Kim Marsh Guinasso, Committee Counsel

Juliann Jenson, Committee Policy Analyst

Wm. Gary Crews, CPA, Legislative Auditor, Audit Division, Legislative Counsel Bureau

Rocky J. Cooper, CPA, Audit Supervisor, Audit Division, Legislative Counsel Bureau

Lee Pierson, Deputy Legislative Auditor, Audit Division, Legislative Counsel Bureau

Gary H. Wolff, Lobbyist, Nevada Highway Patrol Association

Robert J. Gagnier, Lobbyist, State of Nevada Employee’s Association/AFSCME

Robert S. Hadfield, Lobbyist, Nevada Association of Counties

Marvin A. Leavitt, Lobbyist, City of Las Vegas

Thomas J. Grady, Lobbyist, Nevada League of Cities and Municipalities

Thank you, Madam Chair. For the record, I’m [I am] Gary Crews, Legislative Auditor. On my right, I have Rocky Cooper, Audit Supervisor, Audit Division [Rocky J. Cooper, CPA, Audit Supervisor, Audit Division, Legislative Counsel Bureau]. And on my left, I have Lee Pierson, [Lee Pierson, Deputy Legislative Auditor, Audit Division, Legislative Counsel Bureau] who was the in-charge auditor on our audit of the group insurance program. We appreciate the opportunity to come before you today and share some of our observations that we came across when we were doing the audit.

This is a large program. It has insurance coverage for approximately 47,000 state employees, local employees, retirees, and their dependents. As most of you know, there have been significant problems within the program over the last year or so. This program has gone from a healthy cash reserve to where it’s [it is] asking for a $26 million bail out.

Some of the reported problems included millions of dollars in projected overpayments, including duplicate payments; fraud by a third-party administrator; and loss of millions of dollars in medical discounts because of slow payments by third-party administrators. These are only some of the symptoms, but not necessarily the problem, as you saw during the course of the audit.

As a result of these issues becoming public, in January 1998, Speaker Dini [Joseph (Joe) E. Dini, Jr., Lyon and Storey Counties and part of Carson City Assembly District No. 38] requested that the Legislative Commission direct us to conduct an audit of the group insurance program. Primarily, we wanted an audit to determine if the existing organizational responsibilities are appropriate, proper contract management practices and processes were used, and claims information was valid and reliable.

We presented our audit to the Audit Subcommittee, like I mentioned earlier, in December 1998. And Senator Neal [Joseph (Joe) M. Neal Jr., Clark County Senatorial District No. 4] is on that audit subcommittee, so he has some familiarity with that audit report. In general, our audit concluded that the organizational responsibilities and reporting relationships are unclear; the program lacks appropriate management structure and key management functions, such as organizational planning and controlling operations have not been carried out. Also, we noted that the Committee on Benefits does not use appropriate practices to manage its contracts. Poor planning, improper award practices, and inadequate monitoring of contractor activities have led to breakdowns in claims processing, and, as indicated earlier, financial losses are expected to be in the millions of dollars from those breakdowns.

As a result of our audit, we made 13 audit recommendations. Two of those recommendations will request legislation that should come before this committee. Those two recommendations include legislation be obtained to overhaul the current program structure. Legislation should provide a program management structure that ensures program duties, responsibilities, authority, and reporting relationships are clearly identified, adequately defined, and properly aligned. We also recommended that legislation be obtained to revise the composition and methods of appointing members of the Committee on Benefits, to ensure a proper system of accountability is maintained.

This is a lengthy audit report. Mr. Pierson and Mr. Cooper spent a tremendous amount of time within that agency and worked with the members of the committee and have a very detailed understanding of how the operations of the committee and Risk Management Division function.

At this time, I’d [I would] like to turn it over to Rocky Cooper and start the report. We’ll [we will] be glad to answer any questions during the course of the presentation or at the end.

Mr. Cooper testified:

For the record, [I am] Rocky Cooper, [Audit Division] Legislative Counsel Bureau, Audit Supervisor. I’d [I would] like to start on page 10 [Exhibit C]. Madam Chair, members of the committee, I’d [I would] like to go over some background information there on page 10 [Exhibit C]. As shown in Table 1, expenditures for the group health insurance program were more than $117 million for fiscal year 1998. The first two categories shown, personnel and operating costs, amounted to less than 2 percent of the expenditures. The rest of the money was spent for contracts and for paying claims.

On page 11 [Exhibit C], Exhibit 1 shows the increase in total expenditures for fiscal years 1984 through 1998. And Exhibit 2 shows the number of enrollees, this excludes dependents, for fiscal years 1994 through 1998.

On page 16 [Exhibit C], I’ll [I will] go over the findings and recommendations. Organizational responsibilities are not clear. The state’s group health insurance program lacks a management structure to ensure appropriate objectives are achieved and accountability for results is maintained. Although the statutes provide a framework for the administration of the program, organizational responsibilities and reporting relationships are unclear. As a result, key management functions such as organizational planning and controlling program operations have not been effectively carried out. In addition, some activities have not been clearly defined or properly assigned. This has led to conflicts, overlaps, and gaps in essential activities such as monitoring contractors and verifying the accuracy of information.

Although the Committee on Benefits has overall responsibility, it lacks control over many program activities. The basis for the current program structure is not found in any one source, but in many sources, and this has led to confusion about program responsibilities and various reporting relationships that exist today.

On page 17 [Exhibit C], Exhibit 3 shows the existing structure and reporting relationships. The current structure has three direct lines of reporting. The management consultant actuary reports directly to the Committee on Benefits. Contract vendors report directly to the Committee on Benefits. And the state risk manager reports to the director of the Department of Administration, who is a member of the committee.

Although the Committee on Benefits has overall responsibility for the program, it lacks direct authority over many program activities, as shown in Exhibit 3. Administrative activities such as accounting, budgeting, eligibility and member services are performed by the Risk Management Division. However, because the risk manager does not report to the committee, the committee has no control over the functions performed by the division.

On page 18 [Exhibit C], under ‘Confusion about Program Responsibilities,’ current duties and authority for the program are established in various sections of Nevada law. However, the way these laws have been applied has created confusion about program responsibilities and reporting relationships.

On page 19 [Exhibit C], there is little question the Committee on Benefits has overall responsibility for the program. The confusion arises about how the program is to be managed and who is to manage it. The main issues are the committee’s relationship with the state risk manager, the extent to which the Risk Management Division functions as staff to the committee, and who is to oversee contractor activities.

On page 20 [Exhibit C], Exhibit 4 shows the committee’s statutory duties and reporting relationships. As shown, the committee is authorized to hire contractors to carry out program activities and also hire professional, technical and clerical employees. However, statutes do not address what organizational component the employees would belong to, and the committee has not hired any employees.

The statutes do address the risk manager position. The statutes contain several provisions indicating the risk manager has an advisory role in the program, not a managerial role.

On page 21 [Exhibit C], statutes do not mention or suggest that the risk manager or the division have any direct program management or administrative responsibilities. NRS 331 [chapter 331 of Nevada Revised Statues] states, ‘The risk manager shall act as adviser to the Committee [on Benefits].’ And NRS 287 [chapter 287 of NRS] states, ‘The committee shall consult the state risk manager and obtain his advice in the performance of its [the] duties [set forth in this section].’ Exhibit 5 shows this statutory reporting relationship between the risk manager and the Committee on Benefits. The advisory role is shown by the dotted line. The exhibit also shows the direct reporting relationship between the Risk Management Division staff, the risk manager, and the director of the Department of Administration.

On page 22 [Exhibit C], although the committee has not hired any employees and the risk manager’s role is advisory by statute, program descriptions contained in the 1997 Executive Budget Proposal indicate the Risk Management Division is staff to the committee. Part of the 1997 Executive Budget states, ‘The Risk Management Division is responsible for planning, administration, and general staff support to the Committee on Benefits in the day-to-day operation of the benefits program.’ The budget narrative contains some vague and conflicting language that further clouds the issue of program responsibility. First, it states that both the committee and the Risk Management Division are responsible for administration of the plan. Second, it indicates, while the committee is responsible for management of the plan, the Risk Management Division is responsible for key management activities, such as planning, evaluating plan effectiveness and enhancements, and contract negotiations.

On page 23 [Exhibit C], Exhibit 6 shows responsibilities, activities and reporting relationships per executive budget documents and the committee’s statutory authority to hire employees. These documents indicate that contractors report to the Risk Management Division and the division is staff to the committee.

Another source of confusion is the committee’s contract with the risk manager. On page 24 [Exhibit C], in addition to the program structures established through statutes and budget documents, another relationship has been created through the committee’s contract for the services of the risk manager. This contract for services conflicts with the risk manager’s advisory role as stated in statutes.

On page 26 [Exhibit C], Exhibit 7 shows this contractual relationship between the committee and the risk manager, and also the contract with the committee’s management consultant. As shown in Exhibit 7, contracts require both the risk manager and consultant to report directly to the committee, monitor contractor activities, and monitor each other, which adds to the confusion. At the bottom of the page [26] [Exhibit C], strategic planning documents for the Committee on Benefits and the Risk Management Division do not provide direction or clarify organizational responsibilities. If done properly, the strategic planning process should leave no doubt about what an organization is, what it hopes to accomplish, and how its goals will be accomplished. However, the strategic plans related to the program only further confuse the issue of program responsibilities.

On page 28 [Exhibit C], efforts to establish a management function have not been successful. During the 1995 Legislative Session, the committee 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 and budgeted. The committee did not incorporate any new plans for a chief executive position in its 1997 biennial budget request. The executive position requested in 1995 was the result of an operational audit commissioned by the committee in May 1994. The audit was to determine if the employee benefits program was being administered in a cost-effective, efficient and appropriate manner.

On page 29 [Exhibit C], a firm was selected in October 1994. In February 1995, the audit report was issued, and the results were presented to the committee. Recommendations for improvement included establishing a chief executive position to be responsible for running the program. This person would take direction from and be fully accountable to the committee. The report also suggested employing individuals with demonstrated expertise in financial and operational matters. The auditors felt these types of functions were not appropriate to outsource.

On page 32 [Exhibit C], we address the composition of the committee. The current configuration of the Committee on Benefits and methods for appointing members as provided in statutes does not provide a strong system of accountability. In addition, it creates the potential for conflicting responsibilities and authority.

On page 33 [Exhibit C], the composition of the Committee on Benefits is provided for in NRS 287 [chapter 287 of NRS]. This statute requires five members. Two members must be selected by the Board of Directors of the State of Nevada Employees’ Association. One member must be the director of the Department of Administration, and two members must be appointed by the Governor. This statute does not specify terms for the four members selected or appointed to the committee and has no provision for removing committee members for cause. In addition, two members are appointed by the Governor, and two members are selected by a non-public entity, which further diffuses accountability. The two members appointed by the Governor fall under NRS 232A [chapter 232A of NRS], which specifies members of boards, commissions or similar bodies serve 3-year terms. The two members selected by the Board of Directors of the State of Nevada Employees’ Association have no defined terms. The current committee members have a wealth of experience in serving on the committee, averaging nearly 11 years. Defined rotating terms would allow for needed institutional memory, while enhancing accountability.

There is also a potential for conflicts. The Director of the Department of Administration has overlapping responsibilities and authority that create the potential for conflict. First, the director has overall responsibility for the activities of the Risk Management Division and direct authority over the state risk manager. Second, the director serves as a member of the Committee on Benefits, and third, the director serves as the state’s budget director. Because the committee is required to consult with the risk manager and obtain his advice in the performance of its duties, a potential for conflict is created. The director is required to both supervise the risk manager and obtain his advice in the performance of committee duties.

On page 34 [Exhibit C], this puts the risk manager in a difficult position of being both subordinate and consultant to his superior. He may be required to officially question or challenge an action of his supervisor in relation to committee business. In addition, situations could arise where the director instructs the risk manager to ignore committee requests or perform activities contrary to the wishes of the committee.

The committee is responsible for annual expenditures totaling more than $100 million. Therefore, a strong system of accountability is essential. To ensure accountability, committee members should be appointed by and answerable to one authority, serve a fixed term, be subject to removal for cause, and be free of potential conflicts. The current statutory requirements for serving on the committee do not provide these elements of accountability.

Our report contains three recommendations pertaining to organizational responsibilities. The first two require legislation, as mentioned earlier. And the third recommendation is to ensure management functions, such as organizational planning, directing and controlling program operations, and reviewing performance, are carried out.

Lee Pierson [Lee Pierson, Deputy Legislative Auditor, Audit Division, Legislative Counsel Bureau] will now continue with the next section on page 35 [Exhibit C].

Mr. Pierson stated:

Members of the committee, on the top of page 35 [Exhibit C], I will begin discussing contracting. We found that contract management practices are inappropriate. The Committee on Benefits does not use appropriate practices to manage its contracts. A combination of poor planning, improper work practices, and inadequate monitoring have led to breakdowns in key functions such as claims processing. Because nearly all the activities of this program are conducted through contracts, it is critical the committee establish and follow good contracting practices.

The first contracting area I’d [I would] like to talk about is poor contract planning on the bottom of page 35 [Exhibit C]. We found that inadequate planning has led to contract provisions that do not ensure state resources are properly safeguarded, and this hampered the committee’s ability to respond to problems. TPA [third-party administrator] contract provisions do not require basic controls over claims processing activities. Additionally, poor contracts result in unnecessary costs, and have left the committee vulnerable to poor-performing contractors.

On the top of page 36 [Exhibit C], the first example under ‘poor contracting’ I’d [I would] like to talk about is contract terms that result in unnecessary costs. Poor-contract terms obligate the committee to pay hundreds of thousands of dollars each time it changes TPAs. This occurs because the committee must pay extra fees to finish processing claims that are outstanding at the end of the contract. These claims are typically for services that were provided under the old contract, but the provider does not submit the claim until the new TPA takes over. Because contract terms require TPAs to process claims received for services provided during the contract period, there’s [there is] no obligation for the TPAs to process claims outstanding at the end of the contract. The additional cost for processing these claims is left to negotiation between the committee and the TPAs.

On the top of page 37 [Exhibit C], after L&H [L&H Administrators] left, UICI [UICI Administrators] negotiated a fee of $10.50 to process any outstanding claims that were left by L&H. While this was anticipated to cost about half-a-million dollars, it cost quite a bit more, as shown in Table 2 on page 38 [Exhibit C]. The second column from the right in Table 2…

Senator Porter stated:

Actually, I have numerous questions, but one at the moment. It has to do with UICI. Do you know anything about their history prior to us [State of Nevada] contracting with them? Did that come up in your audit, anything about UICI? Were they licensed in Nevada? Were they a corporation in the state at the time?

Mr. Pierson answered:

The committee needed to find someone in a hurry, and they had their consultant check out several potential TPAs. The consultant looked for somebody who, initially in Nevada, they thought could do the job and would be willing to. They were unable to find anyone that met those qualifications. They contacted a couple of out-of-state companies, and the only…

Mr. Pierson expounded:

There was no one – and again, I’m [I am] getting this based on what the consultant told us – there was no one in the state, who the consultant felt was big enough to handle the state account, who was willing to take it on at that time. And what the consultant told us was the only one of the ones they looked at – of course, this was an emergency situation, so they had to find somebody fairly quickly – the only one they were able to find who they felt could do the job and was willing to try to take it on in an emergency-type situation was UICI.

Senator Porter stressed, "And it was an emergency in July of 1997."

Mr. Pierson defined:

They actually began looking for them in May, and the initial get-together between the committee and UICI, I think it was a telephone conference call, was in early June. Then they basically agreed at that time, and the contract was signed a little bit later. The committee asked L&H to continue processing claims until UICI could get up and running, and L&H continued to do that until about mid-July. By that time, because everyone knew they [L&H] were going to lose the state contract, they started to lose employees, and they [L&H] finally reached a point where they just couldn’t [could not] continue.

Senator Porter expressed:

Thank you. I would like to see the background material on that, actually, from 1993 on, some of their contracts and some of the minutes to those meetings on those contracts and the consultant and those particulars please.

Mr. Crews stated, "Senator Porter, we may not have all of them, but we’ll [we will] request them from the committee for you."

Mr. Pierson continued:

On page 38 [Exhibit C], as Table 2 shows, in the second column from the right, we paid UICI about $1.6 million to process these outstanding claims. Since L&H had already been paid to process the claims, in effect, the state has paid twice for the same service.

The second example of poor planning I’d [I would] like to talk about is paying the contractor to process duplicate claims. Contract terms did not limit the number of times UICI could be paid for processing the same claim. On the middle of page 39 [Exhibit C], based on our testing, more than half the fees paid to UICI for processing outstanding claims was for duplicates. An example of a duplicate claim that’s [that has] been processed several times is shown in Table 3 on page 40 [Exhibit C]. As the table shows, this claim was submitted six times. UICI received $10.50 each time they processed the claim. They also paid the claim twice.

A third example I’d [I would] like to talk about is in the middle of page 40 [Exhibit C]. This is duplicate payments and other payment errors. Although the amount of duplicate payments and other errors is unknown, more than $2 million has been returned to UICI voluntarily. On page 41 [Exhibit C], the first full paragraph, UICI’s computer system allows some types of duplicate payments to occur. Based on information available from UICI, we identified $38,000 in duplicate payments for services incurred during April 1997. None of the duplicate payments had been returned as of July 1998, and at that time, duplicate payments were still occurring.

On the bottom of page 41 [Exhibit C] is the next example of poor contract planning I’d [I would] like to talk about. We found that poorly planned contract terms made it difficult for the committee to replace TPAs. Specifically, contract provisions did not provide the committee with sufficient time to replace TPAs, require a backup of computer information, or ensure proper controls over unprocessed claims. In addition, the committee has not developed a contingency plan for the replacement of vendors. These problems contributed to transition problems from L&H to UICI, which cost the program millions of dollars.

Other poor planning examples we have include, on page 43 [Exhibit C], inadequate contract performance requirements. On page 46 [Exhibit C], near the bottom of the page, vendors not given enough time to prepare proposals; and on page 47 [Exhibit C], in the middle of the page, no contract assignment process.

The next area I’d [I would] like to talk about under contracting is the contract award process. This begins on the bottom of page 48 [Exhibit C]. We found that practices used to solicit and evaluate proposals raised concerns about the appropriateness of the award process. Multi-million dollar contracts have been awarded without using established methods for evaluating proposals or properly documenting the process. On page 49 [Exhibit C], at the top of the page, the first item I’d [I would] like to talk about under the award process is ‘established methods not followed.’ We found the committee did not follow established methods for evaluating vendor proposals. We found weaknesses on all seven RFPs [requests for proposals] that we looked at. Some of these weaknesses include first, the committee did not use preestablished criteria to evaluate proposals. Second, evaluation weights were not disclosed in the RFP. Third, evaluators did not use a technical scoring process, which includes determining the points to be awarded for a specific response. And fourth, a standard scoring sheet was not used. To illustrate the importance of following established methods, Table 6 on page 53 [Exhibit C] shows what can happen when points are not assigned based on a specific response. As the table shows, Vendor A, with the most experience, received the fewest number of points for experience.

The next item I’d [I would] like to talk about under the award process is on page 54 [Exhibit C], in the middle of the page, under ‘appropriate practices not followed.’ The evaluation committee did not select finalists based on evaluation criteria listed in the RFP. Rather, it selected finalists as recommended by the committee’s consultant. This process deviates from the information provided to vendors in the RFP. Additionally, the consultant made errors when preparing the cost analysis of the proposals. As a result, the top-ranked firm, as determined by the evaluation committee, was not selected as a finalist. Exhibit 10 on page 57 [Exhibit C] shows the TPA cost-proposal analysis. It shows a comparison in red between how the consultant calculated the cost, and in blue how we calculated it. Before costs were considered, Vendor A was ranked the highest by the evaluation committee. However, when the committee looked at the cost proposals, as shown in red, for Vendor A, they felt their costs were too high, and they excluded them from further consideration. However, when the costs were properly calculated, as shown in blue, Vendor A actually has lower costs than Vendor C, who was selected as a finalist. As a result of problems we found in the contract-award process, we feel the committee has little assurance that it selects the most qualified contractor at the best price.

The third area I’d [I would] like to briefly touch on in the contracting area is the contract monitoring process, which begins on the bottom of page 58 [Exhibit C]. We found the contract-monitoring process is inadequate. And I’d [I would] like to give a couple of examples. On the top of page 59 [Exhibit C], under ‘contract terms not enforced,’ we have several examples here where contract terms have not been enforced. In the first paragraph is an example. Under contract, UICI is required to provide 11 monthly reports to the committee on claims processing-activity. We found that only one of these reports was being provided. On page 60 [Exhibit C], in the middle of the page, under ‘problems are not corrected timely,’ we found that consultants and a CPA firm have reported claims-processing deficiencies and other problems for years, but these problems have not been properly corrected. An effective contract- management system should include a process to ensure problems are identified and resolved quickly.

On page 61 [Exhibit C], we have nine recommendations for the committee, addressing the various areas in contracting. Rocky [Mr. Cooper] will discuss the final section of the report, which starts on page 62 [Exhibit C].

Mr. Cooper expressed:

For the record, [I am] Rocky J. Cooper [CPA, Audit Supervisor, Audit Division], Legislative Counsel Bureau, Audit Supervisor. Madam Chair, members of the committee, I’d [I would] like to continue on page 62 [Exhibit C]. Claim inventory information is unreliable. Because of severe data limitations, we could not determine the extent of UICI’s unprocessed claim inventory from July 1997 to May 1998. UICI has not retained key documents needed to verify the accuracy of information reported to the state. In addition, UICI has poor controls over claims received, claims processed, and calculating claim inventory. As a result, the state has no assurance the inventory information it receives is accurate. Although key inventory documents were not retained, our analysis of available information indicates UICI understated the inventory reported to the state from July 1997 to May 1998.

Mr. Cooper noted:

Continuing on page 63 [Exhibit C], we identified numerous weaknesses in the way UICI documented and controlled the claims it received. These weaknesses encompassed the entire process, from manually counting the claims in the mailroom to ensuring the date received was entered correctly into UICI’s computer system. Without adequate controls, UICI cannot ensure all claims it receives are processed. And on page 64 through 68 [Exhibit C], we have a further analysis of the weaknesses we identified. We can now answer any questions.

Mr. Crews stated:

Madam Chair, I know that’s [that is] a lot of information that’s [that is] thrown to you in a summarized form. I think there are a lot of details we didn’t [did not] cover in our report, but we tried to hit the key issues. We’re [we are] available to try to provide additional information if we can. Like I mentioned earlier, we spent quite a bit of time out there, and I think we have a wealth of knowledge in those areas. I’d [I would] like to open it up to any questions you may have.

Senator Porter remarked:

Thank you, Madam Chairman. I know there have been other committees looking at this, and I’ve [I have] really started my personal review of the process, so bear with me with some of my questions. And I know that you’re [you are] the messengers, so I’ll [I will] apologize in advance. You may have mentioned in your earlier comments, but what is the amount of total unfunded liability at this time? How much do we owe? $26 million?

Mr. Crews answered:

Senator Porter, I don’t [do not] think we really do know. That was the amount that was determined would bring them into a solvent position. I don’t [do not] think the actuaries, at least at this point in time, are comfortable enough to make an adequate projection of claims still outstanding. So I think we’re [we are] still a little bit in the dark.

Mr. Crews pointed out:

I would hope that proper monitoring is put in place, where the committee can monitor the results of the projections and so on. They contract with an actuary. They also contract with a CPA firm to do an annual financial audit. And they also do a claims audit on an annual basis. I think all those factors come into play as far as making a projection, and also, I think they have to rely on those reports to some degree. I think they’ve [they have] been having some difficulty with the actuarial projections, but a lot of that is subject to the quality of the records at the TPA. So until you get the TPAs under control and have adequate and accurate information, it’s [it is] questionable that you’re [you are] going to get good projections.

Senator Porter justified:

Madam Chairman, I can remember sitting here 4 years ago, when White Pine County was here with problems with their school district. And I must tell you that we gave them a very serious hard time as to their management, as to their leadership, as to their accountability to the county and to their community. But what I’ve [I have] seen in my short time of reviewing – I’ve [I have] received some more information from the Governor’s Office – what has happened over a period of years, almost 6 or 7 years, is criminal. And I question where our leadership was throughout this process. There are apparently a number of checks and balances. I’m [I am] being very rhetorical because I know that you’re [you are] here to provide us information. But there appear to be a number of checks and balances, but everyone seemed to look the other way. And I don’t [do not] understand that.

Mr. Crews urged:

Madam Chair, if I may, I think part of the problem really goes back a lot to the organizational structure, who’s [who is] responsible. And when you can’t [cannot] clearly define who’s [who is] responsible, I think you do end up with a lot of finger pointing.

Senator Porter pointed out:

But the taxpayer knows who’s [who is] responsible, and I think they’ve [they have] been cheated, as have the employees. It’s [it is] amazing that, if it was a private sector business, they would’ve [would have] been shut down years ago. If it was a county or a city, we would’ve [would have] had hearings on top of hearings. We would’ve [would have] raked them over the coals, if it was a local government. We spend hours in here beating up local government, and I see something happen in our own backyard; this is unacceptable. I know you’re [you are] the messenger, but we have an Executive Branch. We have a staff. We have professionals that were monitoring this. I just cannot believe that we got to this point without some leadership preventing it; this is criminal. And I don’t [do not] expect you to even respond to that, but it amazes me. And I expect this is just the tip of the iceberg.

Mr. Crews stated:

The thing that we’re [we are] concerned about, Senator Porter, is, again getting back to the actuarial projections, we’re [we are] still operating in the dark. We got a qualified opinion on the state’s financial statements this time, and I believe it’s [it is] probably the first time in at least… over 10 years the state has had an unqualified opinion on the overall financial statements of the state. And it is a very good likelihood we’ll [we will] have the same occur this next June 30 if we can’t [cannot] get some good actuarial projections. And again, it’s [it is] based on the accuracy and reliability of the underlying records.

Senator Porter insisted:

If I read my information correctly, provided from a committee that I’ve [I have] been appointed to serve on here recently, we even increased benefits in the midst of this. Is that correct? In 1995, additional benefit increases – extra glasses – and again, in fairness to the employees, they deserve and certainly should have a superb health plan – but it looks to me like even in the midst of a crisis, we were giving away the ship. I don’t [do not] understand.

Mr. Cooper answered:

Senator Porter, that’s [that is] correct. As a result of bad information, the committee was making decisions based on their reserve, some of which may not have existed because there were outstanding claims from L&H Administrators that weren’t [were not] processed. Once UICI took over, they found quite a few more claims that had not been processed, and so there was a great backlog. But really, this gets back to the accuracy of information provided from the TPAs and the ability to monitor that information. At the time the committee was making these decisions, they were relying on the actuaries, what they were telling them.

Senator Porter insisted:

I understand they were depending upon individuals to provide them information, but there had to be folks within this system that knew the ship was sinking. And there had to be board members that were aware. I can recall, probably in 1995 and in 1997, we were lobbied, not to change the makeup of this board, very heavily by certain organizations, because there was a movement to change and there were rumblings that there was a problem. But we were lobbied not to change the makeup of the board. And that’s [that is] troubling to me. I believe that they knew it at the time, and that’s [that is] unacceptable to me.

Mr. Crews stressed:

Senator Porter, I think also, to kind of come back on your point, there’s [there is] a lot of contracting services going on in the state government right now, and it just so happens this one contracts for the majority of their work. But any time a state agency contracts for services, it doesn’t [does not] relieve them or wash their hands of their responsibilities. We’ve [we have] seen it more than once, and this is a classic example of that.

Mr. Cooper clarified:

Yes, Senator Porter. That occurred late in session, when the request was made. I think there was a lot of discussion regarding the duties that were currently performed by the risk manager. So I think there was just basically a lot of confusion at that time regarding the reporting relationships, and what came of that was [that] there was a letter of intent to actually define what the risk manager was doing, what his duties were. And they were going to later use that to establish whether an executive position was needed.

Senator Porter commented:

The COB [Committee on Benefits] testified the current risk manager – this was in 1995 – was incompetent, but since the risk manager was appointed by the Governor, the COB could not replace him. The money committees directed COB by letter of intent to document the performance expectations. The COB did not renew their request for an executive director during the 1997 session. No documentation of any performance problems was provided to the Legislature. What can I say? The taxpayers and the employees have been abused.

I appreciate all of your efforts and time you put into this. And like I said, if it was a private sector, these individuals would be in jail for taking advantage of their customers, and that’s [that is] what’s [what has] happened here. I’m [I am] sure that as the session unfolds, we’ll [we will] hear more, and hopefully, we’ll [we will] be able to get it taken care of. We need to seek solutions, not to continue to beat up the problem, but this is unacceptable. Again, I appreciate the efforts you’ve [you have] put into this. Thank you, Madam Chairman.

Chairman O’Connell queried:

Anybody else have any comments or questions? Gary [Mr. Crews], I wonder if you’d [you would] kind of step us through this. In looking at the audit from 1985, looking at the audit from 1995, it would appear as though the same problems existed over that length of time. And I wonder, can you tell us if any steps were taken that you’re [you are] aware of? I think the audit that we did 1995 was just because we hadn’t [had not] audited since 1985, is that information correct?

Mr. Crews answered:

Madam Chair, there were a couple of audits. The one in 1995… let me back up a little bit. In 1993, Assemblyman Bache [Douglas (Doug) A. Bache, Clark County Assembly District No. 11] requested that we conduct an audit of the program; that bill did not pass. However, he started the same bill again, I think in the 1995 session. But just prior to the 1995 session, the Committee on Benefits went out and contracted for their own audit, and that’s [that is] the one that’s [that is] referred to here, the 1995 audit. That’s [that is] the one where they recommended an executive officer to oversee the operations, and that same situation does still occur… it’s [it is] the same situation today. There’s [there is] a lot of confusion, and it has not been straightened away. We conducted an audit in 1987 of the Risk Management Division, and then again in 1997, trying to separate risk management from the Committee on Benefits. A lot of the same problems that we identified in the 1987 audit were still problems in the 1997 audit. They had not been corrected.

Mr. Pierson stressed:

I’ve [I have] observed, or gotten some information that I think from the attorney general’s office. It’s [it has] kind of the history of what they’re [they are] doing, and I believe that there have been some lawsuits filed against L&H. There were several companies. There was an L&H Administrators, an L&H Associates, and there were also the principal owners. I’m [I am] not certain how many lawsuits have been filed or against whom, but I know there has been at least one, and the attorney general has been pursuing that.

Mr. Crews answered:

I think it was probably earlier in 1997, if I’m [I am] not mistaken. I think it started really kind of snowballing later on in 1997. That’s [that is] when we were directed to come in, in January 1998, and take a look at the situation.

Mr. Pierson answered:

That’s [That is] our understanding, that they just simply… The employees they had found out that they were going to pretty much be going out of business, and so they started finding other jobs. And sometime in July, they just ceased being able to operate and then suddenly closed their doors.

Mr. Pierson emphasized:

Yes. Actually, the committee in early 1997 became very concerned about problems they were hearing about L&H, not getting claims processed timely, problems with claims being processed. They directed their consultant to go in and look at L&H in April, and they found significant problems. Just prior to that, the state insurance division [Division of Insurance] received complaints, and they began investigation. Eventually, for whatever reasons, L&H chose to lock the insurance division out, and they began proceedings to revoke their license in May 1997. And at that time, the committee was kind of forced into a situation of, you know, this TPA has got problems, they may not be licensed fairly soon. They may lose their license. So that’s [that is] when they said, ‘We’ve [we have] got to make a change.’ It was in their May 1997 meeting that they voted to terminate the contract with L&H. And at that time, their consultant, who had been looking for someone, came in and indicated that they had identified UICI, and then a few weeks after that, there was a meeting between the committee and UICI. I believe it was a telephone conference. That’s [that is] kind of where they met, and they went from there.

Chairman O’Connell expressed:

How many claims were being processed at the time that L&H closed their doors. My understanding is that they were processing maybe only 8 or 80 out of some 100 claims. Did you all come across that information?

Mr. Cooper testified:

Madam Chair, as far as L&H, how many claims they were processing, I don’t [do not] think we have that detail in our report right now. But if you could turn to page 45 [Exhibit C], we have kind of a history here of the claims-processing timeliness and the percentage of claims that have been processed in 10 working days. And you can see that CoreSource, even back in early 1996, had problems, and they apparently got some things straightened out so they could sell this business to L&H. Then L&H had problems starting in January 1997. So at the very end there, regarding claims-processing timeliness, I think the Risk Management Division could provide you how many claims they were processing each month and those types of things.

Chairman O’Connell remarked:

I think it was a minimal amount, and I think that’s [that is] important. Also, I think it’s [it is] important for the committee to recognize that this division is not under the state insurance commissioner, and I think that has been part of our problem because their hands were tied as far as coming in and taking any action whatsoever.

The next thing I would like to know, I do not believe that the current risk manager has experience in that field.

Mr. Crews expounded:

Madam Chair, I think his primary experience was in the liability area, causal liability. He assumed this position after this mess evolved, I guess you might say, and he’s [he has] been working with us during the course of the audit. But no, I don’t [do not] believe he does have a background in health insurance.

Chairman O’Connell stressed:

And the problem, although there are many parallels between this and SIIS [State Industrial Insurance System], for those on the committee who have any information about SIIS, this is different in that we are losing cash, where we were not losing cash as such in the SIIS problem. But this is a cash-flow problem to the tune, my understanding, is about $1 million a month. Does that match with your figures?

Chairman O’Connell insisted:

In excess of $1 million a month… And then the situation with UICI, they found they could not process enough of the claims here, and so they turned it over to their collection division or their processing division in wherever their home office is. And is that where we experienced the embezzlement of the $600,000?

Mr. Pierson summarized:

Madam Chair, the embezzlement problem was with L&H; it was not with UICI. Since UICI was out of state, they had to come in and set up an office and hire people and all those kinds of things. And it was the beginning of September 1997 before they could begin processing claims. We’d [we had] gone a couple of months without any claims being processed, and it was unclear how many claims L&H had processed or they hadn’t [had not] processed. There were also some other problems that UICI encountered. They [UICI] were unable to get an accurate and complete tape from L&H that showed a claim’s history, that shows how many times I’ve [I have] been to the doctor and whether I’ve [I have] satisfied my deductible or not.

Mr. Pierson stated:

There were some code problems. The problem was they didn’t [did not] get information so they could understand the codes. And so it took some time to try to figure those out. They also had problems with the information coming from the preferred-provider network, who is the contractor who contracts with all the doctors, and we contract with the preferred provider to plug into all their doctors. All of these things delayed and contributed to them [UICI] getting started, and so by the time they got started, they had an awful lot of claims to do. They [UICI] decided to try to speed the process up, and the most time-consuming thing for them is to enter in all the information on the claim: the patient’s name and address and all that stuff, and the doctor information. And they decided if they could send some of these claims to a sister organization called Satellite Imaging Systems, which was located in Utah, they felt that these folks could enter that kind of information that could come back to them, and then they [UICI] could do the actual assessment of the fees or the amount that would be paid. They [UICI] sent tens of thousands of claims to Utah over several months, and all of those eventually came back in February and March 1998. There were several problems that they had with those. But their intent in trying to do that was to try to speed the process up, and in hindsight, it probably didn’t [did not] speed it up.

Mr. Pierson stressed:

I believe it’s [it is] $477,000 that we’ve [we have] recovered. What they did, is when she was arrested, I think they froze her bank accounts and everything, and they were able to find $477,000 that had not been spent. After she was convicted, that [money] was returned to the state. Now, I believe, I’m [I am] not certain, the attorney general is pursuing action against her to try to recover the remainder of the money, but as I understand, the individual is in prison now, so it may be difficult to recover that money, at least in the near future.

Senator Care emphasized:

Just one question, too. Any one of you that’s [that is] capable of answering this, on page 33 [Exhibit C], where you discuss methods and terms of appointment do not ensure accountability, and then you recommend for the four appointed members defined rotating terms. If they did have defined rotating terms, would it still be necessary, talking now only about the appointed members, to change the composition of the board, and if you think so, why?

Senator Care urged:

Right, but I’m [I am] talking about the composition. I’m [I am] talking about the statute of having two from the state employees and then the other two appointed, would you have to change the composition in the way the statute currently reads, [that] is what I’m [I am] saying.

Mr. Crews surmised:

Oh, okay. I’ll [I will] try… right now, there is no provision for removal of two of the members, and also in essence you’re [you are] holding the Executive Branch responsible for the operations of this program. Without having the Governor or whoever, I would think, reporting to the Governor having that authority, then you diffuse that accountability.

Senator Care remarked:

I’m [I am] not making myself clear. I apologize. No, I’m [I am] saying that… what’s [what is] the relationship between having defined rotating terms and the composition of the board. I mean, for example, we’re [we are] going to be looking at proposed legislation that says ‘highway patrol,’ I think there’s [there is] one about local government entities, as opposed to what now the statute says. Would you have to change that at all?

Mr. Crews stated:

I don’t [do not] know if you would have to change the composition necessarily. I think that’s [that is] a policy decision, and I don’t [do not] know if I’m [I am] really the one to enter into that. I think you have to have… I think it would be appropriate to have your rotational terms so that you do have the continuity. And I think it’s [it is] also important that if you do have people representing different factions, such as state employees, retired employees, or whatever it may be, that those individuals still would have to report to the Governor, I think, or an ultimate authority, so that you do hold somebody responsible. But as far as the composition, I don’t [do not] know if I can really address your question on that.

Chairman O’Connell summarized:

Gary [Mr. Crews], there was sometime during this period, also, that – and I want to say that it was in 1995, and it might not have been – when there were premiums frozen, so there wasn’t [was not] any premium increase. Was that around 1995?

Mr. Pierson voiced:

It may have been during the 1995 session that was discussed, or maybe it was the 1997 session. I know that the premiums, how much the Legislature contributes for an employee, was frozen, if I remember correctly for fiscal [year] 1997 and fiscal [year] 1998. That may have been in 1997… no, I think that would’ve [would have] been the 1995 session, I think, when that would have been discussed.

Chairman O’Connell stated:

Mr. Gagnier [Robert J. Gagnier, Lobbyist, State of Nevada Employee Association/AFSCME] is kind of signaling me that that happened in 1993, he believes. What I would like to get from you gentlemen – if it’s [it is] possible, I’m [I am] trying to give us some benchmarks here, as to the history of this and how it came about. If we did an audit in 1987 of the risk manager, the information that was found out during that time, then in 1993, 1995, 1997, at the same time we know what was going on with hospital costs. I’d [I would] like to have some information about when L&H closed their doors; the committee’s action then on UICI; the embezzlement, which of course would go back to L&H; and then also the timing of when the premiums were frozen. And if you could kind of provide us with that timeline, I think that would kind of help fix things in our alleged minds.

Senator Porter noted:

If I could capsulize what I’m [I am] hearing, there seem to be two real problems. One was probably the most publicized portion, and that is the problems with the third-party administrator. And I think another area that we haven’t [have not] spent a lot of time on is what our Chairman is asking about, and that is the continual change in benefits and lack of premium authorized by the Committee on Benefits.

And if I may be able to answer a couple of your questions on some of the information that I’ve [I have] received. Apparently, in 1992, the actuary for the Committee on Benefits indicated that there were serious problems with their incurred-but-not-reported [claims], and that there wasn’t [was not] enough funding to cover the incurred-but-not-reported [IBNR], which were approximately $5 million less than it should have been in 1992. The reserve for incurred but not reported claims is the amount – and not to get into the definition. The actuary indicated the plan needed $11 million. They only had about $5 million available in 1992. So in response, and in credit to the COB, they cut benefits, increased rates, and changed the rate schedule in 1992. Then, during the 1993 period, the COB made additional cuts in benefits and increased rates by approximately 3.5 percent for employees with a spouse or employees with children, and a 28.4 percent increase for employees with families, spouse plus children.

The benefit reduction and rate increases were scheduled to return the IBNR in our reserves and to an actuarial sound level over a 4-year period, and in fact, apparently, it did. But then in July 1995, the COB provided additional benefits, increasing coverage. And during the 1996 year, the [benefits] increased to 100 percent coverage on certain areas, added – not that there wasn’t [was not] a need – …hearing aid coverage, reduced the premium for dependent families, increased the maximum coverage to $2 million. Actually, they were probably making it more competitive with the market, but they just weren’t [were not] charging an adequate amount. And then in 1996, they increased the life insurance accordingly, and during the 1997 Legislative Session, the actuary for COB indicated these items would cost approximately $8 million a year. And that was in 1997. The actuary now indicates some of those costs may not have been included while preparing the budget for 1998 and 1999, and the actuary is currently developing a detailed list. So if that may help. And then in 1995, the COB received the results of an independent performance audit, which was covered. But I guess that really maybe summarizes for you some of the sequence, that they may not have taken the proper steps to adjust benefits and premiums accordingly, adding that to the third-party administrator problems.

Chairman O’Connell stated:

…I don’t [do not] know who would be providing this, but I think it’s [it is] important for us to know also, when you were coming to the state – when the employees were coming to the state, represented by their organizations – requesting additional money, perhaps for the state’s participation in the coverage. But I think Senator Porter has probably expressed the feelings of most of the people on the committee as far as the outrage. And what we are doing now, of course, has nothing to do with the state employees. They are the ones paying for this, and they had nothing to do with it. And the responsibility lies on the state to correct what they have so poorly mishandled. It’s [it is] just very frustrating to even try and speak about, but thank you very much for your input. We appreciate that very much. We know that we’re [we are] going to be hearing eight or nine bills on this issue, and giving us this background is very helpful. So, go ahead, Gary [Mr. Crews], you wanted to add something.

Mr. Crews added:

…Madam Chair, I think a lot of the information that you’re [you are] requesting probably is more fiscal in nature, budgetary information, and we’ll [we will] work with the Fiscal [Analysis] Division because I think they’ve [they have] been tracking that from a budgetary standpoint, whereas our audit, basically, again, was requested to address organizational problems within the division and the Committee on Benefits and their contracting practices. But we’ll [we will] work with them to try to get you that information.

Chairman O’Connell stated:

Thank you very much. I think it would be very helpful for us, too, if we could include in that information how many claims were being processed by L&H. I know this is when it was first brought to my attention by some employees of the university, where their credit ratings were being affected because their bills were not being paid, very legitimate bills. And I know that’s [that is] when it first came to my notice about what was going on in the state.

Mr. Crews expounded:

…I’m [I am] going to have to qualify our answer on that, on getting you that information, because a lot of the information, we found out during the audit, was not available, or the quality of the information was unreliable. But we can certainly get you what we have on that. One of the problems we identified was when they did switch TPAs, the committee did not have a good handle on the amount of claims that were still outstanding and were misinformed about how many claims were outstanding by L&H. So when UICI took over, there were tremendously more… I think there were probably double the claims outstanding as they anticipated. But again, we’re [we are] kind of relying on bad information systems, bad record-keeping systems. Any information has to be suspect from that standpoint.

Chairman O’Connell stressed:

…What would you recommend, then, Gary [Mr. Crews], because I sent out a letter to all doctors, all MCOs [Managed Care Organizations], all PPOs [Preferred Provider Organizations], all hospital lobbyists, all insurance agencies, asking them to be very bold and creative in a plan that they might bring to our attention. Before any of those entities would be able to give us any kind of information, they would have to, hopefully, have some idea of the figures, the information that they were dealing with had some sound basis. So anything that you could do for us; we’re [we are] kind of in a limbo situation if you’re [you are] telling us that the information you have, you don’t [do not] know how credible that is. In order for us to move forward and take any positive steps in this, we need to know some numbers. So I don’t [do not] know if that’s [that is] a possibility, but I think if we want to try and help the situation as far as not punishing the employees, again who had no part in this whatsoever, we need to move off square one, which is where we’re [we are] at now. Anything, do we need to get an outside actuarial to come in? Do we need to get … I don’t [do not] think we need another audit. But what would you suggest to us in order to be helpful in presenting information to anybody who might seriously be looking at this for us?

Mr. Crews remarked:

Well, first of all, I think the committee itself has a responsibility – and I don’t [do not] know exactly what they’re [they are] doing right now – to be working with the third-party administrator, UICI, trying to make sure the everyday operations function as they should be. If the claims information is accurate, if their inventorial claims are accurate, which we found it wasn’t [was not] when we did it. I don’t [do not] know what it is today, but that’s [that is] something the committee needs to be addressing on a regular, everyday situation until we get this squared away. I have heard that they’ve [they have] contracted with somebody to take a look at duplicate payments. That project isn’t [is not] done yet from what I understand. They’ve [they have] contracted with a firm, I think, from out of state to go back and try to identify duplicate payments. But somebody has to be involved in the day-to-day operations of the TPA and until you get the TPA’s records and systems working appropriately, you’re [you are] not going to dig out the hole.

Mr. Crews answered:

Madam Chair, we do not go back in there, the statutes provide for a 60-day plan, a 6-month follow-up process by the Department of Administration. And that would be Perry Comeaux’s [John P. Comeaux, Director, Department of Administration] shop is supposed to go in and evaluate the status and implementation of those recommendations. But if you follow that logic, it will be long after session before there is a report as far as implementation of those recommendations. We do have a joint subcommittee of the money committees. I believe we’ll [we will] be taking a look at this and bringing the committee in and trying to find out the status of those recommendations in the interim, probably within the next few weeks. And that is prior to the statutory time-frame of 6 months follow up and soon.

Chairman O’Connell pointed out:

Now let me just make one more point here. Really there was nobody who sat on the board that had the ability to fire anybody. When we found out what was going on because the Risk Management [Division], or the risk manager was working at the pleasure of the Governor and the Governor is the only one who had any authority to do any firing as far as the board was concerned. Is that a correct picture?

Senator Porter stated:

Madam Chairman. Having vented my frustration as to the big picture, I’d [I would] like to talk a little more specifically before you go about the chain of command. I know we covered it briefly. In your comments, we expect a whole lot from some layman board members, and I can appreciate that’s [that is] a huge challenge although we were lobbied to make sure that it remained that way, but we do expect a lot from a layman board member. And I have some background in insurance, although not health; we do not do health insurance so I don’t [do not] claim to be an expert. But with the responsibility of the board members came, I think, a larger responsibility for the professionals advising them. Would I not be correct if I looked at page 17 [Exhibit C] to see the proper structure? You have the state risk manager, the risk management division, accounting, clerical. Is this the best page or is page 20 [Exhibit C] or what’s [what is] the best chart for me to look at.

Senator Porter declared:

So from a checks-and-balance standpoint, we had a Director of the Department of Administration, we had the state risk manager, and then the whole management division. Now what have they told you about this?

Mr. Crews explained:

I think there is some concerns within the committee. I think they have some philosophical differences there because you do have a risk manager that they did not feel they had control of because he reports to the Director of the Department of Administration.

Senator Porter said:

But I’m [I am] not talking about the board I’m [I am] going to leave them alone for a moment because, again, I think they are laymen trying to do the right thing, but they are being advised by some professionals. Have we seen any memos or anything going back and forth to the administration as to the seriousness of this problem from any of these staff people?

Mr. Cooper stated:

Senator Porter, I don’t [do not] think I’ve [I have] seen any memos going back and forth…. The only thing I am aware of would be anything in committee minutes, in the legislative testimony. I think when we look at this organizational structure, what has happened over a period of years, the Committee on Benefits, this program has evolved over time. Early on they were just purchasing insurance for state employees, they didn’t [did not] have the TPA and all these contracts. And over period of years, they became more of a policy-making board. And then at the very end there when they did not have that executive officer position, they really had no management function where they could call on and say please get me this information. And they were essentially running the day-to-day operations of the program as a committee.

Senator Porter stressed:

I’m [I am] not talking about the committee for a second. I am talking about the paid professionals that were there to advise this board. Was there any indication of severity of this problem passed on to the executive office?

Mr. Crews stated:

I don’t [do not] know if you had paid professionals with the group insurance or the health insurance background. Employees of the Risk Management Division. Most of their expertise was relied on through contracts. They contracted the consultant to make a lot of their difficult decisions, they relied on contracted actuaries. Almost all of their services were provided through contract.

Senator Porter said:

Well maybe I should ask in a different way. It seems to me, in this flowchart there’s [there is] some oversight that would report to someone that was in charge. Was there any notice given to whoever that was in charge that there was any problems here?

Senator Porter questioned:

There isn’t [is not] any indication from the AG’s office [Office of the Attorney General] that there was a problem? In fairness to Frankie Sue [Frankie Sue Del Papa, Attorney General, Office of the Attorney General], she’s [she has] been communicating with me in recent history. But during this problem, was there any indication from him [Randal Mund] that there was serious collapse happening.

Mr. Crews concurred:

And that’s [that is] basically what we’re [we are] saying. Everybody is pointing fingers at each other, nobody is responsible. …nor can you hold anybody responsible because you don’t [do not] have it clearly defined in statute. You have budgets built differently than the statutes.

Senator Porter insisted:

I think we can argue on holding someone responsible, because I am responsible and all of us here are responsible. It just seems to me that someone in this process would have had the conscience to go to someone and say, ‘This thing is sinking.’ And apparently no one did and I guess that’s [that is] what upsets me as much as anything that everyone looked the other way. And that’s [that is] the way it appears to me. So they are all accountable. Thank you very much.

Mr. Crews explained:

If I may, I am not saying that they aren’t [are not] accountable. I think there’s [there is] a shared responsibility. I think they’re [they are] responsible to a certain degree. But there is no one single individual accountable and responsible. And that’s [that is] the whole problem. You need to define that. The statutes need to define that. Until you do that, I don’t [do not] know how you are going to address it, and that is why we made the recommendation as it is. I think you need an executive director or you do need somebody that is ultimately responsible.

Senator Care questioned:

Let me put the question this way to follow-up on what Senator Porter was asking. If at any time, before all of this came out, one of the four appointed board members had wanted to go to somebody, just out of curiosity, and say, ‘How are we doing? Are we losing any money?’ is there somebody he or she could have gone to?

Mr. Crews suggested:

If I was one of those board members, I think I’d [I would have] gone to the risk manager. And they’d [they would] have also asked their consultants, they have consultants working for them, too. And I think they had communication with their consultants, I think there are questions there as well.

Senator Porter stated:

Madam Chairman, I have the ultimate respect for Perry [John P.] Comeaux, but I wonder if he’s [he is] here by chance or someone that was in that department at the time? They just left right? We’ll [we will] ask this question later. Thank you.

Chairman O’Connell asked:

Any more questions from the committee? Thank you all very, very much for the excellent audit that you’ve [you have] done. Alright, Mr. Wolff [Gary H. Wolff, Lobbyist, Nevada Highway Patrol Association]. Gary [Mr. Wolff], I would ask you as we begin this, if you would like to make any comment on the questions that have been asked. We would appreciate any information that you could share with us from your discovery as well.

Mr. Wolff testified:

Good afternoon Madam Chairman, members of the committee, for the record, my name is Gary Wolff, I represent the Nevada Highway Patrol Association and I’ve [I have] also however got into this. I am the spokesperson for the committee to fix our plan. That committee consists of various AFL-CIO labor organizations, [CWA] Communications Workers of America, Teamsters, the [NCA] Nevada Corrections Association, people from [NCOPS] Nevada Conference of Police and Sheriffs and their president is back here, I sure wish he’d [he would] have come up here with me.

I want to say something right off of the bat here. I was a state employee for 25 years before I retired and I had the privilege of serving on the PERS [Public Employees Retirement System] Police/Fire advisory committee to the large board and it was truly a privilege. And this bill [S.B. 79] and I’ll get into this bill a little later, but this bill is almost patterned right after the PERS committee. And I am sure there is going to be all kinds of neat things done to this, but the bill is patterned after that. And I don’t [do not] think anybody will argue that the Public Employees Retirement System is well run, it’s [it is] a very fine-tuned clock. It has great administrators over there and we do not have these, never have had these problems in PERS.

A few months ago, quite honestly, back in 95 [1995], I first became involved in the Committee on Benefits’ situation as I was approached and I didn’t [did not] know a darn thing about insurance at that time, and I don’t [do not] know a great deal right now. But they wanted to change the committee based on a couple of factors that the committee, they felt, was one-sided. It didn’t [did not] have a true representation of all the classes of state employees, and I think everybody knew about that bill at that time. It went through the Assembly without any problems and somehow it just disappeared over here, whatever happened to it.

In 97 [1997] a similar bill came up and I got kind of thrown for a little bit of a loop. They wanted to do this again, and I said, ‘Well why would you do this, all these neat things have happened.’ And I had no background on what was going on with this committee until that time. Quite honestly I had other things to worry about. But when this whole thing erupted on a shortfall, being a policeman for 25 years in this state and 6 years in another state, I started doing my own little snooping around and being a policeman I’m [I am] kind of suspicious of things anyway. And, you know, I have listened to the auditors and I have the great respect for the auditors. And the audit report is good, but I believe there needs to be more told to you by state agencies as far as history on things go. And the history of this thing is very unique.

And this committee or this system, and I don’t [do not] want to take shots at individual committee members, I’ll [I will] tell you that right now because I haven’t [have not] got an idea of how informed they are, what their managers tell them, their advisors tell them or anything like that. But I will tell you, based on the historical data I have here, this committee’s [committee has] been in trouble since 1985. And we have document after document including litigation suits filed against this committee. And you know it’s [it is] ironic when I sat here and listened to the auditors, and to use Senator Porter, you said, ‘Nobody’s responsible.’ That’s [that is] exactly what the courts said, the [Nevada] Supreme Court of this state said. Nobody is responsible for anything here. One person points a finger at another one constantly. But you know who’s [who is] responsible, the Committee on Benefits is responsible. Risk management is responsible. It sure as heck isn’t [is not] the 20,000-plus people that are in this program. We put trust in people.

If I buy an insurance program from you Mr. [Senator] Porter, I expect the trust of your insurance company to take care of me if something happens. And I think all of us are this way. Insurance is one of the most…health insurance is probably one of the most valued things we have in our society. And I was looking through some of these documents that go clear back to 1992 and I think you would be astonished, and the reason I haven’t [have not] given you any copies of these things, because this is what I’ve [I have] come up with in about 8 months. And I would be happy to have it copied and give it to you, Madam Chairman, for distribution if LCB [Legislative Counsel Bureau] wants to make copies of this historical background. And I’ll [I will] tell you what it says in here. It says in the NRS [Nevada Revised Statutes] it says the same statute requires the committee to maintain the fund sovereignty stating ‘payments into disbursements from the fund must be so arranged as to keep the fund solid.’

Now I’ve [I have] all kinds of things underlined here, it says the committee is responsible for setting policies, all these things. Well, who is, maybe by the NRS, by the fine tune of the law, you can’t [cannot] put them in jail, and I don’t [do not] think they should go to jail, but if you were, if this was a teamsters fund, people would be in serious difficulties. And what amazes me is this committee hired, allowed a company to come in here and we have all kind of newspaper articles showing that L&H was under indictment in some states. There was an FBI [Federal Bureau of Investigation] probe. They lost their license in this state. They weren’t [were not] even licensed in Nevada. They were bonded for $50,000 is all they could be bonded for in a $100-million-plus program, I guess now they’re [they are] bonded, I hope UICI is bonded for more, but all these little things is what a committee does. They are supposed to poke their nose into things to see what is right with the system. That is what I trust them to do as a retiree. I think that is what everybody here that has their own health plan through the state and it is a responsibility and it is risk management’s responsibility.

I’ll [I will] give you a little thing here that I found out here. They were talking about duplicate payments.

Mr. Wolff continued:

Yes, I will, thank you. I was thinking I might be here before a deposition or something. This first document [Exhibit D] I read from is from the Supreme Court of the State of Nevada. And this was a file where the [Nevada] Supreme Court upheld the fact the Committee on Benefits was not responsible legally for any of the actions in the suit by…a suit that was brought against them by services employees [Service Employees International Union] back in ‘92 [1992] for raising rates in benefits and generally not running the program as it should be. And they very eloquently stated in this decision that although all these things happened, they couldn’t [could not] be held responsible until the law was changed. But it does say they have the responsibility to do all these things, but if all the money went out the door tomorrow, then you couldn’t [could not] do anything to them for the money being gone.

I have a document [Exhibit E] here. During the course of this action, there was an independent individual, her name was Elizabeth Engberg, and this is document that she provided to the service employees union when they were questioning the problems with the committee in ‘92 [1992]. …she spoke to Dave Thomas who was the risk manager at that time, and Dave Thomas simply told them that between 1986 and the middle of last year, the committee contracted with a consultant named Byerly and Company in Denver. The consultant never used an actuary to look into the financial status of the health insurance fund. And this is quote [Exhibit F], this is not my words, this is quote from this individual that was hired. ‘This seems to me, not only stupid, but potentially illegal. In addition, the committee never asked him to justify his premium rate-setting, obviously never reviewed any financial reports nor asked for any reports on claims trends. All of these are basic when running a self-insured benefits program. As a result, the fund apparently began to spend into the reserve and is expected to be $6.2 million in the red by the end of 1992. "I don’t know whether this is $6.2 million into the reserves or really into the red." Apparently claims increased by 30 percent last year while revenue into the fund only went up by 7 percent.’

Mr. Wolff continued his testimony:

I guess what I am saying is historically this goes on and on and on. Unfortunately, I have not been involved in the legislative activity, which I will be in the future, on this health plan committee. … We have numerous news articles showing that Frank, I hope I am pronouncing his name, this is from the Chicago Tribune, and this was dated May 23, 1997, showing that this Frank Rosenthal, who is the head of L&H was under indictment by the grand jury. These are all newspaper articles that go all the way through this, and yet we hired a basically, by my understanding from the articles I am reading, an unlicensed contractor to run our program and a man who is obviously a criminal through all these other states.

The problem with duplication on claims, still goes on Senators, Madam Chair. I have here one employee of the Nevada Highway Patrol, these are all recent, these are numerous duplicate payments that were made that she herself sent to me and I will get you copies. I just got these yesterday. I will make you copies. And this is what’s [what is] going on. And some of them are so ridiculous, it’s [it is] funny because you look at one, they say that they’re [they are] paying the 80 percent and then they reverse it and tell the employee to pay the 80 percent. And you’ll [you will] have to see these when I get you the copies of everything. I am open to any questions if you have any at this time and then I will go through the bill.

S.B. 79 was basically brought in simply because other members of other organizations in state government feel they should have a voice in determining their own future and how this committee runs. I know this bill draws opposition from SNEA [State of Nevada Employees Association], and I think I’ve [I have] gone through and showed what the current committee has done with 40 percent of that committee being SNEA members. This proposed legislation is patterned after PERS. It allows the Governor to appoint the committee from nominees of three people presented by various groups and I’ll [I will] go through those groups. There are six members of the committee and then you have, like Perry [John P.] Comeaux who is in charge of the committee. One member comes from the State of Nevada Employees Association or its successor organization. One member comes from the retired employees of Nevada; one member from a list from the Nevada Highway Patrol Association or its successor organization. One member of a list of nominees submitted by employee organizations which represent professional employees, the University and Community College System [of Nevada], one member from a list of nominees submitted by employee organizations which represent employees of local governments that participate in the state insurance program, and one member from a list of nominees submitted by employee organizations other than organizations set in 1 through 5 [section 1, subsection 1, subparagraphs (1) to (5) of S.B. 79]. That leaves one more. I can tell you from our own organization, we have CPA’s [certified public accountants], we have ex-insurance adjusters. We have a great deal of expertise in our own organization who would more than qualify to sit on this committee. People that have taken the time to study it. As I stated before, when I sat on the police/fire advisory committee, my name went up for nomination. I was interviewed for over an hour to see what my expertise was in the public retirement system. I guess I wooed them over because I became a member for 3 years. I take this serious. I’ve [I have] listened to if they need a manager, maybe they do need a manager like PERS, maybe the committee hires a manager. But, I think, in all fairness to all employees in this state, this committee needs to be expanded. It needs to have a broader representation of all state employees, and it should have something in there that if a committee member isn’t [is not] doing their job somebody can remove that committee member.

Mr. Wolff responded:

We have no active retirees in [our] association. We wanted to but we couldn’t [could not] get the payroll-deduction form through the payroll system because of the way the law reads. We have 411 people in the highway patrol, at the current time we’re [we are] 36 positions down in the highway patrol and we have approximately almost 90-percent membership of those groups.

Senator Titus stated:

I don’t [do not] know, after listening to the auditors, with all due respect, I think that the problems go much beyond who sits on the committee. You can’t [cannot] just blame all of this on who was on the committee. We’ve [we have] heard that it was a long, evolutionary process; that you have contradictory statutes; there has been poor management; there’s [there has] been lack of accountability because there is not clear-cut chain of command. So I think instead of focusing on who sat on the committee, or who’s [who is] going to sit on it and that kind of finger pointing, we need to look at bigger reforms and be more focused on the individuals; the retired school teacher who now finds her whole check eaten up by health insurance, or the state employee whose rates go up 20 percent to pay for his dependents now. We have got to fix this whole system because I can’t [cannot] vote to appropriate money to help fill in the gap or say to people you’ve [you have] got to pay higher premiums and not be able to show them something that we’ve [we have] done substantively to fix the problem so it won’t [will not] happen again. So while this is okay to talk about the membership of the committee, I think we need to look far beyond that for more substantive major types of reform.

Mr.Wolff responded:

I again did not finger point, I don’t [do not] believe I wanted to finger point. I think the problem is … I think the committee itself has been ill advised. The point, I believe I am making, the bill says that the new members shall have a great deal of knowledge in this area. I think what you are trying to do here, I don’t [do not] think we need a bunch of professionals from the outside coming in running our committees, I think state employees need to run that. But I think if you’re [you are] going to sit on a committee, you need to have your own expertise in that field. And I think from 20,000 people, Senator Titus, that we are going to be able to find people that have a good broad knowledge of insurance, and at least question things.

I had a surgery myself. Seven months later, I finally had my last bill paid. I knew something was going wrong just by the fact my bills weren’t [were not] paid. I don’t [do not] understand why we can’t [cannot] tell anybody how much we are losing a month. I think we are losing closer to $2 million a month in this plan. And this is twofold, what’s [what has] happened here because of people not asking questions. What’s [what has] happened here is we’re [we are] kicking the state workers twice. We know the problems the state has in money, so we’ve [we have] all pretty well said there probably won’t [will not] be any pay raises, but now we are going to ‘double whammy’ them by increasing their premium costs. And so they get it on both sides. And this isn’t [is not] right. But what the point I’m [I am] making is I think if you put some other people on here, that represent everybody in the state, you are going to get some good qualified people that at least will ask questions. And I don’t [do not] think the questions have been asked.

Thank you Madam Chair and committee members, for the record I am Marty Bibb. I am executive director of the Retired Public Employee’s of Nevada. And we do support S.B. 79. Without going into great detail … it would expand the membership of the committee from five to seven which makes sense to us because we think that not only is that a broader perspective, but I think in those instances where one or more members are unable to make a Committee on Benefits meeting it gives at least a few more people and a few differing opinions to perhaps help in the debate and dialogue. Secondly, it would require obviously that the members that sit on the committee be selected for that panel in the same fashion; all of those people. Under the present system, two of those individuals are named and two others are appointed by the Governor while the fifth is the director of the Department of Administration. We believe getting all people to the committee in the same fashion is a fairer approach.

Also we think it’s [it is] a good thing this bill requires that members who serve on the Committee on Benefits have knowledge or experience in management of employee benefits which also, we believe is extremely important. This additionally specifies length of terms for everyone who serves on this committee rather than just some of those individuals. And we believe that this is a good idea, it also would permit someone other than the director of the Department of Administration himself or herself to sit in on that committee knowing the manifold duties that that individual has. We believe that that is a good idea as well.

We support this measure also, obviously because our organization which has more than 7,300 members, retired public employees who are retired state employees, city, county, police, fire, school district and other local government type of employees would have the ability to offer up names to be appointed along with other appointees from other entities by the Governor to this committee. The Legislative Counsel Bureau’s audit that has been gone into so lengthily ‘it was released in December of 1998’ cited 13 specific deficiencies which were accepted by the committee and we think that S.B. 79 to recompose this committee is an important first step, not the only step, but it’s [it is] going the right direction, we believe, and trying to get the health insurance program back on its feet.

And we think that’s [that is] extremely important when you consider at least by some estimates that have been done on this problem that about $27 million of the anticipated available cash for the year 1998 had evaporated which led to a significant rate increase as well as a decrease in coverage for both active and retired public employees. We think that certainly more careful management of the system could have helped lessen this negative impact that was felt so broadly by those in the plan this year. And we think that the other bill drafts along with this, which are under consideration by this Legislature, will have other possibilities as well as the notion of establishing an executive director or one person with whom more direct responsibility might be aligned. And I think that that’s [that is] certainly a concern that’s [that has] come out of the report itself.

And we believe it’s [it has] been essential to find out what went wrong with the program in the first place. But we also believe that it’s [it is] really the goal to find out what it takes to make it really right, and that’s [that is] extremely important to the thousands of people who are enrolled in the state’s group health insurance program including the retirees enrolled in it, many of whom do live on fixed incomes. We appreciate the opportunity to speak on behalf of this bill before the committee.

James Richardson, Lobbyist, Nevada Faculty Alliance, testified:

Thank you very much, I am Jim Richardson, representing the Nevada Faculty Alliance chapters around the [university] system. At the risk of starting to take slings and arrows, I might mention that I did chair this committee for 6 years in the 80s [1980s], much more halcyon days than we’re [we are] now facing. As you know there will be many bills coming forward on this and I assume you will hold this bill particularly and wait and see what the others look like. There’s [there is] a BDR [bill draft request] coming over from the Governor’s Office that is based on the one [then] Governor Miller and Frankie Sue Del Papa [Attorney General Del Papa] developed. It’s [it is] being reworked a bit. So there are going to be lots of ideas put forward about how to structure or how to solve the problems that this committee faces.

I want to go on record as supporting the point that Senator Titus made, I am sorry she’s [she is] not here to hear me make that point. It is important who’s [who is] on the committee, but that’s [that is] not the real problem, it’s [it is] the structure of the committee. I want to go on record here, in front of the committee, they’ve [they have] been beat up, other people have been beat up. They all know that the structure is a problem. It’s [it has] taken a while maybe to get everyone there. Bob Gagnier [Robert J. Gagnier, Lobbyist, Executive Director, State of Nevada Employees Association] was trying to point that out to me back in the middle 80s [1980s] by the way and I was a bit of a slow learner then about the structure in terms of setting up some sort of independent organization like PERS. That’s [that is] an idea that’s [that has] been around a long time, it just hasn’t [has not] gotten an audience until the disaster strikes.

I’ve [I have] talked to the risk management people. They want the thing restructured, they want this off their shoulders. There are lots of folks that want it reorganized and done in a way that’s [that is] more rational, perhaps following the suggestion of the audit committee. Having said that I want to make a couple of remarks if I could, just about the membership issue though because that is the bill that’s [that is] before you. I’m [I am] in favor of, the Nevada Faculty Alliance has supported for the last two sessions, bills that would expand the committee and make it more representative of those who are actually being served by the committee. Those bills have not made it all the way through the Legislature. Something perhaps will happen this time. This bill looks a lot like some of those bills, not exactly.

My suggestion to you as you consider this would be that you actually take a look at the number of people served by the various groups and think about some kind of proportionality in terms of membership. It may be that one group, in terms of their involvement in this Committee on Benefits, deserves two members instead of one for instance. And some might not get any by virtue of the size of their organization, so I would urge you to think about a general rule of proportionality that tries to treat everyone fairly and give them some representation. We are of course delighted that there is specific reference to a person from the University and Community College System [of Nevada, UCCSN]. We have never had that named in law although it has been a custom to have one of the five come from the University and Community College System[of Nevada] as you know, we would be delighted to have the law reflect our needs in that direction.

For the record I would like to say where it says at the top of page 2 in section 4 [subparagraph (4) of S.B. 79], talking about nominations from organizations which represent professional employees in the system [UCCSN]. For the record I would want you to clearly understand that I don’t [do not] interpret that to mean just the Nevada Faculty Alliance. I would understand, for instance, that if the faculty senate at one of the community colleges or universities wanted to send forward nominations, that would be their prerogative. We don’t [do not] think we own that slot, in other words. They’re [they are] representing faculty just as we are. We work very closely with the senates, and I would want to say that for the record.

There are some other good things in here too, about the 3-year terms for all the members. I thought it was a little odd when I was on the committee and I served 2, 3-year terms. But there were some people who had no terms, and I thought that was a bit odd. I know that Perry [John P. Comeaux] favors very much section b [paragraph b, subsection1, section 1of S.B. 79], down on lines 14, 15, 16 and 17 on page 2, because he simply can’t [cannot] get to some of the meetings. And for him to be able to send someone in his stead to a meeting, he is the state budget director and he does have other demands on his time. So there are some good features here, but I would recommend that you wait for some other bills and for the big BDR [bill draft request] that’s [that is] coming I think from the Governor’s Office. I would be happy to answer any questions.

Senator Porter said:

Jim [Mr. Richardson], thank you for your testimony, but I would like to respond to your comments about finger pointing. You know we owe it to the taxpayers of the state to restore trust in this process. We owe it to the employees to restore trust in the process, and I believe that’s [that is] what we are doing today. And that’s [that is] what we are doing during this legislative session, but we can’t [cannot] brush under the rug the problems that have been created; the millions of dollars that have been literally wasted, of taxpayer’s dollars. But I think I can agree that what’s [what is] primary is that we find a way to take care of the families of our employees, their children, to make sure that they can trust the system, and turn in a claim, and have it paid, and feel that if they have to go to the hospital, the costs will be covered. So we do agree, but I also believe that we can’t [cannot] brush under the rug these problems and we have to find those accountable and we will.

Senator Raggio commented:

I could easily ask the same question of anybody who comes before us speaking one way or another on this bill, but since you are here, I’ll [I will] just throw it out so there can be some discussion. First of all, let me explain my absence here. I was in another committee on education matters, and I don’t [do not] know what information you’ve [you have] had, but I can tell you that the Interim Finance Committee, through the interim has had tons of information on this. I’m [I am] familiar with the audit. The statement was made that no one person or one matter is responsible for the situation today. There’s [there is] a long list of reasons why this happened. The state insurance program used to be contracted out. We decided at some point years ago that we’d [we would] self-insure. For many years it was successful, we didn’t [did not] run into this kind of a situation and the idea of self-insuring was that we would save a great deal of money instead of paying premiums that were rather large premiums we thought at the time. Looking back, they weren’t [were not] very big, but the system was, of course, not the size that it is today.

Gary [Mr. Crews], how many active state employees do we have all together … is it 47,000 state employees? … I thought it was around 14 or 15 thousand actual state employees. And when you look at the makeup this is only one factor with only one of the recommendations in the audit. And that, incidentally, was accepted by the benefits committee as a recommendation. So there were a long list of reasons as to why the present financial situation occurred, and I don’t [do not] want to go into all those today because we’ve [we have] taken too much time.

Changing the composition of this benefits committee is not the sole answer to how we deal with this problem. But picking up on what Senator Porter said for the first time, in order to deal with this situation, we are going to have to appropriate significant amount of General Fund and Highway Fund to bring this system back to stabilization. And it’s [it is] true that the premiums before were paid out of General Fund, but we’ve [we have] always had the ability to control that because we didn’t [did not] have this problem that arose. But when we’re [we are] asked for example by the Governor, this Governor as well as the last Governor, to inject 16.5 million dollars of General Fund and additional amount of Highway Fund to stabilize and save the system. Isn’t [is not] it appropriate that accountability that maybe we have other people who represent the public sit on this Committee on Benefits as well as those who are going to be potential recipients of the benefits? And one of my proposals will be to add to this Committee on Benefits, people who, still keeping people on who represent those who serve in the public sectors, but as well having persons who don’t [do not] receive benefits, don’t [do not] pay premiums, but represent that likelihood that in the fact that we are injecting significant taxpayer money into resurrecting this system. … I would suggest people who have the kind of background that is essential to monitor. They won’t [will not] control the committee, but they certainly will be an important asset for the committee and their membership will insist that they will be participants.

Now, the reason I’m [I am] saying this, and I’m [I am] not saying it in a pejorative way, but those who presently serve on the Committee on Benefits, obviously have a vested interest in seeing to it that the premiums are kept at a minimum amount particularly for dependents, where they have to pay a part of it, where there’s [there is] a co-payment. Or have a vested interest in seeing to it that we don’t [do not] reduce benefits when we have a situation that might otherwise dictate that. And I’m [I am] not saying that’s [that is] done intentionally, but it is certainly a vested interest and when those decisions have to be made, the appearance is that there’s [there is] a reluctance to change that because of the cost to the loss of the benefit. And, so I think the public, the taxpayers have a right to have some representation at some point in this process that they do not now have other than what overview it gets from the Legislature when we’re [we are] in session or from the Governor who would have the head of the budget on this committee. So I’ve [I have] gone a long circuitous route and if you care to respond to it you may, but I’m [I am] just telling you where I’m [I am] coming from and again let me say, changing this committee isn’t [is not] itself going to restore, and it’s [it is] not the cause of all the problems in any event. But you may want to comment on that.

Mr. Richardson said:

Yes, I would respond briefly, I think there is a good argument to be made that the public deserves some representation in some way in this program. It is a big program. Unless the early version of the BDR from the Governor’s Office actually has an interesting way of doing that, that you may find you prefer more than putting citizen members on. It actually has a kind of a permanent legislative oversight committee made up of a few members of the Legislature appointed by the majority and minority leaders to keep an eye on this committee in a sense and watch it. So that’s [that is] another thing that, in a way, gets the public into the picture. So you’ll be getting, I think that, unless they take it out of the BDR, but it’s [it is] certainly in the early version. Personally I have no problem with the concept that you’ve [you have] laid out.

Senator Raggio interjected:

Don’t [do not] mishear what I said. I didn’t [did not] say it for the purpose of keeping an eye on the committee. I think the committee needs to have that type of input, direct input, from a member or members of the committee who don’t [do not], the perception is not going to be there that they are not making a decision or they’re [they are] not bringing up a decision because they have some kind of a vested interest in whatever is recommended. It wasn’t [was not] to just keep an eye on a committee. I think everybody, including yourself, who’s [who has] ever served on this committee, has probably done or been a very dedicated, committed person. So again I say this isn’t [is not] the reason that it failed, but I think as long as we’re [we are] trying to fix this, resurrect it, and salvage it, this is one aspect that we need to look at.

Mr. Richardson responded:

It’s [it is] somewhere in the range of 3,000-plus dependents. And then Bob Gagnier [Robert J. Gagnier] and I have a little disagreement of whether, when you ask, that’s [that is] professional employees. There are a lot more state classified employees who are members of his organization, and so there’s [there is] a bit of an overlap there. But, we have quite a few independents involved. The exact figures, I think, would be of great interest to you to get the list of how many come from each of the segments that are currently served by the committee. I have that list, and can bring it to you, but others have it as well. Thank you.

Mr. Gagnier testified:

For the record Bob [Robert J.] Gagnier, [Lobbyist] Executive Director, State of Nevada Employee’s Association. Madam Chairman, if I may, if I could do what you’ve [you have] been doing and before I address S.B. 79, maybe talk about a little background. I certainly appreciated Senator Titus’s remarks, and I am glad that she is back because, Jim [Richardson] said the same thing and he was sorry that you were out of the room when he said it. We have a bigger problem here, and just changing the Committee on Benefits is not going to fix that. And let me explain from our perspective a couple of the problems in what has caused them.

Chairman O’Connell interjected:

Let me just say for the record, because the last two speakers have said that. We all know that. This is simply a bill to start the discussion and to look at the committee which we feel definitely needs to be expanded, and many other things need to be done. In fact, I think I mentioned we have eight bills that we are aware of so far that will be coming through on this [subject].

Mr. Gagnier continued:

I’m [I am] aware of at least ten. I think that you must address, in statute, the problems. That is the source of many of the concerns that we have now is because what you have today, is legislation by budget. And this has been a common practice in the State of Nevada for a number of years.

If you go back to 1983 when the Legislature first authorized the state to have a self-funded program, because by the way there were many years when we could not get a private insurance company to bid on our program, and once we had to renegotiate with a firm for a 35-percent increase because nobody would bid on our plan. So in 83 [1983] they established the opportunity for self-funding. Because at that time we had a legislator who was a former risk manager, in another public entity in this state. He thought it would be good if the Committee on Benefits were to consult with the state risk manager which at that time was a brand new position, and so he inserted that language in the bill in 1983. And it’s [it has] grown from there. There is no legislation that says the state’s risk manager will run the state insurance program. It’s [it has] been done in the budget.

Now you have to also remember that in the Executive Branch of government, agencies don’t [do not] control the budget that is presented to the Legislature. That’s [that is] controlled by the Governor and by the Department of Administration. I don’t [do not] think enough was said about the fact that because of an audit and because of the recommendations of the Committee on Benefits, they had asked for a chief executive officer. That much was said, but why wasn’t [was not] it approved by the Legislature. I’m [I am] really sorry that Senator O’Donnell was not here, because he was privy to that.

The Department of Administration said at the time that the state risk manager was spending most of his time doing health insurance work. And the Committee on Benefits wanted a chief executive officer and thereupon the members of the subcommittee of which Senator O’Donnell was the chair, of the Senate subcommittee, said, ‘Alright, well if that’s [that is] the case, then you can do without the risk manager. Because if the risk manager is spending all of his time on health insurance and now you’re [you are] going to have somebody else doing that, then you don’t [do not] need that position.’ The Department of Administration said ‘No. We need that position.’ And the money committees basically said ‘You can’t [cannot] have both.’ And that’s [that was] what ended up killing it. Why wasn’t [was not] it brought back? It wasn’t [was not] brought back, because the administration would not support that legislation. The budget that has been presented to the Legislature this year was not a product of the Committee on Benefits, it was a product of risk management and the Department of Administration.

So, what I’m [I am] trying to get at here is, we really need to craft a law that does all of these things; that says all these things; that says the Committee on Benefits will have staff consisting of and the bill that we have will say ‘a minimum of a chief executive officer and an auditor who must be a CPA’ and we put minimum qualifications right in the law. We think that is as a minimum, you need that. So I think we have to look beyond just the committee and make sure that if you’re [you are] going to have a Committee on Benefits, and sometimes I wonder whether we should, but if we’re [we are] going to have a Committee on Benefits then give them the staff and the authority to do what is necessary. Most of the problems that have brought us to this point have been caused by an outside firm and let’s [let us] just talk about that for a minute because I think some of you may be under the wrong impression.

The Committee on Benefits never hired L&H Administrators, period. L&H Administrators should never have been allowed to come into the State of Nevada. That’s [that is] another law that needs to be fixed. What they did is they bought a firm that the state had a contract with; ‘CoreSource.’ Now, they could come into this state without any background check or without any determination as to whether they were a reliable firm or anything else and allowed to buy a firm. And the Committee on Benefits didn’t [did not] have anything to say about that. And if they had, somebody probably would have said they were interfering in private business, if they were opposing this firm buying CoreSource. So all of a sudden they end up with this successor arrangement and there were problems from the get-go. But I think that is another law that needs to be looked at, a law that allows somebody like that to come into the state and buy a firm that has an existing contract. Now the new contract has a successor clause in it.

Mr. Gagnier said:

I suppose the consultants that the Committee on Benefits had. You have to remember that since the self-funded plan started, they dealt with the same third-party administrator; it never changed; it changed names, it changed corporate ownership, but it was the same firm. Started out it was Mutual Administrators, it was a Las Vegas firm, they sold to an insurance company, I believe Lincoln National, I don’t [do not] know for sure. Then eventually that was sold, it was [became] CoreSource. Always the same firm, the same body, but it changed corporate structure until CoreSource sold. And then you might also be aware that at that time, both CoreSource and L&H Administrators paid considerable fines because they were late in paying their claims. But that’s [that is] a different issue. So I think that we need to change that insurance law, if you’re [you are] going to have a third-party administrator. That brings me to my next point which one of the things we’re [we are] suggesting in our legislation is we don’t [do not] want this to happen again and the best way to do that is not to have third-party administrators and the state should set up its own claims-paying system. And that way we can avoid that problem.

Mr. Gagnier responded:

Well I hope that there will be, Senator, somebody in charge. And that’s [that is] why we need a staff that is in charge of this plan and you can’t [cannot] have this diffusion of some people work for one person and some work for someone else. Some are responsible to one, and some are responsible to the other. That has to be fixed and I agree wholeheartedly with the audit where it says that.

Mr. Gagnier responded:

Well let me give you some background and I may have. I hope I didn’t [did not] confuse the chairman with my sign language. But the state’s contribution to the health plan was frozen in 93 [1993] for budgetary reasons. The Governor proposed no increases in the health insurance. That’s [that is] kind of when we started having the more serious problems eventually. But in 92 [1992] to back up, because of the increase in health insurance costs, the plan was in difficulty, and they raised the premium.

Mr. Gagnier responded:

Yeah, everybody screamed ‘bloody murder.’ So you know that kind of gets to … Senator Raggio’s point. I don’t [do not] think this committee does things reluctant, well they’re [they are] reluctant, but they do take action when it’s [it is] necessary. And in fact I will give you a quote from one of your fellows who was at the meeting that day. And Senator Townsend [Senator Randolph J. Townsend, Washoe County Senatorial District No. 4] said, ‘The day they did that, you bit the bullet and you’ve [you have] taken the action necessary, I wish SIIS [State Industrial Insurance System] would do the same thing.’

Senator Porter questioned:

Bob [Mr. Gagnier], can I ask you another question on my first train of thought? So as you mentioned earlier, or someone did, about the Committee on Benefits’ request for a new CEO. Why was there a request in 95 [1995] if you didn’t [did not] think there was problem in 95 [1995], why was that happening then.

Mr. Gagnier replied:

I think that it has been perceived, Senator, for a number of years that there was a problem that the committee was in, had the responsibility but did not have the control. They base that on that audit. I think it’s [it has] been felt for some time. And I think Jim [James] Richardson in his testimony, alluded to it that we discussed this many years ago.

No, not in 95 [1995]. In 92 [1992], yes there was a virtual war over the increased premiums and the decrease in benefits. Subsequently, when the funds started being restored, the Committee on Benefits restored most of the benefits they had taken away. Those were the increases in benefits that have been alluded to, very few actual increases.

Mr. Gagnier replied:

Yes, and let me back up just a minute, because sometimes you have to refresh my memory as you just did. I think it was pointed out by one of the other witnesses, that for several years, the Committee on Benefits had a consultant and an actuary that may not have been doing the job that they should have been doing. That was not a unanimous decision of the committee that was passed on a 3-to-2 vote. Our two members on the committee voted against that firm because they did not believe that firm was competent.

Mr. Gagnier said:

Okay. But the other was the state’s contribution was not increased. I know that we’re [we are] already an hour over what you told the people at the beginning. Maybe I can just address a couple items in the bill. If there are other historical things, way back in history. I’d [I would] be glad to try and answer them.

Senator Neal questioned:

Do you know anytime prior to the last contract that was signed that now has a successor clause in it? Was this ever brought up to anyone in an official capacity, to the committee, to the Governor that these contracts did not have a successor clause in it?

Senator Neal stated:

It’s [it is] because that gives me some problems in terms of if the attorney general is supposed to be reviewing this, whoever the attorney general was at that time or the lawyer that looked at those contracts, and I assume that is the case, is it not?

Mr. Gagnier replied:

The Committee on Benefits has a deputy assigned to them, they always have. In addition there is an RFP [request for proposal] and a contract division within purchasing that writes these things. But I think that’s [that is] relatively new. I don’t [do not] think that was in existence before, I think there was a study of contracts because the State of Nevada has thousands and thousands of contracts involving hundreds and hundreds of millions of dollars. And so it was studied a few years ago and I believe they set up a special division now that does that.

Let me point out a couple parts of the bill that first, the one that we think is good would be on page 2, lines 21 and 22 and I think that’s [that is] good that there be terms and probably should be overlapping. Right above that is a section that we have some concern about and I know that on several occasions, Chairman O’Connell, you have mentioned that you thought perhaps this committee should be under the jurisdiction of the insurance commissioner. That’s [that is] a conflict of interest because the insurance commissioner has to regulate this and in the past, we’ve [we have] tried to get people from the insurance commission onto various committees and that’s [that has] been determined to be kind of a conflict of interest.

Chairman O’Connell voiced:

My concern, and I think that she [insurance commissioner] knew about this, at least this is our understanding from the subcommittee when we looked at this in finance, that she was aware and tried to do something, but had no power to do anything. So maybe the companies that are handling, if you had a TPA that they should definitely, have to be licensed as has been brought up several times by the commissioner.

Mr. Gagnier stated:

Madam Chairman, that’s [that is] one of the things that we think needs to be changed within the insurance law. Not this law, but the insurance law to assure that they have to give their approval before a company can come in and buy a company that has a contract. But we’re [we are] also concerned about having people on the committee that may have, as it says here, ‘experience in the management of employee benefits.’ It’s [it is] very difficult to find people with experience that would not be in a conflict-of-interest situation. Had several people talk about the similarity between this and PERS. There are no requirements for PERS board members other than three be management, three be employees, and one be a retiree. So they have no requirements that they have any kind of extensive background.

Mr. Gagnier replied that he thought so and stated:

The other one that would be on lines 14 through 17, and you’ll [you will] see this same language, on page 2, you’ll [you will] see this same language, I think in one or more other bills, and it causes us concern. We have no problem with if the director of the Department of Administration is going to be one of the members of the Committee on Benefits, that it could be ‘the director or his designee’, but it should be a permanent designee, not this meeting it’s [it is] ‘Joe’ and next meeting it’s [it is] ‘Jane’ and so forth. It should be a permanent appointment. And I can tell you that several other states do that. I was on a committee similar to this in the State of Washington many years ago, and there the budget director is called the Director of Program Planning and Fiscal Management. And it said he, or his permanent designee. And that would probably make more sense so you would get the continuity and not keep changing things.

Beyond that I would just say that the size of these other organizations that would be appointed to a Committee on Benefits are somewhat disproportionate and we certainly don’t [do not] think that that’s [that is] a good idea. I’ll [I will] just tell you that you have to be a little careful, and this point has come up before, the last time you had one of these bill in front of you, it listed an organization as appointing people to this committee and they don’t [do not] even exist anymore. So you have to be a little concerned in that if you’re [you are] going to get into this disproportion, all of the other employee organizations combined in state government amount to fewer than one thousand. I’m [I am] not talking about university faculty. I have no idea what they are, but just within classified state government. So you have that and if you’re [you are] going to have this disproportionate representation, you know, we think we should get a crack at the retirees, too, because we have 700 retired members. And let me answer the questions, several questions have come up, I’ll give you the actual numbers. The number of active state employees, and this includes university: 21,137.

Dependents; 16,558 for that group. State retirees; 4,394. Their dependents; 1,427. Active non-state employees, these would be local government people; 766, and they have almost an equal number of dependents; 716. We show 1,265 non-state retirees and 435 dependents for them. Now those are the numbers that were provide by the Risk Management Division, I think for a budget presentation, so that’s [that is] what I’ve [I have] given you.

Senator Porter continued:

Well then let me ask you another question since you apparently don’t [do not] like them, and I assume that you probably have attended many of these board meetings. How could they enter into a new contract on 12/2 of 98 [December 2, 1998] with UICI?

Mr. Gagnier replied:

Yes, but no one knew the extent of the mess. And it’s [it has] taken a long time. I don’t [do not] think it should have taken this long to clean up that mess. That’s [that is] one of the reasons why we’re [we are] proposing in our legislation, that the state do away with third-party administrators and pay the claims ourselves.

Chairman O’Connell said:

Anyone else wishing to address S.B. 79? Okay, if not we will now close the hearing on that. And committee, I just felt that it was necessary for you to have this kind of background on this issue and that’s [that is] why we didn’t [did not] try to do anything to shorten the testimony that you’ve [you have] heard.

Next, the committee reviewed S.B. 48.

SENATE BILL 48: Revises provisions governing funds to stabilize operation of local government. (BDR 31-864)

SENATOR RAGGIO MOVED TO DO PASS S.B. 48.

SENATE BILL 52: Revises provisions governing cooperative agreements to allow certain transactions by public agencies with Indian tribes. (BDR 22-198)

SENATOR NEAL MOVED TO DO PASS S.B. 52.

SENATOR RAGGIO SECONDED THE MOTION.

THE MOTION CARRIED. (SENATOR O’DONNELL WAS ABSENT FOR THE VOTE.)

*****

The committee reviewed S.B. 2 and S.B. 3.

SENATE BILL 2: Requires Department of Human Resources to study facilities for long-term care that provide services to recipients of Medicaid. (BDR S-486)

SENATE BILL 3: Requires Department of Human Resources to study feasibility of expanding eligibility for Medicaid to include persons who are medically needy. (BDR S-488)