MINUTES OF THE
JOINT Subcommittee on General Government
of the
Senate Committee on Finance
AND THE
Assembly Committee on Ways and Means
Seventy-second Session
February 20, 2003
The Senate Committee on Finance and the Assembly Committee on Ways and Means, Joint Subcommittee on General Government was called to order at 8:05 a.m., on Thursday, February 20, 2003. Chairman Sandra J. Tiffany presided in Room 2134 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
Senate COMMITTEE MEMBERS PRESENT:
Senator Sandra J. Tiffany, Chairman
Senator Bob Coffin
Senator Dean A. Rhoads
Assembly COMMITTEE MEMBERS PRESENT:
Mrs. Vonne Stout Chowning, Chairman
Mr. Bob Beers
Mr. Joshua B. Griffin
Ms. Kathryn A. McClain
Mr. David R. Parks
STAFF MEMBERS PRESENT:
Bob Guernsey, Principal Deputy Fiscal Analyst
Steven J. Abba, Principal Deputy Fiscal Analyst
Bob Atkinson, Program Analyst
Julie Walker, Committee Secretary
OTHERS PRESENT:
P. Forrest Thorne, Executive Officer, Board of the Public Employees’ Benefits Program
James W. Manning, Budget Analyst V, Budget and Planning, Department of Administration
F. Martin Bibb, Lobbyist, Retired Public Employees of Nevada
Bonnie Parnell
John Yacenda, Lobbyist, State of Nevada Employees Association
James T. Richardson, Lobbyist, Nevada Faculty Alliance
Doug Bierman, Lobbyist, Eureka County, Lander County, City of Caliente
Frank Brusa, Lobbyist, Nevada Association of School Administrators
Danny N. Coyle, Lobbyist, State of Nevada Employees Association/American Federation of State, County and Municipal Employees
We will begin with the Public Employees’ Benefits Program (PEBP) budget.
Public Employees Benefits Program – Budget Page PEBP-1 (Volume 3)
Budget Account 625-1338
Retired Employee Group Insurance – Budget Page PEBP-8
Budget Account 101-1368
P. Forrest Thorne, Executive Officer, Board of the Public Employees’ Benefits Program:
I have a presentation of the PEBP budget entitled Public Employees’ Benefits Program, Accounts 1338 & 1368 (Exhibit C. Original is on file in the Research Library.). I will include a review of information presented at the initial hearing with more detail, including more information on the cost of the plan, the driving cost factors, items to be considered by the board in the near future, self-funded claims history, and financial trends.
Demographics of the program are a key factor driving costs. As you can see on page 4 of the presentation, the largest portion of participants of the program are in the 40- to 59-year age bracket. That is a category in which medical costs tend to increase, with a direct impact on the overall costs of the plan. The highest per capita cost is in the 60- to 64-year age group, followed by the 50‑ to 59-year age group, as shown on page 5 of the presentation. The 50- to 59-year age group also has the highest enrollment counts, and the bulk of these are active employees. It is active employees who largely drive the cost of the program. When we weight this for medical and vision costs, the highest-cost segment of the population is shown dramatically.
As you can see on page 7, the distribution of the State active employees, State retirees, non-State active employees, and non-State retirees has been stable over the last 6 years. Tables on pages 8 and 9 break State participants down by tier of coverage, that is, active versus retired, and further into the type of coverage. The largest group is active employees covered for the employee only. Active employees comprise 81 percent of the total group covered, and retirees the remaining 19 percent. By comparison, the non-state group is much smaller and has a very different distribution. While the largest population is still employee-only coverage, the split between active employees and retirees is almost equal. This has a significant impact on their cost. There is no commingling in this group, and the retiree group is a small population of just under 1600 participants. This means volatility in the claims experience of that group, which results in higher rates.
The split between people on the self-funded and health maintenance organization (HMO) plans remained steady in 1998 through 2000, despite the fact that withdrawal of several HMOs caused all but Clark County participants to go to self-funded coverage. In the last 5 years there has been an average growth of 18 percent in the number of aggregate claims. However, in the last 2 years the number of aggregate claims has grown by 29 percent one year and 28 percent the next.
The graph on page 12 of the presentation shows the factors involved in cost increases. In 2001, the main driver of cost was inflation. In 2002, it was utilization of the plan by participants.
Senator Tiffany:
Is this what is happening in other states?
Mr. Thorne:
Yes. This is the trend nationally, in public as well as private sectors. The largest difference is that the average age of our active employees is 45 years. Nationally, the average age of active public sector employees is 40 to 41 years, and 37 to 38 years in the private sector.
Senator Tiffany:
But in other state pools, are you seeing these same trends?
Mr. Thorne:
Yes.
Senator Tiffany:
Is it baby boomers?
Mr. Thorne:
They are a big part of it. Baby boomers are in their mid 50s now and thus moving into the age group with the highest claims. Since that is the biggest portion of our population, the trend will likely continue in Nevada and across the country. We have also received a study from the Department of Personnel showing 40 percent of the active population will be eligible to retire in the next 5 to 10 years, and many will continue in the plan as early retirees. Much will depend on whether the State replaces these employees with younger individuals who can grow into the positions or with older existing employees who already have the requisite experience.
Senator Tiffany:
So we could see growth in both active and retired employees, correct?
Mr. Thorne:
Yes. Page 13 of the presentation shows changes in the net operating income, or revenues less claims and operating expenses, and the level of the funded reserve for the last 5 years. There was an influx of $26 million in fiscal year (FY) 1999, but even so we had a net income of only $8 million for that year. Though the funded reserve appears to increase over the next several years. However, we have since learned there was a buildup of unpaid claims. When the claims were paid starting in 2001 and 2002, there was an increase in the negative in net income for the plan. As a result, there was a big drain on reserves to meet the unexpected loss. In August 2002, there was another infusion of $18 million. Even with that, we are looking at a projected operating loss for FY 2003 of $5 million.
Senator Tiffany:
I have a question about the board’s authority. When something happens like this sudden influx of claims, does the board have the authority to readjust the benefits or other factors in the middle of the plan year?
Mr. Thorne:
Yes, it is possible. However, it takes a minimum of 5 months to do an analysis, get approval for the changes of the coverage or premiums, and provide 60-day notice to participants. If the process begins in the middle of the year, completion would not be possible before the next year. It is very difficult to make quick changes to the program.
Senator Tiffany:
Is there something we could do to the system to allow the board to make decisions quicker to react to emergencies? I am thinking of something like more frequent actuarial numbers or changing the 60-day notice to 45-day notice.
Mr. Thorne:
The 60-day notice used to be a 30-day notice, and this was changed in the 71st Legislative Session to give us time to provide as much information as possible to participants to allow them to evaluate the plans before deciding which to choose. As we deal with these trends, we will see a shrinking of options, and we will be trying to leverage our purchasing power and focus them to fewer entities. For example, we accepted bids for a Statewide preferred provider organization (PPO). Starting in July, there will be one PPO for the State instead of two. By utilizing the PPO with the best contract rates with the providers, we are looking at a potential annual savings of $4 million to $5 million just from that change.
Senator Tiffany:
So when a trend has an impact on the reserve, the board does not necessarily adjust the plan as quickly as we can. Instead, it looks for other ways to increase benefits. Is that what you are saying?
Mr. Thorne:
Yes.
Senator Tiffany:
But the board could react and quickly adjust the plan with some slight changes in statute.
Mr. Thorne:
Yes. We will still basically need about a month to get the open enrollment materials prepared and out to participants so they have 30 days to evaluate and decide. You then need another 30 days to process the forms.
Senator Tiffany:
Assuming you can add this position, you could add information daily if you needed to.
Mr. Thorne:
The problem is the number of claims may spike one month and be an aberration rather than a trend.
The effect of the drop in the reserves on the fund’s cash balance can been seen on page 14 of the presentation (Exhibit C). In September 2002 there was a $7 million cash advance from the Retired Employees Group Insurance (REGI) account. The remaining $4.3 million is expected to be recognized in mid‑March 2003. Our cash balances are running at about the lowest point where the PEBP can continue to function.
Page 15 of the presentation contains information regarding privatization versus self-funded insurance. Costs of the fully insured plan include profit of 3 to 4 percent, and the premiums must include the cost of funding the reserve in a timely manner. Under either model, the employer is responsible for choosing the most cost-efficient plan, and both programs are subject to market forces and cost trends. However, under a fully insured model, it is the insurer who is at risk during the plan year. Also, the cash flow is not subject to fluctuations. Both plans will pay the same amount of claim dollars in the end, but the insurer’s administrative costs will be higher. There are pros and cons to each approach.
Senator Tiffany:
Did the request for proposal (RFP) start from the assumption that there will be equal plan design?
Mr. Thorne:
The current plan design was used as the base point for the RFP to allow for meaningful comparison of proposals.
Page 16 of the presentation continues the comparison of privatization versus self-funded. Using a broad definition of the word “privatization,” a number of areas of the plan are already privatized, including claims administration, utilization management, enrollment and eligibility information systems, the life, long-term disability, accidental death and dismemberment, and travel accident systems, and the HMO offering in southern Nevada. Our operational costs right now are 2 percent of the total.
There were no responses to the RFP issued in December 2002 for a fully insured statewide HMO or PPO, or for a Medicare supplement. The RFP was issued twice last year with the same results. Davis Vision was selected as the primary vendor for vision. There will be new vendors for life insurance, long‑term disability, and accidental death and dismemberment as of July 2003, and travel accident remains with the current carrier. The board selected a single Statewide network vendor for the PPO, with annual savings projected at $4 million to $5 million. The vendor for utilization management will be finalized at the March board meeting. At that time, it will also be determined whether a disease management component would be added to that program.
Senator Coffin:
Could you define disease management? How is utilization review involved in this?
Mr. Thorne:
Disease management identifies certain specified diseases among participants, then works with participants on controlling the disease. Utilization management is preadmission certifications and case management on large claims. They work with the physician, the participants, and their families to ensure quality care.
Senator Coffin:
Could you give us examples of savings with the use of disease management? What are their fees as a percentage of the premium?
Mr. Thorne:
I will have more information after the board hears more on this in the March board meeting.
Senator Coffin:
Did Intracore submit a proposal for this?
Mr. Thorne
I do not know. The finalists have just been selected by the evaluation committee.
Assemblywoman McClain:
Could you explain the difference between disease management and medication management? Do we do anything in the area of medication management?
Mr. Thorne:
The pharmacists in the CatalystRX program are key components in medication management. This is a key focus with CatalystRX. They look at utilization patterns of the prescribing physicians, and they also look at medication use patterns of patients.
Senator Tiffany:
Would a disease management component add to the premiums?
Mr. Thorne:
There would be a cost associated with the service, but the return from that cost will have to be evaluated by the reduction of claims over a period of time to determine if it is cost-efficient.
Senator Tiffany:
As I understand it, the goal of disease management is not to cut benefits, but maximize utilization. For an ongoing condition such as hypertension or diabetes, the disease management group would help the patient plan the long-term course of the disease to help them get the most out of their benefits. Is that correct?
Mr. Thorne:
I believe that is the case. They also monitor the course of the disease in an attempt to catch any progression or deterioration in the disease status as early as possible, when intervention is most cost-effective. The CatalystRX program includes a diabetes management program in which monitors, test strips, and other equipment are provided at no cost to the participant. The complications arising from unmonitored diabetes are far more expensive than the cost of monitoring.
Senator Tiffany:
But the intent of disease management is to manage the utilization of the 10 percent of the participants who incur most of the costs that drive up the costs.
Assemblywoman Chowning:
The concept of disease management sounds good in the long run, but will there be a change in the way business is conducted inside the physician’s office? Most of the physicians in an HMO system are constrained to less than 15 minutes per patient, and some are only allowed 6 or 7 minutes per patient. The average HMO also has constant turnover of physicians, so that you rarely see the same doctor twice. How does long-term monitoring of an individual patient’s disease fit into the contemporary health care system? It sounds like a huge change to me. Is this being done in other states?
Mr. Thorne:
I have not seen anything suggesting a significant shift in the internal office practices of physicians. The days of the 45-minute office visit are long gone, and we cannot force that kind of change on the physician’s practice without a severe impact on his bottom line. It is because the modern doctor’s office has no time for true monitoring and education of the patient that the disease management company has arisen to take that role.
Assemblywoman Chowning:
Am I right in thinking we do not know the costs of such a program, since this is still just a proposal?
Mr. Thorne:
Correct.
Pages 19 and 20 of the presentation show some of the milestones we have met over the last 18 months. Changes include a new prescription plan design and new prescription benefit manager, which resulted in a reduction of the increase in prescriptions, from 18 percent in 2001 to 7 percent in 2002; a new third‑party administrator, which reduced claims turnaround from 28 days to 10 days, with quarterly claims audits; a new enrollment and eligibility information system; and focus groups and public meetings to discuss plan options. In addition, we restructured budget categories so self-funded and fully insured costs are segregated, initiated agency representative training, and implemented a document imaging system and data upload to our information system.
There were also plan changes that went into effect on January 1, 2003. These are detailed on page 21 of the presentation and include an increase in maximum out-of-pocket expenses, a change in utilization review from on-site to telephonic, and changed the dental plan to a true PPO.
Our budget request for Budget Account 625-1338 begins on page 22 of the presentation. Page 23 outlines our performance goals, which will be in the areas of expense ratios, enrollment errors, customer satisfaction, account billing reconciliation adjustments, and appeals and complaints. Page 24 is an overview of the budget. In FY 2004, the adjusted base is $167,992,429; the maintenance decision units total $39,110,566; the enhancement decision units total $5,900,000; and the total is $213,002,995. In FY 2005, the adjusted base is $168,191,417; the maintenance decision units total $65,102,658; the enhancement decision units total $11,722,755; and the total is $245,016,830. Graphs of projected expenditures and revenues are shown on pages 25 and 26 respectively.
Decision unit M-100 adjusts for inflation and per-unit increases, such as insurances, due-at charges, and purchasing assessments. Decision unit M-101 adjusts costs for inflation in benefits costs. Decision unit M-300 adjusts for the cost of benefits for PEBP employees.
Senator Tiffany:
Are we within the national norm for inflation?
Mr. Thorne:
We are pretty close on the cost of claims. On utilization we are above national norms, which is reflected in our demographics.
Senator Tiffany:
Are those percentages reported to you by actuaries, what the inflation should be?
Mr. Thorne:
We made an analysis of our claims, taking the baseline and looking at the cost per capita, to break out both how much the total increase in expenditures was from growth in enrollment, how much was inflation, that is, cost per claim, and how much was increase in utilization, that is, the number of claims.
Senator Tiffany:
Was this done internally or by an auditor?
Mr. Thorne:
That is correct.
Senator Tiffany:
I assume we do this continuously, since you have the statistics.
Mr. Thorne:
We are building that component now, with a position we have requested to take on more of these duties. The cost of this position will be offset by the cost we currently pay a consultant to provide this service.
Senator Tiffany:
How much higher is our utilization than the norm for state-funded plans around the country?
Mr. Thorne:
I do not have that information. I will see if I can get it for you.
Senator Tiffany:
It could follow the 80-20 rule or the 90-10 rule.
Mr. Thorne:
That will also fluctuate. Generally we have followed the 80-20 rule, in which that 20 percent makes up 80 percent of our costs. This means 80 percent of the participants are low contributors and do not receive much dollar benefit from the plan on a per capita basis.
The components of decision unit M-101, page 29, project an increase of 10 percent in the cost of HMO premiums, an increase of 5 percent in the cost of life insurance products, and a decrease of 4 percent as a result of vendor selection. Current projections of self-funded claims expenses are running considerably higher than anticipated. A single network was selected, with annual savings projected at $4 million to $5 million. All of the increases are covered by premium revenue increases.
Assemblyman Beers:
What is the percentage increase in the self-funded claims expense in the M-101 decision unit?
Mr. Thorne:
In the budget, it was 15 percent for medical. Our claims experience is running closer to 28 percent. We will have to adjust for that. When we look at our claims trend over the last couple of years, we are running far above the regional averages for plans such as ours. One reason for this is that we were going through operational clean-up, such as paying off a backlog of claims and a significant number of high-cost claims. We thought this was an aberration and continued to use the regional trend factors. We have now caught up on our claims but are still seeing this sort of increase. We will have to adjust either plan design or pricing to accommodate that higher trend.
The enhancement decision units are outlined on page 30 of the presentation. Decision unit E-275 allows $44,000 for overtime, representing 3.25 percent of regular salaries. Historically the overtime requirement has been higher. We are eliminating temporary positions to fund permanent positions, which are critical to continuity and consistency, and to improving accuracy and communications. Salary savings in the budget are substantially higher in the new biennium than in the current biennium.
Decision unit E-500 is a new permanent Financial Analyst position, which would replace contracted services with an outside consulting firm. The cost of this is fully offset by reduction in contract expense, and one-time startup expenses for furnishings and computer equipment will be depreciated over 5 and 3 years respectively. We are looking to bring in someone with underwriting skills. The person will be looking at trend and utilization analyses, cost projections, contract cost analyses, and rate setting. This will also allow us to have the information on a more timely basis.
Senator Tiffany:
Can we offer the type of salary that would attract the type of person we need?
Mr. Thorne:
The position is not for an actuary. They tend to be mathematics gurus who do a small portion of the work and get into the esoterica of the business. This position is more about the day-to-day underwriting business. We discussed this with our current consultants, and they think we can get someone with the skills we are looking for at the salary in the budget.
Senator Tiffany:
What do you expect this person to add, considering current conditions?
Mr. Thorne:
The person will monitor the condition of the plan from an underwriter’s viewpoint. It requires regular ongoing review of reports and information from our third-party administrator, including what claims are being paid and at what levels, what diseases are we seeing, and shifts in the demographics. This continuous monitoring lets us know what is happening within our plan and allows us to make whatever modifications are needed to meet tomorrow’s needs.
Senator Tiffany:
If we privatize, will we need this person?
Mr. Thorne:
I could probably make a case either way. We would have to look at it more carefully. We might get the same information from an insurance carrier that we get from a third-party administrator, but the insurance carrier has a vested interest in keeping us in the dark. We would still need to monitor the plan independently.
Assemblyman Parks:
What is the cost of the contracted services?
Mr. Thorne:
The adjusted budget includes $294,000 for contracted services. The cost for this position is just over $78,000.
Senator Tiffany:
This still does not preclude us from needing an actuary. Is the consultant an actuary as well?
Mr. Thorne:
The consultant provides knowledge and experience of multiple plans across multiple sectors. A very small portion of what they provide is an annual actuarial analysis and review. They make recommendations as to what our annual reserve level should be, for example.
Senator Tiffany:
Will the addition of this one position allow us to cut all of the $294,000 cost of the consultant?
Mr. Thorne:
No.
Senator Tiffany:
How much are we going to cut?
Mr. Thorne:
We will cut the cost of the position.
Senator Tiffany:
So the new position is revenue neutral, correct?
Mr. Thorne:
Yes.
Decision units E-501 and E-502 replace temporary service agency staff with four permanent positions in operations and one in public information. We have required temporary staff in these positions on an ongoing basis for several years, averaging about 10 staff per month. The cost of the permanent positions will be offset by the reduction in the temporary staff.
Assemblywoman Chowning:
Will these permanent positions do away with the need for temporary staff? Do you really feel there is enough work for four full-time employees?
Mr. Thorne:
We have been averaging 10 temporary staff per month since before 2001. We have removed all the temporary services money from the budget to fund this new position. There is certainly enough work for the four new permanent staff, but there will still be a need for overtime, particularly during open enrollment.
Assemblywoman Chowning:
So this too is a revenue-neutral change?
Mr. Thorne:
Yes.
Decision unit E-503 adds funds for expansion of the office space that began this month. We currently have staff working in a storage room on tables elbow to elbow. A portion of the new space will be sublet to staff from our third-party administrator to provide on-site assistance in addressing participant issues.
Decision unit E-504 adds funds for restoration of the reserve fund. The board has been looking at a 4-year restoration plan to bring the reserve back to a fully‑funded level. The plan is to add $5.9 million each year of the biennium, which would bring the reserve up to $15 million at the end of FY 2005. This is 61 percent of the reserve recommended on June 30, 2002. It should be noted that premium rates will also increase for this purpose, since the reserve must increase every year as claims increase.
Decision unit E-710 is equipment replacement. We plan to begin replacing aging computer equipment in FY 2005, including a scanner in FY 2004, one uninterruptible power supply (UPS) in FY 2004, and one UPS in FY 2005.
Ms. McClain:
You say you will build up the reserves with an increase that will be built into the new rates, but do we know what the new rates are going to be?
Mr. Thorne:
No. That will be one of the decisions made by the board when it meets in March 2003. We have not finalized the pricing yet.
Ms. McClain:
My concern is whether the new rates will be enough to build up the reserves.
Mr. Thorne:
We are planning to design both plan and rates to fund the needs of this budget.
Assemblyman Beers:
The meeting of the board in March could have a significant impact on our decision-making process. Is it possible to get a list of the changes to be considered?
Mr. Thorne:
I will be reviewing a laundry list of changes to be considered later in the presentation. I will provide the committee with the same information we give to the board.
Senator Tiffany:
The committee needs to be aware of the time frames involved. Given the timing of the board meeting, there will not be many options for the Legislature to make changes because of the requirement for 60-day notice. What is the “drop-dead” date for the Legislature to make recommendations?
Mr. Thorne:
The board has to make its decision by March 6 or 7 in order for us to prepare materials for open enrollment in April or May
Senator Tiffany:
So the last opportunity for legislative input is March 6.
Mr. Thorne:
Correct.
Senator Tiffany:
We will not even know what the costs associated with the recommendations will be until March 4 or 5.
Mr. Thorne:
We should have that information to you early next week. I will have more information on this later in the presentation.
Senator Tiffany:
With that in mind, perhaps you should speed this up to make sure we can cover the laundry list. The time frames are very short, and we may want to have some input into the board’s decisions.
Mr. Thorne:
State participant rates are covered on page 37 of the presentation. Nevada Revised Statutes (NRS) 287.0434 requires that State active and State retiree experience be commingled when calculating rates. Again, the board will make decisions on rates at the March board meeting. The State subsidy for State active employees is currently $465, based on the action of Senate Bill (S.B.) No. 3 of the 71st Session, increasing to $495 in FY 2004 and to $558 in FY 2005. The subsidy for retired employees will increase by the same percentages, from $263 currently to $280 in FY 2004 and $316 in FY 2005.
Ms. McClain:
Could you explain how the various pools are set up between the State active and retired employees versus the non-State active and non-State retirees? There is a perception they are all commingled and non-State retirees drive up costs for State active employees.
Mr. Thorne:
The State actives and retirees are a completely separate pool from non-State actives and retirees. The pool of non-State actives and retirees must be self‑supporting. In addition, NRS 287.045 prohibits commingling the experience of retirees from nonparticipating agencies with other retirees or active State employees. More than 90 percent of the non-State retirees in the plan are from nonparticipating agencies, so they are completely separate and must be self‑sufficient.
Senator Tiffany:
We have all gotten letters from non-State employee retirees because the premiums have jumped so radically. We will make sure this issue is on the table for discussion at some point. One of the options for changing that is to include everybody in one pool. That is a policy decision the Legislature would want to weigh in on, and we only have 2 weeks to do so.
Mr. Thorne:
Legislative action would be required to bring all of the local government and State entities together in a single pool. Any changes mandated by legislation this session could not be implemented until July 2004.
Senator Tiffany:
We may ask you to tell the board we would like them to move in that direction. We may also look at this as an interim study just to tell the board the legislative intent.
Assemblywoman Chowning:
So there will not be any true changes in the plan until at least a year from now.
Mr. Thorne:
Yes. We will plan a starting date of July 1, 2004.
Assemblywoman Chowning:
At least we can tell people there will be no changes till July 2004. An increase of 112 percent in 1 year is devastating. There are people who have insurance premiums greater than their income, and they must get second jobs just to pay for their insurance.
Mr. Thorne:
A lot will depend on the recommendations the board makes at the March 6 meeting. However, unless there is a statutory change to remove the separation between the groups, there is nothing the board can do about it. The experience must be taken into account and those rates must be self-supporting. The action of the board will be limited. Significant plan design changes may keep costs down, but ultimately the price must be paid, either through higher premiums or through higher out-of-pocket expenses.
Ms. McClain:
Are there any other options for non-State retirees, such as buying into Medicare?
Mr. Thorne:
The hardest hit among the non-State retirees are the early retirees who are not Medicare age. One of the policy decisions the committee has to make has to do with the requirement that PEBP be the only government health benefits program required to take these participants. Many of the local government entities have their own retirement programs, but very few provide any subsidy. When they retire, participants in those programs must choose to either stay in the local government plan or go into the State plan. If the State plan is chosen, the retiree cannot go back to the local entity retirement program. However, if the retiree stays in the local government retirement program and the rates increase, there is an option every other year to change to the State plan. Either the State plan must cease being the assigned risk pool for local government participants, or it needs to be a mutual requirement where participants can go back to the local government plan.
The laundry list begins on page 41 of the presentation (Exhibit C) and consists of options to be considered by the board at its meeting in March. They are intended to bring about a long-term approach to the plan’s benefit structure. Two options will be presented to the board. The first option would continue the current benefits, with all participants contributing to the plan regardless of dependent status. This will maintain current benefit levels, but it will be very expensive and participants will pay higher premiums to offset the costs.
The second option is to create a core benefit with an option to “buy up” to better benefits. The core benefit would provide catastrophic coverage with incentives to curb utilization. This would allow premiums to stay at current levels. The utilization of the flexible spending account under Section 125 of the Internal Revenue Code (IRC) would be encouraged to increase participation and increase the limit from $3000 to $5000 per year. This allows known medical expenses to be funded in the coming year on a pretax basis to help reduce the cost of out-of-pocket expenses. Utilization data from July through January indicate 20 percent of participants use 90 percent of the medical dollars.
The “laundry list” of items the board will be considering includes various levels of annual deductibles, annual out-of-pocket maximums, and co-payment amounts for primary care physicians, specialists, urgent care, emergency room, and hospital inpatient, with additional deductible amounts for emergency room and hospital inpatient services. We will consider covering only preventative dental care and vision care. For dental, that would include annual exam, semiannual cleaning, and X rays when needed; for vision, that would be an annual exam only.
Assemblywoman Chowning:
So when dental or vision problems do occur, participants will have no coverage.
Senator Tiffany:
Is this being proposed because these benefits have been overused or because they have not been used much?
Mr. Thorne:
Dental and vision benefits are not high-cost items in the plan. The idea is to move the focus to catastrophic medical events and preventative treatment across the board.
Senator Tiffany:
Does that philosophy parallel the utilization for people whose dental and vision claims have been excessive?
Mr. Thorne:
No. The coverage in those areas was relatively low, but the coverage amounts are also low. Preventative care is budgetable.
Senator Coffin:
I would like to see more details and analyses on all these line items, including expenditure, loss ratio, and so on.
Mr. Thorne:
We are currently putting together details about the dollar savings for each item at various levels. I will make sure you get this information.
Assemblywoman McClain:
What is the cost of option one?
Mr. Thorne:
We do not have the final costing. There is a ripple effect down through all the changes. We hope to have that information in the next few days.
Assemblywoman Chowning:
Why reduce dental and vision benefits when they are not high-cost items? Are you that desperate to find a place to save? If necessary dental work is put off, it becomes major and even catastrophic. It does not sound as if you are saving that much.
Mr. Thorne:
In aggregate, there is a significant dollar amount in the dental and vision benefits. The goal is an operational philosophy for the program. The emphasis would be on preventative care and catastrophic protection, just as you might purchase catastrophic protection with a high deductible on your auto insurance. Coverage with an annual benefit of $1500 gives you a benefit of about $100 per month. If you must pay a premium of $100 a month, coverage is self‑defeating. We are looking to get out of the low-end costs. There is also a buy‑up option that would allow you to increase coverage to the previous level.
Other items to be considered by the board at the March meeting include an increase in the annual wellness benefit, inclusion of a weight loss program, a supplemental Medicare plan, limiting services such as acupuncture and chiropractic services to mandated levels, and limiting either dollars or visits. For example, we may put a maximum price on hearing aids. We are considering a change in coinsurance from 100 percent to 80 percent. This would affect preadmission laboratory tests, radiology, nuclear medicine, and radiation therapy.
We will be looking at long-term disability benefits past the age of 65 to see if there are any significant dollars to be saved there. We are looking at all life insurance coverage to determine whether changes should include reduction, elimination, or employee option.
We are looking at prescription alternatives to maintain our reduced trend in this area. Antihistamines changes could include consideration of over-the-counter alternatives, with more expensive alternatives being moved to the third tier. Other changes to be considered are clinically derived quantity limits, a $50 annual deductible, lower mail-order co-pay to encourage use of generics, increase of second tier co-pay on both retail and mail-order level, and 100 percent co‑pay for third-tier on both retail and mail order. There has been enough progress over the last couple of years in the available generics and second-tier drugs that the pharmacists who advise us say they can put together clinically broad-spectrum prescription coverage that will eliminate most of the high-cost drugs and focuses on the generic and second-tier brand names.
Senator Coffin:
With a co-pay of 100 percent, the employee would pay the full amount, correct?
Mr. Thorne:
Yes.
Senator Coffin:
Could you give us an example of how much they would pay for some of the most commonly used drugs?
Mr. Thorne:
I do not have a list of the more expensive drugs. For some medications, the existing co-pay was already higher than the cost of the drug. In many other cases, the very expensive drugs have a sole source and are already second‑tier drugs, so they would not be affected by this. High-cost drugs such as injectables are also on the second tier. We think we have drugs for which there is not a less expensive alternative covered.
Senator Coffin:
I am thinking of a drug that may have saved the life of one of the members of this committee. That drug is very expensive, and I suspect it is a third-tier drug. What is that drug going to cost me?
Mr. Thorne:
I cannot tell unless I know the name of the drug.
Senator Coffin:
I would like you to give us some examples of common third-tier drugs and their cost in the new system, including medical, antipsychotic, and other areas.
Mr. Thorne:
I will get a list from CatalystRX.
At their January meeting, the board heard a presentation on what is known as consumer-driven plan design or the defined contribution approach to benefits programs. An outline of this appears on page 46 of the presentation (Exhibit C). A recent IRS ruling allows health care accounts to be rolled over, unlike the “use it or lose it” provisions under Section 125 of the IRC. Some major organizations are putting this approach into place as an option for employees, including the American Postal Workers and the Federal Employees Health Plan. This is an approach that allows participants to have more choices in how they access services. However, there will be an additional initial cost for this. It may not be a cash cost at the beginning, but there is an accrued liability that will ultimately have to be paid. The board plans to review the results of these other organizations over the next couple of years to see whether they achieve the hoped-for savings.
Senator Rhoads:
When you say the rates will stay as they are until the board comes up with a new plan, do you mean they will stay as they are now or go back to what they were before the 112 percent increase?
Mr. Thorne:
The current rates will stay in effect through June 30, 2003, based on plan design decisions. Regardless of the plan offered, rates will not go back to what they were, though they may come down some.
Senator Tiffany:
How much do you plan on saving? Will the Legislature have to spend additional funds in the interim to bail you out again?
Mr. Thorne:
It was to avoid the need for another bailout that we decided to base our rates on the 28 percent trend rather than the regional trend of 15 percent. By doing that, we should not have to come back for additional funds as we did last year. There is always the possibility that the trend will worsen, but we do not think that will be the case.
Senator Tiffany:
I like the approach of the core and buyout programs. However, I am aware that the committee will not have any impact past the first of March for next year’s plan. What if the board does not approve these programs?
Mr. Thorne:
I cannot speak for the board on this. Their reluctance to make changes in the last 18 months is the result of not having good data available. We are starting to get that data now, and the board is becoming more comfortable with the options we present. Once we get the pricing with the actual trends, the choices will be obvious. The board has the interests of the participants and the plan at heart, and they are trying to balance the two needs as best they can.
Senator Tiffany:
How much do you intend to save?
Mr. Thorne:
By adjusting our trend to the actual trend of the plan, we are looking at coming up with an additional $21 million.
Senator Tiffany:
When will we get a report on what the board decides to implement?
Mr. Thorne:
We will do a presentation to the board and accept public comment on Wednesday, March 5, and a decision should be made on Thursday, March 6. This will allow time for comment by members of the Legislature, if you would like to make them. If representatives from the employee groups wish to provide additional input, we are open to any input. It is not an easy process, and there will be disruption no matter what we do. We would like to meet here in the Legislative Building, but this is difficult during the Legislative Session. If a room is available, that would be beneficial.
Senator Tiffany:
I will see what we can do.
Senator Coffin:
Is there anyone with any group insurance business on the board at this time?
Mr. Thorne:
There are two private sector board members, and their input has been invaluable. Those positions were set to sunset off the board on June 30, 2003, but we have submitted a bill to keep those positions so we can retain their expertise. They are Randy Kirner with International Game Technology and James E. Pettis with Wynn Resorts, LLC.
Senator Coffin:
I know Mr. Pettis has a real depth of experience in this field. The committee could benefit from hearing from him directly. Do you know his evaluation of the options?
Mr. Thorne:
The board members will review the same information we give you and make their recommendations at the meeting in March. I am not at liberty to have individual discussions with the board members due to open meeting restrictions.
Senator Coffin:
You cannot discuss the matter with one board member?
Mr. Thorne:
I could have a one-on-one discussion with one board member, but they could not communicate with other board members, and I could not do it on a serial basis. This is an issue we are struggling with. There is a lot of interest among board members about the bills that will have an impact on PEBP. We are trying to work out a way for me to let them know the progress of these bills and perhaps have a telephonic meeting on short notice to discuss particular bills.
Senator Coffin:
I would like a list of the board members and their telephone numbers.
Mr. Thorne:
I will provide that for you as soon as possible.
Senator Tiffany:
There are nine members on the board, six of whom are users of the plan. I have some concerns about having participation from members of the private sector on this board.
Senator Coffin:
The question of who should or should not be on the board is a longstanding one. Premium payers have always felt they should have the majority voice. That could be a subset of this discussion, though I do not think we will resolve it now.
Senator Tiffany:
I agree.
Assemblywoman Chowning:
I would like to request another hearing before the board meeting in March so the committee could analyze the other data to be provided. That would be on March 4.
Mr. Thorne:
I would be happy to testify at such a meeting.
Assemblywoman Chowning:
I would like staff to look into the availability of Room 1214 for the board meeting with videoconferencing available as well.
Assemblyman Griffin:
What options are offered by local entities for retirees? What do they do in other states?
Mr. Thorne:
There have been discussions on how to make that happen. One possibility is mandated participation on the part of local government entities, but that would be a policy decision for the Legislature, not the board. Many local government entities do not have the funding to provide a retiree benefit option. There is no other choice for these retirees unless they obtain individual coverage while they are healthy and can get an affordable rate. Many people at retirement age have ailments that make their premiums equal to or far higher than those available through PEBP, even at the high rates we have.
Some California entities are facing the same issues. For example, an instate retiree from San Mateo County, California, can get HMO coverage for $600 to $700 per month. A retiree from the same department who lives out of state will pay $1163 per month for the same coverage. This is in addition to a subsidy of $350 per month. Many states have this same sort of problem, and they deal with it in different ways. Some are very restrictive on how they let local government entities into the plan. If you leave the plan, some states require an 18-month notice and will not let you back into the plan for at least 5 years.
Assemblyman Griffin:
The temptation to tap into the General Fund to resolve these problems will grow. It is important for us to be aware that there are other options out there.
Senator Tiffany:
I have a question about the prioritization of the use of the state contribution with dependents and active employees. Has any decision been made on the policy to be followed for the next plan year?
Mr. Thorne:
We have been trying to come up with a methodology for the current plan year to allocate that equitably across all classes. The first mandate of S.B. No. 3 of the 71st Session was that there be no premium contribution by single employees. Any subsidy amount left over once this mandate is met is allocated across the dependent tiers. We tried to come up with a percentage contribution, so regardless of the actual cost, each tier of the dependent status is paying the percentage of dependent costs.
Senator Tiffany:
Is that decision still open for the Legislature to weigh in on if we choose to do so?
Mr. Thorne:
Yes.
Senator Tiffany:
Why do you think no one responded to the RFP? What can we do next time to make sure we get a response?
Mr. Thorne:
Every presenter before the board on any PPO or HMO option was asked why they did not bid on the Statewide programs. The answer was uniformly that they did not want to take the risk, given our demographics and claims experience. They did not feel they could produce a competitive product that would either make money or protect themselves from losses.
Senator Tiffany:
The one group I talked to was concerned we were trying to match plan for plan. They could not match our plan and did not feel there was much leeway to be creative. Do we plan on releasing the RFP again?
Mr. Thorne:
We will look at going out for bid on an insurance plan on a regular basis. The opening paragraph of the RFP says, “We are looking for creative proposals.” If they do not provide a proposal, it is because they are reluctant to meet our cost requirements. We need to be able to compare like plans, to compare apples to apples. That is why we gave them our present plan and told them to bid on that but give us other options. There has been a move to provide a different price‑out option and compare that from a cost standpoint to the current benefit structure to identify what the cost would be to continue. That would provide a benchmark for any significant savings or changes made.
We also found that many insurance carriers are moving in the direction to provide an administrative-services-only (ASO) contract. In the HMO bids there were a number of responses for a self-funded HMO, which meant the bidders would not take the financial risk but would provide administrative services.
Senator Tiffany:
Did you get any feedback from the bidders’ conference?
Mr. Thorne:
Yes. We generally include a question and answer section in any RFP conference we have. In that process, we had no questions asking if this was the only configuration we would accept.
Senator Tiffany:
“Another question I have is on the assessments for the retirees. Can you tell me what other assessments that are off budget that were added for the retirees? Because the numbers don’t add up.”
Bob Atkinson, Program Analyst, Fiscal Division, Legislative Counsel Bureau:
When we look in the Executive Budget and look at the assessments that are charged out of all the other budget accounts, they don’t add up to as much revenue as is brought in to this budget account. We’ve heard that it involves, and we’ve requested some confirmation from the Budget Division, that it involves some budgets that aren’t in the Executive Budget, and we’d just sort of like confirmation of that, and then some sort of idea of when I might get a listing of what those budgets that are included are and what those amounts are.
Mr. Thorne:
We do not have any involvement in that process and will have to defer to the Budget Office for a response.
James W. Manning, Budget Analyst V, Budget and Planning, Department of Administration:
There is currently $484,000 still to be collected in the current fiscal year for the university system in retired employee group insurance. There are retiree group assessments for non-state or self-supporting university systems budgets included in the FY 2004 and FY 2005 assessment structure. However, there is a problem with a shortfall in FY 2003 projections and a modification must be done to incorporate the new numbers into the FY 2004 and FY 2005 collections in the budget. I will work with staff to finalize the information.
Senator Tiffany:
Mr. Thorne, what did you decide was the appropriate level of the retiree subsidy?
Mr. Thorne:
The retiree subsidy is currently at $263.89. It will go up at the same percentage increase as the active employee rates, so it will be $287.88 in FY 2004 and $316.26 in FY 2005.
Senator Tiffany:
Have you considered changing that amount?
Mr. Thorne:
No. There has been an historical pattern of the relative contribution of the State subsidy toward the cost of the benefit, and we have tried to maintain that in developing the budget request. That was approved by the board and the Governor.
Assemblywoman McClain:
How are you coming with compliance with the Health Insurance Portability and Accountability Act (HIPAA)?
Mr. Thorne:
Compliance officer responsibilities have been designated to one of the staff in our quality control section. We are modifying contracts as they renew to make sure HIPAA compliance language is included.
Senator Tiffany:
As we discussed, we would like to have another meeting prior to the board’s meeting in March. I am informed Room 1214 is available on March 5 and 6. You should contact Becky Wood to arrange that.
Mr. Thorne:
Thank you, I will do that. I will also arrange for videoconferencing with Las Vegas.
F. Martin Bibb, Lobbyist, Retired Public Employees of Nevada (RPEN):
My organization represents some 23,000 retired public employees, of whom almost 8,000 are members of RPEN. We support the budget request. We recognize that some of the charts presented to the committee show a huge change in available cash from FY 2001 to FY 2002. We believe the current plan managers have inherited a potential time bomb with the failure of L&H Administrators Incorporated to process claims several years ago. This is what led to the need for the bail-out at the special session because the reserves were simply not there. As the committee knows, the cost of coverage is a serious challenge to be met. There are many possible solutions, and we believe those managing the plan are doing their best to get out that information. Plan changes are essential, and the core plan with buy up might afford some financial relief. We think they are headed in the right direction.
Bonnie Parnell:
There are 1600 non-State retirees at the present time. Many see PEBP as a very inequitable system. A non-State retiree pays $17,220 per year for health insurance coverage for self and spouse. Non-State retirees pay approximately 117 times the amount paid by State retirees for the same coverage. This inequity pits individual groups against each other. Seven bill draft requests are being considered to solve this dilemma. Many of these bills propose re‑aggregating employees as a first step to resolving the inequity. The common message is to go back to commingling, and then try to find the most equitable way to charge premiums. I was alarmed today to hear Mr. Thorne suggest we only have a few weeks to figure out how to correct. I have told a number of non-State retirees to pay the higher fees because there would be some correction by July 1, 2003. I hope this is something you can achieve.
John Yacenda, Lobbyist, State of Nevada Employees Association (SNEA):
The committee has expressed policy concerns about the presentation. Many of these questions will be answered next week when we get the figures. I would like to mention that SNEA is embarked on a new partnership with PEBP to try to achieve some solutions for our membership. One way to decrease costs that should be considered is to change the behavior of participants. The defined benefit contribution proposal does that. Once participants and the State fully understand the advantages of it, there will be a large movement toward utilizing it. Disease management is also a good option and one that is used throughout the country. But beyond these options, there needs to be closer involvement of participants in plan benefit development, quality improvement, and user satisfaction. We are currently in discussion with the chairman of the board regarding some ways to do this, such as advisory board activity. Participants must be involved in decisions about changes in contributions, benefits, deductibles, and so on if the plan is to be successful.
James T. Richardson, Lobbyist, Nevada Faculty Alliance:
We appreciate the Governor’s response to the problems in this area. I recommend to you the amounts in the Executive Budget. We need to be able to deal with the problem as well as we can, and that takes funding. Part of the problem derives from the fact that there was no increase in rates in 2001, even though there was an increase of 12 percent in medical costs, because it was believed the reserves were adequate. We helped dig this hole for ourselves by not addressing medical inflation 2 years ago.
I would also like to say for the record that the PEBP board is functioning well. It is a board with some professional people on it and some very committed State employees who are participants in the plan trying to make it work better. I think you would do well to consider them partners as you try to resolve this problem. I think you will find them open to your suggestions and willing to work with you. Indeed, they recognize that you have the ultimate authority on both funding and policy, and so I don’t think they are in any sense the enemy. They want to solve this problem too.
Regarding the non-State entities, some years ago the board had to decide whether this would be a plan just for State employees or should be broadened. At the time I supported broadening the plan because there are a number of small counties that cannot furnish a health plan for their employees. I have always supported a separate rate for these participants. This has proved disastrous, as you have heard. All the same, there is a very serious policy issue to be addressed as to what the State health plan is. It is unconscionable that some large non-State public entities are dumping retirees into this plan and not paying any of the costs. Some small counties or small school districts may not have the funds to pay for benefits, but some of the large non‑State entities are capable of paying for benefits and choose instead to make the State health plan do it. This is unacceptable. A long-term solution will have to be sought.
Assemblywoman Chowning:
I appreciate your comments. The letters we get are very discomforting and make it sound as if we do not care about the years of service retirees have given. That is not true at all. These good people have been put in this terrible situation because someone is just dumping them off on the State. It is unconscionable. It is a tough situation, and all of us working together will have to come up with some solution.
Senator Tiffany:
I appreciate your comments as well. I am a participant in the State pool and pay 100 percent of the premium, but I am grateful to have a pool to join. Because it is a State pool, it looks like we are the ones subsidizing it, and we are not. We will probably do an interim study on this. One of the issues will be whether to combine both groups in an aggregate pool. I do not know if we will be able to resolve this issue.
Doug Bierman, Lobbyist, Eureka County, Lander County, and City of Caliente:
One issue that has not come up is the impact the large rate increases have on the local government entities participating in their county or city health programs. Some of the rural counties are already in dire straits economically, and these increased premiums will be very damaging.
I would also like to touch on the concept that retirees are being dumped on the State health plan. Some years ago, PEBP recruited these outlying areas because they wanted to broaden their base, and these groups were actively encouraged to participate. None of those who participated in those groups realized they would be segregated from the rest of the pool. They assumed benefits would be better in a larger group because profits and losses would be spread over a wider group. This is a very difficult problem we are all facing, and I am encouraged by the interest the committee has shown in doing something about it.
Finally, if this truly is the Public Employees’ Benefit Program, all public employees who are allowed to join should be treated the same, with the same contributions and the same benefits. When the program has been bailed out in the past, it appears those funds have gone to State employees and their dependents and has not gone to the other participants.
Assemblywoman McClain:
Are the local governments you represent subsidizing their employees?
Mr. Bierman:
Yes. Both Eureka County and Lander County pick up 100 percent of the employees’ premiums and up to 70 percent of the dependents’ premiums.
Frank Brusa, Lobbyist, Nevada Association of School Administrators:
I am a non-State retiree. I concur with the other speakers that there is a terrible problem to be solved here. The short-term problem is whether to re-aggregate the groups. From the long-term point of view, there are something like 100,000 people in the Public Employees’ Retirement System (PERS). Perhaps it is time to consider requiring all members of PERS to participate in PEBP.
Senator Tiffany:
It has been suggested before that those mandated to participate in PERS should be similarly required to participate in PEBP. This will be discussed as part of the long-term solution.
Danny N. Coyle, Lobbyist, State of Nevada Employees Association/American Federation of State, County and Municipal Employees:
I agree with Mr. Richardson. Some five or six sessions ago, legislation was introduced to allow local government entities to participate in the PEBP. Legislation did not require local governments to subsidize retirees’ premiums. I think that is going to be a key solution. The committee may want to consider requiring that, if local government entities participate in PEBP, they must contribute to the cost of premiums with a subsidy equal to the State’s contribution.
Senator Tiffany:
There being no further business, the meeting is adjourned at 10:46 a.m.
RESPECTFULLY SUBMITTED:
Lynn Hendricks,
Committee Secretary
APPROVED BY:
Senator Sandra J. Tiffany, Chairman
DATE:
APPROVED BY:
Assemblywoman Vonne Stout Chowning, Chairman
DATE: