The Budget Subcommittee of the Legislative Commission was called to order by Chairman William J. Raggio at 8:15 a.m. on Friday, January 29, 1999, in Room 1214 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

SENATE COMMITTEE MEMBERS PRESENT:

Senator William J. Raggio, Chairman

Senator Ann O’Connell sitting as an alternate for Senator Raymond D. Rawson

Senator Lawrence E. Jacobsen

Senator Joseph M. Neal, Jr.

Senator Bob Coffin

Senator Bernice Mathews

Senator William O’Donnell (Excused)

Ms. Jan Evans, Vice Chairman

Mr. Bob Beers

Mrs. Barbara Cegavske

Mrs. Vonne Chowning

Mrs. Marcia de Braga

Mr. Joseph E. Dini, Jr.

Mr. David E. Goldwater

Mr. Lynn C. Hettrick

Mr. John W. Marvel

Mr. David Parks

Mr. Richard Perkins

Mr. Bob Price

Mr. Morse Arberry, Jr. (Excused)

Ms. Chris Giunchigliani (Excused)

STAFF MEMBERS PRESENT:

Millard Clark, Committee Secretary

OTHERS PRESENT:

Public Employees Health Program – Budget Page SPEC PURPOSE-11 (Volume 3)

Budget Account 625-1338

Randy Waterman, Acting Risk Manager, Risk Management Division, Department of Administration, presented a general overview that included the goals and mission statement of the Risk Management Division, presented in Exhibit C. (Original is on file in the Research Library.) Exhibit C incorporated seven handouts that outlined Mr. Waterman’s presentation.

Mr. Waterman said the goal of the Risk Management Division is to provide a health care program that is affordable, meets the needs of participants, and is financially sound. He reminded committee members that the agency has had serious problems with the financial solvency of the fund. For various reasons delineated during the past 12 months, the fund has gone from a very positive balance to a deficit.

Mr. Waterman said the self-funded plan is financially stressed. Without an infusion of cash from the Legislature during Fiscal Year (FY) 1999, there will not be enough funding to pay claims throughout the fiscal year. The budget includes plans to reestablish the financial stability and regain control of the program. Mr. Waterman stated there had been no premium increases or other significant plan changes during the past two years that adversely affected the financial well-being of plan participants. Recent changes adopted by the Committee on Benefits because of the financial condition of the plan have made the benefits plan less affordable than it was last year.

Mr. Waterman acknowledged he was aware the Budget Subcommittee of the Legislative Commission had concerns about participants dropping dependent care, switching to health maintenance organizations (HMOs), and not being able to afford health care coverage. He directed attention to another handout (Exhibit D) that shows there was little shift in the number of people dropping dependents during the last open enrollment. There were 142 families that dropped dependent coverage and 76 families that added coverage.

Mr. Waterman discussed the coverage provided by the State of Nevada Benefits Plan (Exhibit C, Informational Handout No. 2). The coverage includes a medical plan and a dental plan, both self-funded. Vision care, life insurance, accidental death and dismemberment insurance, and business accident insurance are also included in the monthly premium. Participants may also choose HMOs, long-term care (a voluntary product), long-term disability, and increased life insurance for additional coverage, accidental death and dismemberment insurance, and business accident insurance. There is also a premium-only plan, section 125, which allows participants to pay for dependent insurance premium with pre-tax dollars. There are additional voluntary add-on products such as homeowners’ insurance, automobile insurance and other miscellaneous voluntary products. Mr. Waterman then discussed Exhibit C, Informational Handout 2-A, which provides a statistical overview of the number of participants in the plan.

Mr. Waterman explained the plan uses the services of a third-party administrator to pay its claims. The state hired UICI Administrators to process claims when the third-party administrator L&H went into bankruptcy and closed in June 1997. The current contract with UICI Administrators went through the formal Request for Proposal (RFP) process in 1998. UICI’s current contract period is January 1, 1999, through December 31, 2001. Mr. Waterman said many of the problems with L&H have been corrected in the new contract with UICI Administrators, and the contract better protects the interests of the state.

Mr. Waterman identified that the average number of claims handled per month by UICI Administrators during July 1, 1998, through December 31, 1998, was 37,140. The claims volume during the period prior to July 1, 1998, was as high as 120,000 claims per month because of the backlog from L&H.

Mr. Waterman discussed the major benefit changes in the plan, most of which took effect January 1, 1999, although a few went into effect November 1, 1998, as shown in Exhibit C, Informational Handout 2-C. Those changes were in response to the financial situation identified by the Committee on Benefits.

Mr. Waterman noted that the Committee on Benefits consists of five members. The Committee on Benefits is discussed in Exhibit C, Informational Handout 3.

Mr. Waterman discussed Exhibit C, Informational Handout 4, which addresses Risk Management’s relationship to the Committee on Benefits. The Committee on Benefits does not currently have any staff assigned to it. The Risk Management Division, using a formal agreement, provides staff services, consultants and other paid vendors to perform all other necessary services. There is a single line in the statutes, Nevada Revised Statutes (NRS) 331.184(11), which states that the risk manager shall "act as an advisor to the committee on benefits." Vendors provide many of the services needed by the Committee on Benefits. There are more than 30 vendors on contract with the Committee on Benefits (identified in Exhibit C, Informational Handout 5). UICI Administrators is the largest contract and has the most day-to-day impact on the plan. The contracts with Merck Medco for prescription drugs and IntraCorp, for large case-management and utilization reviews, are utilized daily. The preferred provider organization (PPO) contracts are also used daily to help route clients to preferred providers. Mr. Waterman noted there are currently two direct contracts with hospitals that are outside of the PPOs.

Mr. Waterman talked about the staffing of the Risk Management Division as shown in Exhibit C, Informational Handout 6. There are 28 authorized positions plus one part-time student position in the Risk Management Division. Of those 28 employees, 21 are dedicated to the Committee on Benefits. The other seven positions are responsible for workplace safety and state workers’ compensation, and the property casualty insurance for the State of Nevada. Exhibit C, Informational Handout 6-A, is the organization chart of the existing office. Exhibit C, Informational Handout 6-B, reflects the organization as it would be if the Property and Casualty section reported directly to the Department of Administration.

Mr. Waterman stated there is a dire need to get an infusion of money during the current fiscal year. If the money is not obtained, it is likely the fund will have serious cash flow problems as early as the end of February 1999 but no later than April 1999. The specific timing of the cash flow problems depends on the month-to-month cash disbursements for claims payments. Mr. Waterman suggested the Legislature fund the benefits health plan $26 million: $15 million to cover current-year claims expense and $11 million to reestablish the reserve for incurred but not reported claims. Without the $15 million this year, the plan will be unable to pay claims. The $11 million for the reserve fund is necessary to cover contingencies such as the incurred-but-not-reported (IBNR) claims and as part of the rate stabilization. Mr. Waterman said Mike Gray, the actuary, would give more detail.

Mr. Waterman said the funding would come from several sources. The appropriation would actually go to the various state agencies and the Risk Management Division would bill the agencies. Mr. Waterman said his calculations show that $15.9 million would go to the General Fund agencies, $2.3 million would be from the Highway Fund, and $8 million would be assessed to the federally funded and fee-funded agencies. Part of this concept is that a portion will be paid back to the General Fund over a period of four years. Funding is requested in this budget to enable the program to meet its continuing obligations for medical and dental prescriptions, drug claims, claims administration, payment for fully insured programs such as HMOs and mental health, and general administration, and to establish the necessary reserves throughout the next biennium. Mr. Waterman said it is very important that the fund rebuild its reserves and the rate stabilization fund.

Mr. Waterman said there was an immediate impact on dependent premium. Dependent premiums have already been increased an average of 23.7 percent effective January 1, 1999. Dependent premiums for the future are planned to increase 12.7 percent beginning January 1, 2000 and 7.5 percent beginning January 1 of both 2001 and 2002. Future state contribution increases are projected to increase 23.7 percent July 1, 1999, 12.7 percent July 1, 2000, and 7.5 percent July 1, 2001 and 2002. Mr. Waterman noted that all of the suggested proposals known to date consider restructuring the Committee on Benefits in the Risk Management Division. He said there have been many Legislative Counsel Bureau (LCB) audits that have been performed in addition to audits initiated by the Committee on Benefits, and it is obvious to the division that a change is needed. He added that how the Risk Management Division has operated in the past has not worked well and the division would like to change.

Mr. Waterman remarked that the changes contained in this budget reflect both additional positions and the transformation of some positions to perform different duties. He was requesting a total of five new positions and the reclassification of five existing positions, discussed in Exhibit C, Informational Handout 7.

Senator Raggio said that because of the time constraints it was not necessary to discuss each position unless it represented a material change in operations as a result of the new position.

Mr. Waterman replied that the Internal Auditor position was needed and had been suggested in the LCB audit. While all of the positions requested were needed, the Internal Auditor position was the most critical and was needed as soon as possible. The position would be responsible to audit the performance of the third-party claims administrator, as well as the performance of other critical vendors. The Internal Auditor position would also be responsible to assure those functions within the Risk Management Division are being performed in accordance with pertinent statutes, regulations and policies. Senator Raggio asked if there was currently any audit position in existence. Mr. Waterman replied there was not.

Mr. Waterman said the Management Analyst position is also needed. There are over 30 contracts with vendors, which require monitoring. Without proper monitoring the state may not get the services it is paying for. This position would be responsible for drafting RFPs and assisting the Internal Auditor with monitoring various contracts to assure that vendors are complying with their contracts.

Mikel T. Gray, Managing Consultant, William M. Mercer, introduced himself as the actuary to the state self-funded insurance plan. He said he has reviewed the budget that was submitted which included a zero-dollar balance forward from FY 1999 to FY 2000. That zero-dollar balance was developed without the knowledge of what would happen to the appropriation request of $26 million to fund a $15 million shortfall during FY 1999 and the $11 million for the incurred but not reported reserve (IBNR). Mr. Gray said the actual shortfall projected during FY 1999 was $14 million but because there was some error in the claims estimates, it was determined that $15 million was a safe number to budget for the balance of FY 1999. The $11 million would fund the current estimate of IBNR claims. These are claims that have dates of service during the current fiscal year but have not yet been processed. Mr. Gray noted it is common to establish a reserve for these claims.

Mr. Gray said that if the appropriation did occur and additional money is provided during the current fiscal year, the budget document would be changed to reflect an anticipated balance forward from FY 1999 to FY 2000 of $11 million. This $11 million would replace the zero-dollar balance forward contained in the current budget document.

Senator Raggio asked Mr. Gray to comment on his recommendations pertaining to the request for the infusion of state dollars for the self-funded plan. The senator inquired about the amount of money needed, what the goals of the plan are, and the projected status of the plan at the end of the current fiscal year if the request for $26 million is approved. He asked what the estimated reserves would be at the end of FY 1999, and at the end of the next biennium if the $26 million were approved. Senator Raggio questioned, "Where do we need to go from here?"

Mr. Gray responded that, assuming the requested appropriation is approved, the IBNR reserve at the end of FY 1999 will be $11 million. During FY 2000 the state and dependent contributions will be raised. Projections indicate that during FY 2000 the plan will be caught up. The revenue will be increased and the benefits changed to control the expenses to almost reach the break-even point. By the end of FY 2000 the fund is projected to have the $11 million IBNR reserve plus approximately $400,000 in additional reserves money that was generated during FY 2000. Mr. Gray projected that by the end of FY 2001, the end of the budget biennium, there will be an additional surplus of approximately $5 million. This $5 million would be the first installment of the payback of the $15 million appropriation. The four-year payback plan that was proposed includes FYs 2000, 2001, 2002, and 2003.

Senator Raggio asked for clarification on the payback, noting that if there is a $5 million reserve at the end of FY 2001, and if the payments continue to exceed the revenues, there will be a serious problem in the next biennium. He asked whether the increase in premium and adjustments to the co-payment would resolve the problem of more being paid out than being received.

Mr. Gray replied that in FY 2000, projections indicate the revenue and expenses will be in balance and the plan will no longer be losing money. That will occur as a result of the 23.7 percent increase to dependent premiums that took effect January 1, 1999, and 23.7 percent increase to state contributions that will occur July 1, 1999, an additional 12.7 percent increase to dependent premiums that will occur January 1, 2000, and the benefit changes that were outlined.

Senator Raggio asked how much is needed in General Fund dollars. He questioned, "Is it $16 million from the General Fund and approximately $2 million from the Highway Fund and how will that money be paid back?" Mr. Gray answered that the $5 million surplus at the end of FY 2001 would be in addition to the $11 million IBNR reserve. The IBNR reserve would be the balance forward from FY 2000 to FY 2001. This adjustment will be shown when the corrections to the current budget document are provided. Mr. Gray said that at the end of FY 2001 there will be $16 million, $11 million for the IBNR and $5 million for payback. The remaining payback will occur during the next biennium.

Senator Raggio asked how long Mr. Waterman had been in his current position. Mr. Waterman replied that he had been in his current position for 10½ months. Senator Raggio shared that the budget subcommittee had been provided a chronology of activity that has taken place since 1992. Because Mr. Waterman was not there at that time, the senator continued, it is possible he may not have information dating back to 1992.

Senator Raggio asked about the audit performed by Kafoury Armstrong & Company. The audit identified a 10.7 percent error rate for claim payments. This error rate was identified using a random survey of claims payments. Kafoury Armstrong & Company indicated they were unable to determine the correct level of claims payments for FY 1998. As a result they qualified their opinion for the audit. Senator Raggio asked the representative from Kafoury Armstrong & Company to discuss the audit and identify their recommendations.

Randal S. Kuckenmeister, Certified Public Accountant, Shareholder of Kafoury Armstrong & Company (KA&Co.), introduced himself. He stated that Kafoury Armstrong & Company has been performing audit and claims testing for the Self-Insurance Trust Fund since the early 1980s. KA&Co. was engaged this fiscal year to perform two separate services. One was to issue the independent auditor’s report on the financial statements as of June 30, 1998, and the other was to perform claims testing to examine specific claims payment issues. KA&Co. first presented to the Committee on Benefits the claims testing report. This report was prepared by first selecting a random sample of 195 claims. KA&Co. then went to the UICI Administrator’s office to perform compliance procedures on the 195 claims selected. This review identified a 10.77 percent error rate, which included both underpayments and overpayments. One significant overpayment in excess of $80,000 was identified, prompting the auditors to expand the scope of the samples selected.

Senator Raggio asked whether the auditors examined the accuracy of claims payments or whether instead their examination was limited to identifying duplicate claims payments. Mr. Kuckenmeister replied the audit examined the accuracy of claim payments as well as duplicate claims payments. There were three duplicate payments identified in the samples selected. The bulk of the audit time was spent examining the accuracy of claims payments. The auditors examined the vendor contract to determine that claims payments made complied with the contracts and that payment information was correctly entered into the computer for payment. Overpayments, underpayments and duplicate payments were all included in calculating the 10.77 percent error rate.

Mr. Kuckenmeister said the auditors met with Mr. Waterman to discuss expanding the scope of testing in several areas. As a result of a large overpayment for an open-heart surgery claim, the auditors expanded the scope of the audit to include all open-heart surgery claims paid during the audit period. They found several underpayments of open-heart claims. This identified there was an overall compliance issue with open-heart claims. The auditors also examined 23 claims in excess of $50,000 to identify any significant errors. Of the 23 claims in excess of $50,000, 5 contained both underpayment and overpayment errors.

Mr. Kuckenmeister said that after completing the claims testing and not being able to isolate the problems identified in the initial sample, Kafoury Armstrong & Co. presented a report to the Committee on Benefits. This information was used when performing the audit procedures for the independent auditor’s report and KA&Co. determined that they would disclaim the opinion on the financial statements of the Self-Insurance Trust Fund. This was primarily because the auditors could not rely upon the accuracy of the claims payments due to the error rate identified, and there was no systematic pattern to what was found. That resulted in a qualification, not a disclaimer, of the State of Nevada’s audit report as a whole because the Self-Insurance Trust fund is a significant component of the Internal Service Fund of the state.

Ms. Evans asked whether the 10.77 percent error rate was high, low, or average in terms of KA&Co.’s expectations. Mr. Kuckenmeister replied that it was high compared to what it has been in the past 15 years. An error rate in the 3 to 4 percent range could be expected but a 2 percent error rate is included in the current contracts. Over time it has been as low as the 1 to 2 percent range; 10.77 percent was cause for concern and that is why the scope of the audit was expanded.

Senator Mathews asked about unpaid claims. She said that she filed a claim May 1, 1998, which is still unpaid, that she last questioned the status of the claim December 28, 1998, and that to date there has been no payment on the claim. The claim has now been referred to collection because it remains unpaid. The senator asked whether the auditors had examined unpaid claims. Mr. Kuckenmeister responded the audit included only paid claims; the actuaries use paid claims data to determine the incurred but not reported (IBNR) reserve which includes unpaid claims. He suggested the actuary should respond to the question. Senator Mathews shared that she had specific information pertaining to the claim in question. Senator Raggio suggested that personal claims questions should be directed to Mr. Waterman at a later time. Senator Mathews asked Mr. Waterman whether there is a person whose function it is to respond to these types of questions. Mr. Waterman replied there is. He said he would get the information to UICI Administrators and make sure the problem is resolved.

Senator Raggio asked about the 10 recommendations contained in the LCB audit. He noted that the audit recommendations were agreed to but have not been fully addressed. He asked what action has been taken to implement the recommendations. Mr. Waterman replied there are two LCB audits. The recommendations were included in the first of the two audits and included the Risk Management Division. Senator Raggio clarified the audit in question discussed the management of the Benefit Services Fund. Mr. Waterman responded that the audit, which included the 10 recommendations, was completed in 1997. He said there are a couple of recommendations that still need to be finalized and fully implemented. One of the recommendations is the reconciliation of the accounts between the Risk Management Division and the pay centers. Most of these accounts have been reconciled, but there are still three or four outstanding. A timeline has been established for the outstanding reconciliations to be completed. Mr. Waterman said the problem has been with staffing. All available resources have been utilized but it will be another four to five months before the reconciliations can be completed.

Senator Raggio observed that some of the recommendations were related to the 1995 audit and asked why, if the recommendations were agreed to, they had still not been implemented four years later. He requested Mr. Waterman to prepare a report, to be presented during the next meeting, identifying the status of the recommendations.

Ms. Evans asked what the time frame was for the reconciliation of the pay center accounts. Mr. Waterman replied he had just met with his accountant to discuss the time frame. There are four pay centers still not reconciled. The first three will take about one month each. The last one, Central Payroll, is large and will take a couple of months. All of the reconciliations should be completed by the end of May 1999. Ms. Evans said there was a lot of information from Mr. Waterman and the actuary projecting each year of the next biennium, but this information is not reflected in the current budget document. For example, the current budget shows the reserve to be a negative $8,313,048 at the end of FY 2000 and a negative $13,180,310 at the end of FY 2001. She asked whether a revised budget document would be submitted so the information is current.

Mr. Gray apologized for the errors. He said the numbers have been revised and the corrections should be done by Monday, February 1, 1999. The corrected document will show the reserve at the end of FY 2000 will be slightly less than $400,000 and the reserve at the end of FY 2001 will be approximately $5 million. Mr. Gray said the zero-dollar balance forward from FY 1999 to FY 2000 will also be revised and will be submitted in a later revision. Ms. Evans asked whether the changes would be submitted to LCB staff during the week of February 1, 1999. Mr. Gray replied they would be.

Mrs. de Braga asked whether there were any estimates of claims that are more than a year old and claims that are currently under protest. Mr. Waterman replied there is an appeal log that is maintained but he did not have with him the number of claims currently in the formal appeals process. He estimated there is not more than a handful of these claims. UICI Administrators provided the Committee on Benefits the statistics showing the number of claims that have been suspended for various reasons. Claims can be suspended because they need supervisory review, additional information is needed, or for a variety of other reasons. The number of suspended claims is down to approximately 3,200 claims as of January 27, 1999. Mr. Waterman noted that two months ago it was as high as 6,000 claims.

Mrs. de Braga asked whether old claims that were paid at 100 percent but should have had deductibles applied to them before payment were a significant part of the deficit. Mr. Waterman stated there were a couple of things that took place in 1997 that cost the plan money. As a result of the loss of data, deductibles were waived for claims filed during 1997. Additionally, because of the contract in northern Nevada with Sierra Healthcare Options, claims were not being paid timely and discounts negotiated with the preferred provider organizations were lost. That cost the plan a significant amount of money.

Mr. Gray said that when UICI Administrators assumed responsibility for claims payments they were unable to load the claims tape from the prior third-party administrators, L&H. That lack of claim history was one of the issues with the deductible. Without the history, duplicate claims payments were possible. Healthcare Benefits Review LLC (HBR) was contracted to determine the dollar value of the duplicate claims processed by both UICI and L&H. Noting the report from HBR is due in February 1999, Mr. Gray said that without the report from HBR, it is not possible to estimate the amount of money the duplicate payments represent. By the end of February 1999, costs resulting from the backlog and problems with the prior third-party administrators will be accounted for.

Senator Raggio asked, "How we will ever be secure in determining trends and actual health care costs if we are unable to get the financial data? Will HBR identify this information?" Mr. Gray replied that HBR would develop a cost estimate for the total value of duplicate claims processed by UICI Administrators that had already been paid by L&H. After L&H quit processing claims, in July 1997, limited information was available. By July 1998, the process of developing the rate increases and plan changes had begun. Although the information was limited it was complete enough and the timing was so crucial that it was used. Since then, incurred claims have been closely tracked. The projections developed in July 1998 match what UICI Administrators are actually processing each month. While there are limitations with the data used in July 1998, the projections developed appear to be acceptable.

Senator Neal asked what the negative $8,313,048 million in FY 2000 and the negative $13,180,310 million in FY 2001, shown as expenditures titled Reserve, represent. Mr. Gray replied those numbers are in error. The correct numbers are $361,000, the reserve for FY 2000, and $4,840,000, the reserve for FY 2001. This reserve represents the projected surplus generated in those two fiscal years, revenue over expenses. The reserve would actually include the $11 million appropriation during the 1999 session of the Legislature. The reserve amounts would be the $11 million plus the $360,000 for FY 2000 plus the $4,840,000 for FY 2001.

Senator Neal referred to the Public Employees Health Program, Budget Page SPEC PURPOSE-12 (Vol. 3, Account 625-1338), and asked what had happened to the $25,432,783 shown as Resources, Balance Forward From Previous Year. Mr. Gray said he attempted to explain by memo to the Interim Finance Committee (IFC) during their meeting in early December 1998 that there were a number of expenses which were over budget, totaling approximately $27 million. The majority of that expense, approximately $18 million of the $27 million, was from the medical and dental claims. The largest single problem encountered during this budget biennium, which caused both the $27 million shortfall that occurred during FY 1998 and the additional $15 million projected as a shortfall during FY 1999, was that the base of claims projected when the last budget was submitted was well below the actual number of claims. Mr. Gray said the estimate was low because L&H Administrators, and possibly Core Source before them, were processing claim amounts that were artificially low and their inventory was much higher than known at the time the budget was submitted. The numbers being submitted by L&H Administrators were relatively consistent, so the information appeared to be accurate.

Mr. Gray said FY 1997 was very important to the budget estimates for this budget biennium. He said that now that the backlog had been processed, the FY 1997 information is more accurate and significantly higher. The largest single contributor to the shortfall was that the base of claims used was, by far, too low, Mr. Gray said. Additionally, the onetime expenses for deductibles and discounts have been estimated to be $9 million.

Senator Neal voiced concern that the $25,432,783 is referred to as Balance Forward From Previous Year, meaning the money is available for this year. He asked whether $25,432,783 was spent this year. Mr. Gray said his interpretation of the $25,432,783 is that it was the Balance Forward From Previous Year into FY 1998. The Balance Forward From Previous Year into FY 1999 is $950,977. During the course of FY 1999 the $950,977 Balance Forward From Previous Year was spent, along with an additional projected $15 million. Senator Neal said it appears there should be $4 million or $225,000 that is not shown in this budget. Mr. Gray replied it is projected that at the end of FY 1998 there will be a negative $15 million balance forward. That is the amount projected after expenditure of all reserves and all money available. The budget document that was provided shows a balance forward of zero. Without an appropriation, the correct balance forward for FY 2000 will be a negative $15 million.

Senator Raggio requested that Fiscal Analysis Division staff provide to budget subcommittee members who did not serve on the Interim Finance Committee, the memo Mr. Gray sent to the IFC in December 1998. He reminded Mr. Waterman the administration will need to submit a revised budget document that includes the requested appropriations and revised budget information.

Senator Neal said there seems to be some confusion in connection with not being able to track approximately $225,000. He said he would discuss it with staff members to get additional clarification. Mr. Waterman said that when the budget revisions are submitted, the questions should be resolved.

Mrs. Chowning said utilization data has not been provided since August 1996. She asked how this plan compares to other plans. She said she has been told the Nevada plan has experienced an increase of approximately 13 percent in health care costs while the national trend has been only about 3 percent. Mrs. Chowning wondered why the employees covered by this plan are paying more for the same services. She asked, "Have the providers increased their rates, are more services being utilized, or is there a lack of control with outpatient versus inpatient services?" She added, "We want the most cost-beneficial treatment available, so we need to know where the differences are between the cost in Nevada and the cost in the rest of the nation." She requested this information be provided for the budget subcommittee. Mrs. Chowning also noted that the contract with UICI Administrators requires a 98 percent financial accuracy, but the budget subcommittee had just been told there is 10.7 percent claim payment error rate in claims selected in a random manner. She asked whether UICI Administrators had been assessed a penalty and if so, how much it was. Further, she inquired, if no penalty was assessed, why was it not?

Mr. Gray replied that a preliminary utilization report has been produced for the Committee on Benefits meeting later in the week and will be provided. The report is preliminary until additional data for calendar year 1998 is available. Mr. Gray said his employer, William M. Mercer, prepared the largest survey of its kind in the country. This survey shows that the average increase for medical care services during 1998 for employers who sponsor health programs is 6.1 percent. This was up significantly from the prior survey, which showed an increase of less than 1 percent. The survey also indicated the expected increase for 1999 is an average of 9 percent. Mr. Gray promised to prepare exhibits that address the issues raised. He said many of the cost trends the Nevada plan has experienced are in line with national averages.

Mr. Waterman said a commercial firm is auditing UICI Administrators to examine the error rates. The KA&Co. audit looked at a different period of time, the period prior to July 1998. The penalties would be assessed on more recent experience. Mr. Waterman said he was concerned about the 10.7 percent error rate but that was during the time UICI Administrators were working through the backlog. He said an additional audit would be done to examine claims paid during the second half of 1998. That audit will be completed February 19, 1999, and will determine if penalties will be assessed.

Senator Coffin agreed it was a good idea for all of the budget subcommittee members to review the record of the Public Employees Health Program for the past few years beginning with the 1997 Legislative Session. He said the Interim Finance Committee minutes should be included to see the questions that have been asked and the answers given. He commented the Risk Manager position might be able to perform the functions identified in the requested Management Analyst position.

Senator Coffin asked about the value of the benefit cuts identified in Exhibit C, Informational Handout 2-C. He questioned the real cost to the participants, considering both the premium increase and the benefit cuts. Mr. Gray replied that the value of the benefit change used to develop the budget was 8.4 percent. The value of benefit cuts to retirees was approximately 25 percent. The largest difference between the benefit changes for retirees and those for active members was the change in the method of coordinating with Medicare. The plan went to a carve-out method, which shifts more out-of-pocket costs to retirees. The reason for the disparity between active members and retirees was that when comparing the financial performance of the revenues versus expenses for active members and retirees, the financial performance was very different. If the active members and retirees had not been merged together, the rate increases for retirees would have been in excess of 30 percent in addition to the benefit changes.

Senator Coffin asked what the actual premium increase for retirees is, considering a cut in benefits is also a premium increase. Mr. Gray responded he would have to research that information. Senator Coffin asked whether the minutes of the Committee on Benefits reflect what the costs are. Mr. Gray said he discussed with the Committee on Benefits what the rate increases would be without any benefit changes. There is a record of what the rate increase would be with no benefit changes. That would be slightly different than what it would have been when the final decision was made.

Senator Coffin asked whether a table was used that contains the past experience, age, and demographics of each group identified within approximately 1 percent of the cost of the benefit. Mr. Gray said there is information which identifies methods to calculate what a change in deductible or a change in coinsurance is worth. In some cases that information is used; however, the actual experience of the group is used to measure the cost of the specific item being considered for change whenever possible. In this case the information available in the office, rather than the actual experience of the group, was used. Senator Coffin asked whether Mr. Gray used a manual and deviated up or down from the manual depending on actual experience. He asked Mr. Gray to provide the calculations used to develop the benefit changes as well as the line item experience for the benefit changes. Mr. Gray said there were a number of different alternatives considered by the Committee on Benefits. Several memos were created identifying the percentage changes for each alternative. Senator Raggio asked Mr. Gray to work with the LCB fiscal analysis staff to provide the information requested.

Mr. Hettrick asked whether the projections prepared were based on actual utilization and expenses and, if so, whether they were close to the projections. He pointed out that if the experience varies in the future as it has in the past, the problems will continue. The utilization data is needed to confirm that the projections being made currently are valid. Mr. Gray responded that he would continue to provide all of the information available and would continue to cooperate with the LCB staff. Mr. Hettrick clarified that his concern was not just with the claims audit; he was also concerned about the detail utilization data. He inquired, "What is currently being paid and why is the expense now $8.3 million over original projections? Without the detailed utilization data we have no way of understanding where we are headed. We are projecting and planning in the dark."

Mr. Goldwater observed that as the search continues for culpability in this process, it appears that an actuary provided inaccurate data. He asked Mr. Waterman whether there are any causes for action or fiduciary breaches on the part of anyone. Mr. Waterman replied that the Office of the Attorney General is investigating this question and that there is litigation between the State of Nevada and L&H Administrators. Mr. Goldwater clarified he was asking whether any action was being taken against the former consultant and the former actuary. Mr. Waterman stated the attorney general’s office is looking at all of those entities, but L&H Administrators is the central focus. Mr. Waterman said he was not prepared to discuss this issue today, because it is in litigation. Mr. Goldwater emphasized again that "we should consider litigation against the former consultant and actuary as well as L&H Administrators."

Ms. Evans noted that a lot of time has been taken looking retrospectively at the past problems. The LCB audit report contained 13 recommendations, all of which were accepted. The recommendations are very comprehensive and will require changing the way business is currently conducted, Ms. Evans remarked. She said it was poor management practices and a lack of control that created the problems of today and the audit identifies what corrective actions need to be taken to get back on track. She asked what Mr. Waterman’s plans are for implementing the recommended changes. Mr. Waterman replied that many of the audit recommendations were on the contracting process. Much of that process has been corrected now and was occurring at the time of the audit. Before the audit was actually completed, many of the recommended changes were implemented. A large part of the audit included the reporting structure within the Risk Management Division and the Committee on Benefits. The organizational changes contained in this budget request are a direct result of the LCB audit and the 13 recommendations contained in the audit. Senator Raggio said this has been previously discussed and requested that Mr. Waterman report on the status of implementing all of the audit recommendations.

Senator O’Connell asked whether it would be suggested that the Risk Management Division or the Committee on Benefits be placed under the Commissioner of Insurance. Mr. Waterman said the suggested structure would be similar to the Public Employees Retirement System for the State of Nevada with a board of directors. There may also be a suggestion for an interim legislative oversight committee. Mr. Waterman did not think there would be a suggestion to report directly to the Division of Insurance because the division is the oversight agency.

Senator Raggio noted there were a number of bill draft requests (BDRs) that had been submitted which impact the Public Employees Health Program. He said some of the BDRs deal with the composition of the Committee on Benefits, and these will be carefully considered. The present membership of the Committee on Benefits Board comprises insured participants. Senator Raggio said there may be an advantage to having the committee membership include additional people knowledgeable about insurance.

Senator Neal asked what the increases for the Self-Insured Medical cost were based on and whether it was the medical price index. Mr. Gray said the two areas of growth have been the trend, which includes the Consumer Price Index (CPI) and utilization, and any changes of the types of service being utilized. He said a revised budget would be submitted. Senator Raggio asked when the revised budget would be available. Mr. Waterman replied the budget would be submitted to the state budget office, and as soon as the revised pages can be published, they would be forwarded to the budget subcommittee. Senator Raggio reminded the budget director, John P. (Perry) Comeaux, the revised budgets were needed as soon as possible.

Mr. Waterman said that as better information was received it would be utilized in the revised budget. The errors contained in the earlier submission would be corrected. Senator Raggio said there are only 120 days in which the corrections can be made and acted on and requested the process be expedited.

DEPARTMENT OF INFORMATION TECHNOLOGY

DoIT Director’s Office – Budget Page DOIT-1 (Volume 1)

Budget Account 721-1373

Marlene Lockard, Director, Department of Information Technology (DoIT), introduced herself. She said that according to The Journal of Defense Software Engineering, "adopting a new technology (whether it is a process, methodology, or tool) means change. This is more than a technical issue; you must overcome social, behavioral, managerial, and organizational barriers." Ms. Lockard said the 1998-99 biennium has been a watershed period for DoIT. Fortunately, she continued, the 1997 Legislature supported and appropriated funding for several critical initiatives to assist DoIT in implementing much-needed, long-overdue change into the organization. The department has assessed and reassessed every aspect of the operation and is implementing needed improvements and change at a rapid pace. It is important for DoIT to transition to a truly credible and accountable technology and be an advisor and leader, Ms. Lockard said, and to do this it was essential to mend and correct internal operations first. That process was started and many of the findings were reported to the Legislature last session.

Ms. Lockard said she believes considerable progress has been made, especially considering that these improvements were achieved in the midst of meeting the ongoing responsibilities of customer agency support and other duties. Additionally, DoIT has had to contend with a legislative audit, 26 major projects totaling approximately $150 million, budget and legislative preparation, staff turnover, and an issue called Year 2000. Ms. Lockard said she hopes the legislators agree the progress has been remarkable. She added that it was not easy and the department is not finished yet, but it is on track with identifiable and quantifiable results. Ms. Lockard gave a progress report identifying the activities to transition DoIT into a model organization equipped to provide critical technology solutions and the infrastructure required to be a meaningful and valued business partner in providing the essential services of state government. A 29 page budget overview, Exhibit E (Original is on file in the Research Library.), was distributed to the budget subcommittee. Page 3 of Exhibit E is a chart that documents where the department was, where it is now, and what it is trying to attain. The chart outlines what is involved in the change process. The first column represents where DoIT was during the 1997 legislative session. The middle column shows the current status of different activity. The final column indicates where DoIT would like to be by the next legislative session and beyond. Ms. Lockard noted that some of the projects identified in the strategic plan are beyond the next biennium.

Ms. Lockard discussed Exhibit E. She noted there were essentially no protocols or procedures within DoIT and pointed out that any assessment of what goes wrong with projects will identify that the process methodology must be in place. She said the single best achievement so far is the Technology Improvement Project and Investment Justification document. This starts the agencies and DoIT working together as partners in the beginning, or the idea stage, of the project. It requires both DoIT and the program agency to ask critical questions. In that way, the full expectation of what will be involved in the project is clearly identified and laid out. It also calculates the potential return on investment, if any, and many projects do not have a return on investment. If there is no return on investment, everyone clearly understands at the beginning that the project is being implemented for other reasons, such as to comply with either a federal mandate or a legislative mandate, or to provide required essential potential public services.

Ms. Lockard stated the Technology Improvement Project and Investment Justification document does many things. It starts the process to innately track and monitor the progress of a project. During the last legislative session, DoIT requested and the Legislature approved two Quality Assurance positions. Ms. Lockard remarked it is hard to "quality assure" a project when nothing is documented. Once this process is fully implemented DoIT establishes a base that can hold the program agency and DoIT accountable to measure whether the results initially intended are being met.

Ms. Lockard said another major improvement was the Programming Protocols and Methodology for DoIT, much of which was borrowed from the Carnegie Mellon University Software Engineering Institute. She said this was a very important first step to get the DoIT programming and technical staff to use the uniform approach for project development and implementation. DoIT also developed service agreements with the customer state agencies. In the past there were only loosely defined agreements between DoIT and the agencies, which created a lot of misunderstanding about exactly what DoIT and the agencies’ individual responsibilities were.

Ms. Lockard briefly discussed internal project tracking and monitoring. She noted there was no central tracking or monitoring of projects when the Legislature last met. Projects are now tracked and monitored closely. DoIT developed a state training plan, as training is critical to the success of DoIT. Individual skill assessments were performed; then the skill requirement for each position was developed. The two were compared and a skill-gap analysis report was created that identified exactly what skills are required to perform the current job, what skills the person in the job possessed, and what additional training was needed by each position.

Senator Raggio asked for whom this training assessment was performed. Ms. Lockard replied the assessment was performed for DoIT staff, not all state agency staff. She said a strategic plan was developed for DoIT, and the plan is a working document and not just filed in a drawer. Each strategic plan contains identifiable target dates and measurable objectives to monitor its progress.

Senator Raggio asked what DoIT does to help the customer agencies identify the people in their organizations that need special training. He asked, "Is that part of the DoIT relationship with the customer agencies?" Ms. Lockard replied that it has not been but that later in the presentation there would be a discussion about the need for project management competency centers. She said DoIT has direct authority over only its own staff, not the customer agency staff.

Ms. Lockard said DoIT has been trying to professionalize the organization and its staff. She commented it has been very difficult to attract and retain skilled staff. She reviewed the qualifications of some of her key staff as shown in Exhibit E, page 5.

Ms. Lockard stated that in Nevada there were 26 projects of $50,000 or more that total nearly $150 million. Of these, 84 percent were within budget and 60 percent were on schedule. Ms. Lockard emphasized these are important statistics. She said that even though many of the technology improvements made in an organization take a number of years to begin to make a difference, DoIT is pleased that some of the early corrective action is beginning to pay off.

Ms. Lockard said a funding study has been completed. An external consultant has recommended that DoIT cost-allocate the Planning and Contract section. It was recommended that the Communications and Computing Division be split into four separate budget accounts so the costs can be clearly identified. The four budget accounts would be the Computing Division, Telecommunications, Data Communications, and Mobile Microwave Communications. DoIT has also established new cost pools to stabilize the billing rates with annual adjustments. The consultant also recommended that a major equipment replacement fund be established. Ms. Lockard shared that DoIT does not depreciate the major equipment acquisitions. She said that because of the ongoing nature of information technology, the rapid changes, and the high price of the infrastructure equipment which is essential to do the job, the acquisitions should be depreciated. An equipment replacement fund should be established so DoIT can stay current. Ms. Lockard said this equipment replacement fund is not included in this budget request because of the current economic situation.

Senator Raggio asked that examples of replacement funds which are in existence in other states be submitted. Ms. Lockard replied the examples would be submitted. Remarking that the state of Washington is actually a model state, she said DoIT has examined that fund extensively and found that it works very well for Washington State.

Ms. Lockard said the major budget initiatives include the Carnegie Mellon University’s Software Engineering Institute Capability Maturity Model, completion of the migration to Complementary Metal Oxide Semiconductor (CMOS) technology, the expansion and enhancement of SilverNet, the state’s data network, and the personnel recruitment, retention, and incentive proposal.

Ms. Lockard discussed the Project Management Competency Center in Exhibit E, page 9. She said the concept is to have DoIT staff in place to function as trainers, consultants, and mentors, working with agency staff to identify the proper approach to implementing a successful project. Equally important is the technical architecture and planning, as it is critical to any successful project, Ms. Lockard stated. If the design is good, a programmer can program to the design. The Project Management Competency Center in the Planning Division of DoIT works with the other systems in DoIT to answer questions about possible network enhancement support needed and the data requirement. The Project Management Competency Center integrates the different project requirements with the end user, the customer.

Ms. Lockard said the capability maturity model, level 1, is defined as "no development methodology, and few if any controls are in place. Progress, even if attainable, may not be recognized because of lack of measurement." Approximately 80-85 percent of application development organizations operate at this level. DoIT is at level 1. According to the strategic plan included in this budget, DoIT is requesting funding to move to level 2. It will take approximately 27 months to move DoIT from level 1 to level 2. Ms. Lockard said the initial step to developing this protocol is a major first effort. DoIT was able to start this first effort and is asking for modest funding to achieve level 2.

Ms. Lockard identified the technology infrastructure as a critical priority for DoIT. She said the Gartner Group identified that "by the year 2000, less than 25 percent of information technology organizations will have the necessary infrastructure in place to consistently leverage an applications architecture in the construction of new applications." Ms. Lockard said there are 26 major projects, which are in different stages of development and which have already been approved by the Legislature, that will be implemented during the next two years. The DoIT budget request includes funds to complete the migration to the CMOS/SYSPLEX technology. This advanced clustering technology can provide 24-hours-a-day, 7-days-a-week availability, which will allow up to 32 separate servers to be linked together as a single system.

Ms. Lockard said the current capacity with approvals to date is 130 real millions of instructions per second (RMIPS). When the currently approved migration is completed to the R25, the RMIPS will be increased. The DoIT request includes an additional 307 RMIPS. This plan calls for the retirement of the ES 9000 mainframe. These changes would result in a projected capacity of 90 percent in the year 2001. That means DoIT will be back during the 2001 Legislative Session requesting the equipment replacement fund, Ms. Lockard stated.

Ms. Lockard discussed the network infrastructure as it was in 1997. If the current request is approved, a complete redundant loop around the state that is necessary to adequately support the massive explosion in network requests will be implemented. The estimated increase in bandwidth is needed to support the increased usage of the Internet and the use of visual capacity at the desktops. During the last legislative session the first phase of the Capitol Complex conduit system was approved. That is now in place and the current request includes funding for the fiber optics cable to complete this project. Ms. Lockard said that when this project is completed, the first phase of the Public Broadcasting System (PBS), which is anticipated to save the state more than $40,000 monthly, can be implemented. Phase 1 of the PBS has realized a $20,000 to $25,000 savings each month even before the fiber optics cable has been installed.

Ms. Lockard discussed the personnel retention and recruitment initiative. The current proposal includes recommendations to develop a technical career path. Very often, to advance, the person must move into a management position. A good technical person does not necessarily make a good manager or want to be a manager, Ms. Lockard pointed out. She said DoIT wants to develop a journeyman level for technical staff. DoIT is working with the University of Nevada, Reno, to develop both a work-study intern program and an accelerated-degree program. These programs will hopefully encourage university students to work with DoIT before they graduate with the thought they will want to work with DoIT after graduation, Ms. Lockard said. She added that this will help in attracting and retaining skilled staff.

Ms. Lockard said DoIT is also working with the Department of Personnel on potential classification studies. The crux of the personnel recruitment and retention proposal is the bonus-signing program. DoIT is experiencing spot areas of high turnover, especially in the high-pressure activities. If DoIT could pay a signing or skill bonus for employees with demonstrated proven skills or a critical project bonus to be paid if the employee stayed until the end of the project, recruitment and retention would be improved. Ms. Lockard said DoIT would explore the Nevada Revised Statutes to see whether there are impediments to implementing this type of bonus program.

Ms. Lockard stated that the most critical incentive that can be used to retain qualified staff is training. In FY 1997, DoIT was spending $621 on average per employee. During the last legislative session DoIT was able to increase this to $961 on average per employee. DoIT is asking for a substantial increase during both years of the biennium. A total of $1,524 during FY 2000 and $1,393 during FY 2001 on average per employee is being requested. Ms. Lockard said it is critical for DoIT to be able keep the staff skills current. She said she is also requesting the ability to require DoIT employees receiving training to sign an agreement saying if they leave within a certain period of time after completing the training, they must repay a percentage of the training expense. She said this was common in the private sector.

Ms. Lockard gave an update on the Year 2000 preparations. She said that there are 337 days left until January 1, 2000. There are only 241 working days left until that date. DoIT has identified the areas of risk and has moved professionally through the project plan to avoid the meltdown of the computers on January 1, 2000. Ms. Lockard said that almost 60 percent of the code was updated and back in production. Approximately 30 percent of the code was in test; the goal was to have all mission-critical applications renovated by the end of FY 1999. Ms. Lockard said DoIT has met that goal. There are a few small projects that are being held in abeyance for various reasons. The payroll and personnel systems are being held because of the pending implementation of new systems, which are Year 2000-compliant. Ms. Lockard said it was also important to ensure that the interface is working between other agencies, the federal government, and third-party vendors. A considerable amount of time was spent helping various agencies develop contingency plans.

Ms. Lockard noted that the Legislature appropriated nearly $6,292,906 during the last session, and to date $2,400,795 has been spent. She indicated there were sufficient funds to see Project 2000 to completion. The actual code renovation costs have been under the original projections but the testing component exceeded projections. The testing component was very comprehensive and took a full 60 percent of the project time.

Senator Raggio asked whether the pamphlet he had, titled State of Nevada’s Year 2000 Awareness Guide, Exhibit F, was prepared by DoIT. Ms. Lockard replied it was. The pamphlet had been distributed to various groups for discussion of the Year 2000 problem at their meetings. These groups included chambers of commerce, the Small Business Administration, local and county organizations, and others.

Mrs. Chowning noted she had been told DoIT was 65 percent, not 60 percent, completed but approximately 73 percent of the funding has been spent. She asked whether the job could be completed with the funding that was allocated. Ms. Lockard said she would review the statistics Mrs. Chowning has and reconcile to where DoIT believes it is and report the results during future subcommittee meetings.

Ms. Lockard stated that the mission of DoIT was to provide information technology leadership to efficiently add value, reduce redundancy, and improve delivery of public services to the citizens of Nevada.

Senator Raggio asked when the new rates DoIT will charge would be applied to the agency budgets. Ms. Lockard replied that the information and recommendations of the consultant, David M. Griffith & Associates, and DoIT staff is at the state Budget Division. DoIT staff is also working to provide that information to the budget subcommittee fiscal staff so appropriate adjustments to the agency budgets can be made.

Ms. Evans noted that the rate changes would impact virtually every state agency and budget account. She asked how the adjustments would be provided. John P. Comeaux, Director, Department of Administration, replied that the state budget office believes the right amount of money is in the budget. It is now necessary to correctly reflect those amounts to the various agency budgets. Mr. Comeaux recently received from the consultant, David M. Griffith & Associates, a report identifying how to implement the new cost allocation plan. There are still a few corrections that need to be made but the plan is close to completion. Mr. Comeaux said he would present a spreadsheet correctly showing the adjustments of expenses. Ms. Evans asked what the estimated timetable for the adjustment spreadsheet is. Mr. Comeaux replied he would need approximately two weeks to complete the adjustment spreadsheet.

Mr. Beers clarified that only the individual agency budget expense will change and the overall total revenue would remain the same. Mr. Comeaux said that was correct.

Senator Raggio adjourned the meeting at 11 a.m.

RESPECTFULLY SUBMITTED:

Millard Clark

Committee Secretary

APPROVED BY:

Senator William J. Raggio, Chairman

DATE:

Assemblywoman Jan Evans, Chairman

DATE: