K-12 Employee Health Benefits Study Washington State Auditor’s Office Joint Legislative Audit & Review Committee Initiative 900 Subcommittee February 18, 2011 Larisa Benson, Director of Performance Audit Hay Group presenters: Adam Reese, Fellow of the Society of Actuaries Tom Wildsmith, Fellow of the Society of Actuaries Jeff Furnish, Associate of the Society of Actuaries

Introduction Why we did the study: Washington public school districts spend more than $1 billion each year on health benefits for K-12 employees. The system is complex, expensive and lacks transparency. Previous studies are dated and lack important information. Decision-makers are looking for ways to save money. Study objectives: 1.How much are we spending and what benefits are we buying? 2.What are the opportunities to save money? 2

Scope and Methodology Scope: Analyzed K-12 health benefits for the school year. Methodology: Contracted with health benefit actuaries from the Hay Group. Hay Group is a reputable, international firm, with prior experience analyzing state K-12 health benefits (Pennsylvania and Michigan) Conducted extensive stakeholder outreach throughout the study. Designed and sent a survey to all 295 school districts and nine educational service districts. Response rate was representative and very high — 42 percent of all districts, 93 percent of largest districts and 68 percent of employees. Extrapolated survey results to the population and verified totals. Used actuarial modeling to analyze and compare health plans. 3

Results in Brief How much are we spending? K-12 employee health benefits cost more than $1.2 billion annually. The employee benefits funding system at districts is complex. Premiums for employees with family coverage appear out of proportion compared to premiums for those who insure just themselves. What benefits are we buying? More than 30 percent of employees have medical plans 14 percent richer than the largest federal employee medical plan. Employees are enrolled in more than 200 medical plans. Are there opportunities for cost savings? Cost savings of up to $180 million per biennium may be achieved by: 1.Streamlining the system. 2.Standardizing coverage levels. 3.Restructuring the benefits system. Consolidating the K-12 benefits system with state employees’ PEBB system would not significantly reduce costs. 4

How Much Are We Spending? Who Pays? 5 About 85 percent of the $1.2 billion was spent on medical benefits. Dental accounted for 13 percent. Vision accounted for 2 percent. About 51 percent of all K-12 employees enrolled in a medical plan pay an average of $27 per month in premiums. About 27 percent pay nothing.

Opportunity 1: Streamline the System Current situation: More than 1,000 funding pools. Employees do not know their premiums until after enrollment. Employee expenses can vary greatly from year to year. Schools recalculate sometimes monthly. Opportunity to streamline: Create fewer and larger funding pools. Benefits of streamlining: Reduce administrative costs. Increase transparency and stability. 6

Opportunity 2: Standardize Coverage Current situation: Most popular plans are relatively rich. More than 80 percent of employees above “platinum.” Opportunity to standardize: Align benefits to the levels in the 2010 federal health-care reform law (Patient Protection and Affordable Care Act). Benefits of standardization: Provide affordable, quality care. Achieve cost savings. Still offers employees choices. 7

How Do Current Plans Compare? 8 Source: Hay Group analysis of school district survey data

Opportunity 3: Restructure the System Current situation: Fractured system with many providers and plans. Inefficiencies in plan administration. Opportunity to restructure: Create a separate statewide, self-funded benefits program. Benefits of restructuring: Save money through economies of scale. Create an efficient program tailored to K-12 employee needs. Simplify the system and reduce administrative burden for school districts. 9

Combined Potential Cost Savings 10 Estimated annual savings or cost increases from standardizing medical benefits and restructuring the system (Dollars in millions from all sources) Program Structure Current Plans PEBBFEHBPlatinumGoldSilver Mapped to Closest Plan Current Structure No Change $45 3.7% increase $13 1.1% $7 0.6% increase $158 13% $ % $28 2.3% Voluntary $29 2.4% $16 1.3% increase $41 3.4% $22 1.8% $182 15% $ % $56 4.6% Mandatory $64 5.3% $21 1.7% $76 6.3% $57 4.7% $ % $ % $90 7.4% Source: Estimates by The Hay Group based on school district survey data. Estimates are based on health benefits costs of $1.21 billion. Note: “Mapped to closest” represents the 82% of K-12 employees whose plans are most similar to the platinum tier and the 18% whose plans are most similar to the gold tier.

For more information 11 Executive Summary : Full study:

For more information State Auditor Brian Sonntag, CGFM (360) Larisa Benson, Director of Performance Audit (360) Lou Adams, Principal Performance Auditor (360) Bruce Botka, Assistant Director of Performance Audit (360)

Questions and Answers 13

Why Not Consolidate With PEBB? Managing state funding commitments to K-12 and state employees would be simplified if funding were not combined into a single insurance risk pool. PEBB is designed for the particular needs of state employees and their dependents. K-12 employees and their dependents have different needs and would likely require different benefit designs. A separate K-12 program could be tailored to local districts’ financing and enrollment schedules. A separate program also would permit separate governance of the school employees’ plan. This would increase transparency and give school employees, labor representatives and district management greater confidence in the system. 14 K-12 benefits program should be separate from PEBB

Survey found 80 percent of K-12 districts use funding pools and 20 percent have six or more funding pools. Pooling is complex and requires significant management. More than 50 percent of the funding pools are recalculated two or more times per year; 13 percent are recalculated four or more times per year. The current structure encourages the formation of multiple funding pools at the district level. Employees sign up for benefits without knowing what their employee contribution will be because pooling is completed following signup. This structure can produce significant disparities in employer funding between different employees, different funding pools, or even within the same funding pool over time. Why Are Funding Pools Inefficient? 15

Observations From Other States We studied 23 states, including Oregon, California, Nevada, New Mexico, Arizona, Colorado and Texas. Six states require schools to participate in state-sponsored, statewide health plans. Statewide structure effectively controls costs only if plan is well managed. Fifteen states have voluntary participation in statewide plans, including Nevada, which has county school districts. 10 states have state-sponsored plans. Two states have union-sponsored plans. Four states have management-sponsored plans (e.g., state school board association; 1 state also has voluntary state plan). Maryland has large, county-wide school districts. Ohio has struggled with consolidation without success. 16

Implementation Considerations If a mandatory statewide K-12 employee health benefits program is adopted, we recommend school districts phase in the program no later than the expiration of their current collective bargaining agreements. More than 77 percent of CBAs expire by 2012, 96 percent by If the statewide program is voluntary, deadlines will not be needed, but rules will be required for opting out, re-entry and exclusion periods. Statewide administration would include enrollment verification and processing, claims administration, monitoring and auditing contracts with health providers and insurers, a call center and an executive director’s office to manage the system. The administering organization would prepare an implementation timetable. 17

WEA Rate Stabilization Funds A Rate Stabilization Fund is a financial reserve used to slow insurance premium increases. It is a standard practice in the insurance industry. During year-end accounting, excess premiums over claims, reserve adjustments, administration costs and premium taxes are transferred to the fund. Stabilization funds must be used when premium rates increase more slowly than claims costs. WEA maintains a separate RSF for each coverage type—medical, dental, vision. Due in part to favorable claims experience, the balance of WEA’s stabilization funds increased to $106 million in It is scheduled to be spent down to about $22 million by 2013 by setting premium rates below claims costs. The money in the funds belongs to the rate payers—not to the WEA. By law, stabilization funds may be used only to hold down premium rates. The funds are audited annually by a public accounting firm. 18