructuring was finance and local improvements; as well as utilities and franchises.

Ms. Segerblom questioned if her understanding that not all cities were under charters was correct. In response, Ms. Marton replied, there were 13 charter cities highlighted in the bulletin.

Ms. Segerblom queried, was there a chance of a lawsuit if regulations in a particular city charter did not conform to regulations in cities without charters. Ms. O’Grady responded she did not believe that was a possibility.

Mr. Mortensen asked for elaboration on the changes needed for utility issues. To the best of her knowledge, Ms. Marton felt an example would be Boulder City, which operated its own utilities. Most of the other city charters did not, so the issue was whether the charter provisions should include setting up the utility, its structure, and implementation. The general statutes were rather detailed in those areas. The question was how much detail should be in the city charter and how any contradictions should be resolved.

Mr. Mortensen observed Clark County oversees the utilities for the county.

Ms. Gibbons questioned if the charter determined when elected candidates were sworn in for city or county offices. Ms. Marton believed the charter specified when a city official took office, the county would be a separate issue, with the state officials governed by statute.

Randy Waterman, Acting Risk Manager, began his presentation by stating he had an informational handout (Exhibit G), to share with the committee. He added they could read it at their leisure, but he would present a brief overview. He felt the committee was aware the present state benefit program for health insurance was in financial turmoil. He said a bill draft would be submitted giving the fund an infusion of cash. Without additional funding, claims would cease to be paid as early as the beginning of March and certainly no later than the beginning of April. The problem became compounded due to the fact when the last biennium budget was put together, the actuary of the plan used understated information because of lost data. The budget therefore was understated as much as $16- to $18-million. An electronic audit was currently in progress at the Risk Management Division.

He went on to explain preliminary audit results showed L & H, the former administrator, which went bankrupt in June 1997, had processed all the easy claims, thus causing the claims values to be understated. Because of the claims processing procedure, it appeared the completed claim frequency was operating at a reasonable level. When UICI Administrators started processing the backlog of claims it found the high dollar claims had not been processed by L & H, so UICI had not included those items in the formula when the rates were put together for the biennium.

Mrs. Freemen questioned if there was any person or agency at the state level reviewing the claim processing when L & H Administrators were in charge. In responding, Mr. Waterman felt there had not been sufficient review. When the backlog of claims started appearing in the last 6 to 8 months, the Risk Management Division had no idea what the volume or dollar amount was going to be. It only became apparent the numbers had been understated when the budget was being formulated, because the information was not evident before that time.

Mrs. Freeman asked if there hadn’t been an insurance actuary who could have anticipated the backlog problem. Mr. Waterman explained the claims payment appeared normal. He noted an on-sight auditor would have helped at the time. An outside firm conducted annual audits, but a day-to-day position on-site in his division was needed to track the claims processing.

Mrs. Freeman questioned if the director or the Committee on Benefits made the decision to have an auditor on staff. In response, Mr. Waterman said it was a combination. In the coming biennium, the division was requesting an audit position, but it would be up to the legislature to approve the position.

Mrs. Freeman asked if there were any bills being proposed to change the makeup of the membership on the Committee on Benefits. It was Mr. Waterman’s understanding there were several BDRs being submitted. The Department of Administration submitted one BDR he believed was BDR 23-230, which he felt was a fairly comprehensive bill. Governor Guinn had temporarily pulled the bill for review because it had been put together under the Miller Administration and Governor Guinn wanted to make sure it followed his philosophy. The bill would cover appointments to the committee, qualifications for committee members, and also reorganize the Risk Management Division.

Ms. Segerblom disclosed she had spoken with a constituent and was advised the insurance premium payment had been raised 23 percent for retired public employees. Mr. Waterman conceded the average across-the-board increase would be 23.7 percent for fiscal year 1999. He pointed out, when the committee originally looked at increasing the figure for retirees it was in excess of 45 percent due to the fact retirees had a higher utilization rate. The committee felt that figure was disproportionate, and it only took about a 1½ percent increase to active employees contributions to bring both active and retired employees in line at 23.7 percent.

Ms. Segerblom questioned if the committee was aware of how small some retirees’ income was. In response, Mr. Waterman stated he was aware of several calls on the issue. However, he was helping the committee to administer the plan and following the decisions they made.

Ms. Segerblom inquired if the committee or his division was involved with Pacific Care. Mr. Waterman said he was aware that Pacific Care was one of the Health Maintenance Organizations (HMO’s) offered by the Benefits Committee, but that was the extent of his involvement.

Ms. Segerblom went on to say Pacific Care had pulled out of Boulder City, so the retirees under that plan were now without insurance. Mr. Waterman revealed that Pacific Care had undergone some severe problems. The president of that organization had recently talked with the committee and told them they were scrambling to make available new providers and get some of their contracts back in place.

Ms. Von Tobel expressed her biggest concern was open enrollment for employees. It occurred last October and employees were not given proper information, because there were other plans they could have selected even though the premiums were higher. Once the insured employees realized their out-of-pocket hospital deductible was $3,000 many of her constituents voiced their concern over their ability to pay an amount that high. She questioned the feasibility of sending out additional information and then holding another open enrollment. She felt the opportunity should be given to the employees to select another plan now rather than waiting until next October when they would realize how terrible the present self-funded plan had become. She added she had also heard the premiums were going to be raised again, even after the current 23.7 percent.

Mr. Waterman informed Ms. Von Tobel she was correct. The rate increases were budgeted for 12.7 percent for the next calendar year and a 7.5 percent for each of the following 2 years. The last two increases were to keep up with the trend in utilization and inflation. The decision to hold an open enrollment would have to be made by the Committee on Benefits, he said he would be happy to suggest it; however, open enrollments become work intensive. He felt the major problem was the co-insurance threshold going from $7,500 to $15,000.

Ms. Von Tobel contended she had several calls, which was understandable when you realize a person has to come up with $3,000 when going into the hospital; when retirees are having a problem meeting the new premiums she felt the $3,000 out-of-pocket expense was going to be a tremendous burden. She knew with the other three plans the threshold was not $3,000. Because notification to the members of the self-funded plan was not strong enough, the insured did not realize the expenses that would face them for another year. She did not feel the facts were presented to the employees in October and an open enrollment should be held to offer alternative plans. If the employees did not change plans that would be their decision, but at least they would have the facts and the opportunity to choose an alternate plan.

Mr. Waterman went on to say there were other problems with the plan in addition to the claims experience in the past, L & H Administrators was not a third party administrator the Committee on Benefits solicited under a Request for Proposal (RFP). L & H had bought Core Source about a year before L & H went bankrupt, and the committee had no provision or clause in the contract to tell the company they could not assume the contract. In the current contract there was a provision that gave the committee the right to refuse a contract as well as sufficient time to re-bid a contract should a refusal occur. It was apparent when L & H took over there were problems.

Continuing, Mr. Waterman said, in December of 1996 the computer crashed in the middle of computer conversion, which resulted in unpaid claims for a protracted period of time. In June of 1997, L & H declared bankruptcy and its license to do business with the State of Nevada was terminated. Unfortunately, the state then had only 1 week to get an RFP for a third-party administrator instead of the usual 6 months. UICI was awarded the contract and was up and running in about 3 months. Because of L & H’s problems, historic claims data such as Preferred Provider Organization (PPO) and other organizational agreement information could not be accessed, resulting in a huge backlog of unpaid claims.

Several factors contributed to the loss of money by the state. Discounts were given the state by agreement with providers, only if they were paid on timely basis. Because they were not paid in a timely manner, it was estimated it cost the state $8 to $10 million in lost discounts. The committee also made a decision to waive deductibles for 1997 because of the lack of historical data there was no way to enforce a deductible provision in the plan. That decision cost the state about another $2 million.

Another important aspect was the "run-in" claims. A written contract with UICI handled the unpaid claims left over from L & H at a cost of $10.50 apiece. The $10.50 was paid each time a claim hit the system, resulting in many claims being paid two or three times. If a doctor had not been paid for 6 months or longer, another bill would be submitted to UICI. That bill would not be recognized as a duplicate bill until it hit their system, but the $10.50 was still applied. Processing the "run-in" (extremely stale) claims cost the State of Nevada Benefits Services Fund about $1.5 million. The state started the last biennium with a surplus of about a $25 million, but by the end of the biennium there would be a deficit of about $15 million.

An additional factor was the previously mentioned perceived surplus at the beginning of the biennium. Due to that misinformation the committee thought the employee benefits should be increased. So when the real data became available it was obvious there was an additional loss of about $6 to $7 million.

In regard to the makeup of the committee, Mr. Humke questioned if there was a pending appointment for the retiree member, Mr. Howard Barrett who had resigned. He asked if the governor made the appointment. Mr. Waterman responded the governor did make the appointment. He understood several names had been submitted, but he had not heard of a specific appointment.

Mr. Humke inquired if there was a term limitation on appointments. Mr. Waterman said the way it was set up there was no term limit of committee members either in statute or Nevada Administrative Code (NAC). The term limit issue had been brought up during the Legislative audit.

Mr. Humke questioned if members serving at the pleasure of the governor were subject to background requirements. Mr. Waterman replied three were governor appointees and two were appointed by the State of Nevada Employees Association (SNEA). Currently, there were no background requirements in the statutes other than retiree positions.

Mr. Humke inquired if there were any other requirements such as insurance, accounting, legal, or health care expertise. Mr. Waterman pointed out a BDR submitted by the Department of Administration had been submitted requesting there be some qualifications in order to serve on the board.

The duties of the Risk Manager to act as advisor to the board were set out by statute; Mr. Humke inquired if other duties beside health care were specified. Mr. Waterman replied the Risk Management Division was responsible for operating the property and casualty insurance for the State of Nevada including workers compensation, employee safety and health, as well as developing contracts.

In answer to Mr. Humke’s question on the time spent of his duties; Mr. Waterman related he spent about 110 percent on the Committee on Benefits, and about 10 percent on his other responsibilities.

Mr. Humke felt the one line in statute indicating he was to act as an advisor to the committee left a pretty loose interpretation. Mr. Waterman explained until 1983 the program was an insurance program operated by an insurance company, with the Committee on Benefits deciding who the insurance carrier would be. Up until that point the Risk Management Division, which was created in 1979, concentrated on taking care of what he now spent almost 100 percent of his time doing. Because of that he felt other duties were somewhat neglected. Until 1983 the Risk Management Division was responsible for the property and casualty contracting, employee safety and health, workers compensation and things of that nature. Those duties were the "dog" and employee benefits were the "tail" and "the tail is now certainly wagging the dog." When he started with the division in 1986 in property and casualty there were three and a half positions in the office, including the employee benefits staff. Today there were 28 positions, with 21 of those positions dedicated to employee benefits. He related there was an executive director position being requested in a BDR who would be dedicated only to employee benefits, and a risk manager position who would be dedicated to risk management.

Mr. Humke said it was his understanding there was an agreement with the present benefits committee, and he would like to read the agreement to determine what was needed in statute. He pronounced he was a fan of putting important state functions into statute and he might offer some amendments so the relationship between the committee and the risk management office could be completely spelled out.

Mr. Waterman informed Mr. Humke he felt the BDR took care of a lot of Mr. Humke’s concerns, but he would be happy to supply him with a copy. He added he currently reported to the Director of the Department of Administration. Under the new structure in the BDR, there would be a director for the benefits committee.

Mr. Humke disagreed with Mr. Waterman’s opening statement the system was in "turmoil." He felt the program was in "free fall."

Ms. Gibbons questioned if the positions the agency were requesting had been in place when L&H failed, would that have reduced the $25 million surplus and the $15 million debt. Mr. Waterman stated had the internal auditor he was requesting been on board, certainly there would have been more insight into the problem at an earlier time. Whether all of it could have been stopped, he opined "probably not." The other two requested positions would not have had an impact on the problem. One of the positions would help keep the reconciliation with the pay center up to date. A clerical support person was the second position requested, which was desperately needed to keep up with filing, but would have had no effect on the claim backlog had it been in place.

Ms. Gibbons asked why three new positions were being requested when there was a hiring freeze and why the legislature had to approve them. Mr. Waterman explained all new positions had to be approved by the Legislature. The requested positions were the result of legislative audits that the department and Committee on Benefits had in the last 2 years. Some of the problems which contributed to the office falling behind on daily duties, was due to the lack of people and technology.

Mr. Mortensen questioned the statement where claims were paid multiple times and asked if the agency was trying to collect those overpayments, and if it would be a significant amount. Mr. Waterman asserted that even though a claim may have been processed twice it did not mean the actual bill had been paid twice. The way the third party administrator laws (TPA) were written, when the TPA received a claim it had to be processed. Each claim must be run through the system, which in turn generated an explanation of benefits indicating if the claim had already been paid, or already processed but no payment made. In the case of a stale claim, the contract that was in place at the time stipulated the administrator be paid each time those claims were processed, even though they could be duplicates or triplicates. Under the new contract, the administrator was paid on the number of individuals in the plan on a per month basis rather than on a per claim basis.

Mr. Waterman pointed out UICI was currently undergoing an electronic claims audit. The major objective was to look at claims that may have had duplicate payments, as well as potential TPA claims liability where collection could have been made against another party. Commercial auditors were hired to identify duplicate claims in addition to scrutinizing the plan administrator on an ongoing basis.

He mentioned that the Committee on Benefits currently had over 30 contracts, some such as the Third Party Organization (TPO), the prescription drug program, and the preferred provider network were very large contracts. Those also had a much larger impact on the participant contributions than the smaller contracts.

Mr. Waterman indicated in the informational handout, items #6A and #6B were the current and proposed organizational charts for the office. The last two pages dealt with the requested, deleted and replaced positions. A request was being made to replace the present Risk Manager by an Executive Director, who would report directly to the board, and to replace the Benefits Manager with an Operations Officer. The thought behind that request, was once there was an Executive Director, who would in effect become the Benefits Manager the Operations Manager could oversee the day-to-day operation of the office. The Information Technician System Manager would replace the Computer Network Specialist position and be responsible for network maintenance, programming needs, and developing systems. The request to upgrade the present Management Assistant III to an Executive Assistant was because the position already handled many routine administrative matters. In addition the position would serve as the Executive Director’s General Office Manager.

Mr. Waterman noted the most critical position to be filled would be the Internal Auditor. Without that position, the office would still rely heavily on self-reporting by vendors and TPO administrators without having tracked their actual performance. He felt an annual report by an outside auditor was simply not efficient when dealing with such a high volume of claims. The in-house auditor could also enforce the term of the contracts.

The Management Analyst position was requested to oversee more than 30 contracts and would work closely with the Internal Auditor to assure the accuracy of the self-reporting. The request for the position of a Training Officer would accomplish two things. That position would also serve as a public information officer to make sure accurate information was disseminated during the opening enrollment period, and when other issues came up with the plan.

The Program Assistant would focus primarily on the pay center and vendor reconciliation process which had become very labor intensive. That position was needed to bring the agency up-to-date and keep it current. The filing for the eligibility staff would be done by the requested Administrative Aide position. There were over 28,000 members including dependents in the plan and all the paper files for the participants were constantly being pulled for reference. This position would eliminate overtime for the eligibility staff, who currently spent a significant part of their time doing clerical duties.

.

Ms. Von Tobel reported some state employees who had left state service as long as two years before and not eligible for coverage were still have their premiums paid. She asked if the problem with the premiums had been resolved.

Mr. Waterman felt most of the problem had been cleared up. There had been a time-line finalization set and each of the four pay centers would have the backlog resolved in approximately a month.

In response to Mrs. Freeman’s question whether there was currently sufficient staff, Mr. Waterman replied at present there were not sufficient resources in the office. He added the requested positions would have to be approved by the money committees and at least three were needed immediately. He did not feel those could wait until July or October to remedy the situation.

Mrs. Freeman asked if there was sufficient technology in the office. Mr. Waterman responded the Department of Information Technology (DOIT) was helping to accomplish a higher level of technology. Recently a technology person with more expertise was hired, filling a position vacated in January. He added the present software system and mainframe were year 2000 compliant, however, some of the hardware in between needed to be assessed and changed. DOIT was also helping with a contingency plan in case a major glitch was encountered.

Mrs. Freemen queried if the money committees decided the requested funding was approved as an emergency measure, how soon could a complete program be implemented. Mr. Waterman believed in the case of the positions, the office would immediately start hiring and it would probably take about a month from approval to staffing.

Mrs. Freeman noted many times state salaries and benefits were not commensurate with the private sector and asked if, in this case, they would be competitive. Mr. Waterman informed Mrs. Freeman that the higher level managerial positions were unclassified and salaries commensurate with the position. In order to attract qualified applicants to deal with a program as large and complex as the one in place, people with insurance knowledge must be sought.

Mr. Waterman continued there were about 47,000 participants in the plan, including active state employees, state and non-state retirees, and non-state employees. There were approximately 40 pay centers in the program, 7 of which were state, the others were different public entities who participated in the plan. He pointed out there were some rate changes in the plan, such as the office co-payment to primary care physicians from $10 to $15. The largest change was for retirees who previously did not have to meet a deductible threshold. Prior to January 1 there was a coordination of benefits with Medicare, which was no longer the case. The impact was the retirees out-of-pocket exposure went up to $3,000 plus the deductible

Mr. Waterman called attention to the fact there was no longer a self-funded low plan, only the core plan which paid on an 80/20 basis. Individual deductibles went from $250 to $300 with family deductibles of $700 rather than the previous $500. All of the changes were made to alleviate raising the premium. The mail order drug co-pay went from $15 to $25 and generic from $5 to $10. The co-insurance threshold increased from $7,500 to $15,000, increasing the maximum out-of-pocket expenses from $1,500 to $3,000, if major medical treatment occurred during the year.

Ms. Tiffany believed the state had always had problems with contracts. Were state employees writing the contracts and what expertise did they have? Were those people professional contract writers, did they negotiate, and did they have the authority to deal with the vendor?

Mr. Waterman contended the office had professional contract people. State Purchasing Division was funded during last session for a unit to help agencies draft Request for Proposal’s (RFPs) and work on their contracts. If an item was not requested in the RFP it was not available at the contract level without a lot of cost and trouble. There was also a contract specialist in his office who worked with all state agencies to put together contracts at a risk management level, making sure the appropriate provisions such as insurance and bonding were in the contract. The Attorney General’s office had also helped draft RFPs and contracts. He contended his office learned a lot from the L & H contracts, which was probably the worst contract he had ever seen. There was nothing in the contract to protect the state from all the grief and money it cost. The largest oversight was a provision for the state to have backup tapes of the historical claims data. Without the tapes the whole system crashed.

Ms. Tiffany felt it was an oxymoron to say the contracts were great and added if the benefits office was so contract-driven, perhaps Mr. Crews would address the problems in his audit comments. Contract problems were ongoing within the state and perhaps there was single authority problem also. She had yet to see a contract that had proper tracking, follow-up with the vendor, or enforcement of the contract.

Responding to Mrs. Tiffany’s question, Mr. Waterman stated TPA handled the claims processing and was their primary function. The contract with L & H was written in such a way the company was required to process a certain amount of claims in a timely manner each month. Although there were some systems problems, it was not the only problem, TPA processed the easy claims leaving the rest unprocessed.

Ms. Tiffany asked Mr. Waterman if he was comfortable with the present TPA and if there was current information available from them so the auditor could recognize problems before they spun out of control. Mr. Waterman replied he was not completely comfortable. What was really needed, was verification claims were being processed, in the manner the state was being told they were. That was the main reason he was requesting an internal audit position.

Ms. Tiffany questioned the reason to have an internal auditor rather than a private sector auditor. She pointed out the Gaming Control Board had internal auditors in the casinos like flies; however it appeared there were problems with the auditors in the tax division.

Mr. Waterman remarked there was a difference between gaming or taxation and his office. There were only a few contracts that needed serious auditing and felt the internal auditor would be almost camping out at the administrator’s door.

Ms. Tiffany felt part of the problem with an internal auditor was sometimes they almost became a part of the organization. She felt there should be some checks and balances and perhaps there were some real problems with quality and qualifications. It appeared the systems could be fixed but qualified persons should be paramount.

Mr. Watterman apprised the committee, when the problem was identified by the LCB audit staff, a serious look had been taken at all the contract processing. Unfortunately, the first contract with the new purchasing unit was with UICI. It was a better contract but there were still flaws, which were not easily fixed. As contracts were contemplated they would be scrutinized and heavily revised to reflect all the issues raised by the legislative audit.

Responding to Chairman Bache’s request for final comments, Mr. Waterman requested the committee look at some solutions to help the office function better. The office had requested some solutions in the BDR. He was aware during the Interim Finance Committee and audit sub-committee hearings there was a lot of anger. He acknowledged the program was not managed very well. No matter where one looked a finger could be pointed where something went wrong. He hoped there was more of a fix-it mode rather than a blame mode. The program needed to be fixed not only for the participants but financial reasons as well.

Mr. Mortensen queried if it was possible to access contracts other states used or are they confidential. Mr. Waterman responded that was possible. However, because of the way the program had evolved, Nevada’s plan was rather unique. In other states contracts were looked at on a Risk Manager to Risk Manager and Benefits Manager to Benefits Manager basis. He added not only other state plans, but also private sector specialists were consulted.

Chairman Bache thanked Mr. Waterman for his presentation and efforts, and fully realized the difficulties of his position in dealing with past problems. The Chairman pointed out in both the 1993 and 1995 session he had requested audits of the benefits program.

Gary Crews, Legislative Auditor, indicated he had with him Rocky Cooper, Audit Supervisor for Risk Management and Committee on Benefits. Also with him was Lee Pierson, Deputy Legislative Auditor who, who was in charge of the Risk Management and Committee on Benefits audits.

Mr. Crews exclaimed he remembered in 1993 legislation, the Chairman had requested an audit; unfortunately the bill died on the Senate side. He went on to say in 1994 the Committee on Benefits contracted with a private firm to do an audit, and felt that had some bearing on a legislative audit in 1995. Certain problems had become very public, with significant financial impact to the state. He believed the committee was asking for a $26 million bailout from the money committees. There were millions of dollars in over-payments, duplicate payments, fraud by the previous administrator, and loss of provider discounts due to unusually late payments to the providers. He thought those were all symptoms of the problem, and in January 1998 Speaker Dini requested an audit, which was approved by the Legislative Commission. The three objectives of the audit were: to look at the existing organizational responsibilities; the contracting process used by the Committee on Benefits; and, claims information being provided to the various committees, such as Interim Finance Committee.

Continuing, Mr. Crews said the audit report was presented to the Audit Subcommittee of the Legislative Commission in December 1998. In general, the audit concluded that organizational responsibilities and reporting relationships were unclear. The program lacked appropriate management structure. Key management functions such as organizational planning and controlling operations had not been carried out. The Committee on Benefits found there were no appropriate practices in place to manage contracts. Improper contract awards and inadequate monitoring of contractor activities led to breakdowns in key functions such as claim processing.

There were 13 recommendations made, 2 of which would will come back before the committee because they all required legislation. That legislation was requested to overhaul the current program structure; provide a program management structure that ensured program duties, responsibilities, and authority; also reporting procedures be clearly identified, adequately defined, and properly aligned. Legislation was also requested to revise the composition and method of appointing members to the Committee on Benefits to ensure maintenance of a proper system of accountability.

The other 11 recommendations were more administrative in nature. Mr. Crews suggested the report could be broken into two parts: management structure, and, contract process. Mr. Crews invited Mr. Cooper to highlight the areas in the Audit Report (Exhibit H) that were the most critical.

Mr. Cooper reported the audit included an evaluation of existing organizational responsibilities of the state’s group health insurance program. It included evaluating methods for procuring and monitoring contractor services of contracts already in effect or those awarded during the period of January 1997 to June 1998. The objectives of the audit: were to determine if there were existing appropriate organizational responsibilities; proper contract management practices, and, if the claims information was valid and reliable.

The existing structure of the program, Mr. Cooper pointed out, had significant organization and management weaknesses. As a result, functions such as organizational planning and control of program operations had not been carried out. Some activities had not been clearly defined or properly assigned. Due to the overlap and gaps in essential activities such as monitoring contractors and verifying accuracy of information had occurred. Although the Committee on Benefits had overall responsibility for the Group Health Insurance Program (GHIP), it lacked direct authority over many program activities, as shown on Page 17 of the report. The Risk Management Division performed accounting, budgeting, eligibility, and member service functions. The Chief of the Risk Management Division reports to the Director of the Department of Administration, not the committee, so the committee had no control over functions performed by the division.

Another source of confusion was the committee’s contract with the Risk Manager, which conflicted with the Risk Manager’s advisory role as stated in statute. During the 1995 Legislative Session, the Committee on Benefits sought to establish a chief executive position to manage the program. However, because of late timing of the request and other concerns, the position was not approved in the budget. The committee did not incorporate any new plans for a chief executive position in its 1997 budget request. An operational audit was conducted in 1994, and in February 1995 the report was issued. Recommendations for improvement included establishment of a chief executive position, who took direction from and was fully responsible to the committee.

Mr. Cooper felt because authority for the GHIP was established in various sections of Nevada Law and the way the laws had been applied, there was confusion about program and reporting responsibilities. It established the committee had overall responsibility for the program, but confusion arose on how the program was managed and who was to manage it. Statutes contain several provisions indicating the Risk Manager had an advisory role, not a managerial role. The statutes did not mention the Risk Management Division had any direct management or administrative responsibilities. Program descriptions contained in the Governor’s Executive Budget proposal indicated the Risk Management Division was staff to the committee and identified a number of program responsibilities.

The budget narrative contained vague and sometimes conflicting language that further clouded the issue of program responsibilities. On one hand it stated both the committee and division were responsible for the plan; but it also indicated that, while the committee was responsible for management of the plan, the division was responsible for key management activities such as planning, evaluating plan effectiveness, and contract negotiations.

Mr. Cooper went on to say, the composition of the Committee on Benefits was provided for in NRS 287.041. The two members appointed by the governor fell under NRS 232A.20, which specified members of boards, commissions, or similar bodies serve 3-year terms. However, the two members selected by the Board of Directors of SNEA had no defined terms. It was stipulated the fifth member be the director of the Department of Administration, which caused a conflict. The director served as a member of the Committee on Benefits, but was also responsible for the activities of the Risk Management Division. That placed the Risk Manager as a subordinate and also consultant to his superior. The conflicting responsibilities and authority did not provide a good system of checks and balances. Three audit recommendations were made:

1. Legislation should be obtained to overhaul the current program structure;

Mr. Crews interjected the present structure was a convoluted system of accountability and responsibility. No one person was accountable in the past and that must be rectified.

Ms. Gibbons questioned if the committee members were salaried. Chairman Bache responded they were volunteer positions, but because most of them were state employees they got their regular salary. The retiree received an $80 per day stipend.

Mr. Crews added there was no accountability and there was no authority over some of the members to remove them for cause. However, a committee was established with no staff statutorily assigned to the committee. He felt the whole program was convoluted, and had led to the present organizational situation. There were legislative proposals to modify the structure. When the proposals came before the Government Affairs Committee, proper methods had to be weighed. Mr. Crews indicated he and his staff would be happy to work with the committee to make sure any legislation passed would solve the problems identified in the audit.

Mr. Pierson stated he would discuss the problems with contracts. The audit found the Committee on Benefits did not use appropriate practices to manage its contracts. Poor planning, improper award practices, and inadequate monitoring of contractor activities led to breakdown in key functions such as claims processing. Financial losses suffered from claims processing failures totaled millions of dollars. Inadequate planning led to contract provisions that did not ensure state resources had been properly safeguarded. Poor planning hampered the committee’s ability to respond to problems. For instance, TPA contract provisions did not require fundamental controls over claims processing activities. The committee’s process for preparing and issuing Requests for Proposals (RFPs) did not ensure qualified vendor notification or sufficient time to respond.

Mr. Pierson pointed out poor contract terms obligated the committee to pay hundreds of thousands of dollars each time the TPA was changed. Extra processing fees would be required on the outstanding claims at the end of the contract. The claims were typically for services provided under the old contract period, but the provider did not submit the claim until the new TPA took over. For example, when UICI took over from L&H, the committee agreed to pay UICI a monthly fee for processing claims incurred and received during the contract period. In addition, the committee negotiated to pay an extra fee for each claim UICI processed for services incurred during L&H’s contract period. UICI negotiated a fee of $10.50 for processing any claim received for services incurred before July 1, 1997.

The termination clause with UICI had similar language regarding the negotiation of claims processed at the end of the contract term. Mr. Pierson exclaimed when UICI took over, the anticipated cost was about $472,500 for processing the 45,000 claims. However, the actual cost was three times more. Based on testing by LCB staff, it was found that more than half the fees paid to UICI for processing claims prior to July 1, 1997, were duplicated. From a random sample of 100 claims with service dates in April 1997, 56 were processed more than once. Although there were problems with L&H, many payments to providers were duplicated because of slow processing. No duplicate payments had been returned by providers as of July 1998, and duplicate payments were presently still occurring.

Mr. Pierson went on to state the problems with contract provisions. Specifically it did not provide the Committee adequate time to replace TPA’s, require a back-up of computer information, or ensure proper controls over unprocessed claims. Also, there was no contingency plan in place to replace a poor performing vendor. All of that contributed to transition problems from L&H to UICI, and cost the program millions of dollars. The committee did not follow established methods for evaluating vendor RFPs. All seven of the proposal evaluation processes reviewed in the audit had weaknesses. Although total points were assigned to scoring areas, points for evaluation factors were not established. The evaluation committee set a total of 40 points for the first scoring area; however it did not establish maximum points for competence, experience, or financial stability. That resulted in some proposals having received the full 40 points, but varied scores for each evaluation factor. Because of improper evaluation practices the finalists were chosen based on recommendations by the Committee on Benefits consultant. It resulted in the top ranked firm being excluded as a finalist. The consultant evaluated, scored, and ranked the proposals using different criteria than stated in the RFP.

The audit also brought out the fact that contract terms were not enforced. UICI’s current contract required 11 monthly reports be submitted to the state. It was found only one was being provided. Mr. Pierson added there were 9 recommendations made to the Committee, and could be found on page 61 of the Audit Report.

Ms. Gibbons queried if there was a way to require the contract vendors have a provision in their contract penalizing them for accepting duplicate payment from the state.

Mr. Pierson replied there was nothing in the contracts at the present time. Responding to a further question from Ms. Gibbons, he felt a provision was certainly legal and something that could be discussed with the TPA. The problem was if the TPA kept sending in claims, the claims could not be identified before going through the process.

Ms. Segerblom wondered if there was a way to reduce the number of vendors, because the paperwork required so much time in all government departments. Mr. Pierson said it was possible. However, that meant more would have to be done in-house. Some vendors, such as Health Maintenance Organizations (HMOs), gave participants alternatives. He did not feel the present contracts were too large given the size of the program.

Mr. Humke questioned where the permission for the "documentation holiday" during the transition period came from. Mr. Crews remarked the decision came from the committee, as the TPA had to come in from out of state, set up office, and get up and running. The committee needed some time to organize before they should be held accountable for timeliness.

Mr. Humke questioned if Interim Finance Committee (IFC) had ratified the decision to delay record keeping. Mr. Crews replied he was not sure.

Mr. Humke went on to say, at that time the IFC had just gone through the massive fraud by L&H with a single employee and then the overall fraud became apparent when they went into bankruptcy.

Mr. Crews pointed out one of the problems when UICI took over was they were informed there were a certain number of outstanding claims. However, it became clear the outstanding claims were almost double. He felt there were still problems and, as indicated in the report, the requirements of the contracts were not met.

Mr. Humke questioned if the TPA alluded to in the graph on page 57 of the report, was the consultant that the committee used to try to evaluate potential contractors. Mr. Pierson indicated the exhibit showed all of the TPA’s who submitted proposals on the last RFP. Each were shown by a letter. The red color reflected how the consultant calculated a potential cost and the blue was how LCB calculated the cost based on their proposals.

Mr. Humke expressed his concern because the consultant was considered the savior in the short term to resolve the structural problems documented in the audit. A lack of reporting and, conflicting relationships between the committee and the Risk Management Office were indicated. He believed the consultant had been over-compensated for coming up with a corrupted result.

Mr. Humke felt he should disclose, for the record, he was a member of the self-funded health care plan.

Mr. Pierson pronounced another problem with UICI was incorrect information. Because of severe data limitations, the extent of UICI’s unprocessed claim inventory could not be determined from July 1997 to May 1998. UICI also had poor controls over claims received, processed, and in calculating claim inventory. As a result the state had no assurance the inventory information received was even accurate. Although L&H reported 14,111 unprocessed as of June 27, 1997, subsequent processing of old L&H claims by UICI revealed the claim backlog had been understated by tens of thousands.

Mr. Crews reiterated his staff would be happy to work with the Government Affairs Committee on any questions or legislation pertaining to the Group Health Insurance Program. The problems addressed in the audit were not just problems that were experienced a year or two ago, there were identifiable problems in the organizational structure as well as contractual that still needed to be resolved.

Ms. Von Tobel requested clarification from Mr. Waterman, as she understood UICI had been paying fines for not having paid claims on time. Mr. Waterman responded Ms. Von Tobel was correct. There were penalties built into the current contract. There were some in the prior contract, although they had been revised. There were penalties for both timeliness issues as well as accuracy levels on claims processing and payment basis. UICI was penalized when it was appropriate to do so.

He added he would like to point out that the embezzlement by L&H, although it was significant, did not contribute in a large part to the current problem. An L&H employee stole approximately $600,000 of the plan’s money. Of that amount over $400,000 had been recovered.

Mr. Neighbors questioned if L&H was bonded, and if so was the $200,000 recoverable. Mr. Waterman declared bonding for L&H was inadequate. He felt it was unlikely there was anything recoverable from the bond. The contract with UICI had much more stringent bonding and insurance requirements. He believed the bond in place with UICI was for $5 million, while the bond for L&H was for $50,000. The best way to avoid losses was to require the TPA to have very good controls in place, and in working with UICI, that had been accomplished.

Robert Gagnier, Executive Director, Nevada State Employees’ Association remarked, prior to 1983 the employees health plan was always an insured plan. Up to that time the plan was handled by an insurance company, with the insurance company determining who paid the claims. There were years when no company was willing to bid on the state employee health plan. In 1983 the self-funded plan was initiated. He believed there were approximately 12 bills dealing with the issue; going back to the time there were fully insured health plans up to another bill which would eliminate an outside TPA. What occurred presently was a hybrid of having both state government and private industry involved.

According to Mr. Gagnier, originally the Risk Manager was not supposed to run the plan. Like a number of other laws, it was run by budget. That plan was run similarly to the Payroll Division. By law, the State Controller was responsible for payroll, but by budget it was handled by the Department of Personnel. There was one line about the Committee on Benefits seeking the advice of the Risk Manager, and was added into the original legislation by an assemblyman who was the Risk Manager in Clark County at that time. The Risk Manager was fairly new and had no experience in health plans. The position simply evolved from budgets, from that point forward. Both the Budget Director and the legislature resisted any change. What killed the idea of having a Chief Executive Officer of the plan in the 1995 session was the Budget Director. The question was asked if it would be acceptable to eliminate the Risk Management position and the Department of Administration had said "no." The committee members told the administration they could not have both positions.

Mr. Gagnier stated there was another issue no one had touched on. He thought the insurance laws needed to be changed. His association had a BDR in to do that very thing; although, he was not sure the BDR did the job well enough. L&H Administrators should never have been allowed to practice in the state of Nevada. L&H should never have been able to buy Core Source. When they defaulted there were so many people in line for the bonding the state was way down the list. One of the main reasons it cost the state so much money L&H was in trouble when they came to Nevada.

Mr. Gagnier expressed the belief the retirees were not "thrown to the wolves." The retirees were subsidized heavily and because of that many retirees from other governmental entities wanted to join the plan. The retirees had one of the best plans available for the cost, and the cash contributions are in accordance with the number of years of service.

Ms. Segerblom questioned if Mr. Gagnier was referring to the teachers who were presently retiring. Mr. Gagnier replied there were several local government retirees in the state’s health plan and those who continued coming into the plan. He added a bill would be introduced during the session to expand the ability of other entities to join the plan.

In reply to Ms. Segerblom’s assertion the retirees pay into the plan. Mr. Gagnier said that was true, but at subsidized rates. If the rates had been raised to what the actuary was requesting, the rate would have gone up 45 percent. The rate only went up 23 percent with the active employees picking up the difference. That was done because it was felt the retirees could not afford a 45 percent increase.

Mr. Mortensen asked why no one in the insurance industry wanted to bid or enter into renegotiations with the existing actuary. Mr. Gagnier responded he could not give a definitive answer. He felt one of the main reasons was the high medical costs in the state, according to the American Chamber of Commerce Researchers Association, the costs had been 18 percent above the mean for the whole country. He pointed out Carson City was at 124 percent, with a very high percentage of government employees residing in the area.

Mr. T.J. Grady, Executive Director, Nevada League of Cities & Municipalities, distributed to the members a preliminary working draft for a staff study of City Charters (Exhibit I) and a letter from Patricia Lynch in response to the study (Exhibit J). He informed the committee his office did not see the finished product before the report was presented to the Legislative Commission. He added although Ms. Marton, the Senior Research Analyst did a very good job of putting the report together, there needed to be some cleanup in the language. Before accepting the study, he asked the committee to review the handout.

As there was no further business, Chairman Bache adjourned the meeting at 10:52 a.m.

RESPECTFULLY SUBMITTED:

Virginia Letts,

Committee Secretary

APPROVED BY:

Assemblyman Douglas Bache, Chairman

DATE: