The second meeting of the Blue Ribbon Panel on Public Employee Health Benefits was a two-day meeting held on Tuesday, May 24, and Wednesday, May 25, 2005. The Panel convened at 1:00 PM on May 24 in Room 129 of the Capitol Annex. Co-chairs Senator Tom Buford and Representative Harry Moberly jointly chaired the meeting. Senator Buford called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Tom Buford, Co-Chair; Representative Harry Moberly, Jr., Co-Chair; Senators Julie Denton and Daniel Mongiardo; Representatives Bob DeWeese and Jimmie Lee; Bob Arnold, Jerry Bailey, Carol Carman, Victor Cooper, Shawn Crouch, Lee Guice, Gary Harbin, Cheryl Hayes, Lee Jackson, J. D. Jones, Arletta Kennedy, Thomas Loving, Milton Mains, Brent McKim, Wanda Mitchell-Smith, Richard Remmers, Erwin Roberts, Jim Sproul, Jude Thompson, Nancy Toombs, and J.P. Wiles. (This was the first meeting for Mr. Mains and Mr. Thompson, new members of the Panel.)
Guests: Mark Birdwhistell and Mike Burnside, Cabinet for Health & Family Services; Christine Wilcoxson, Personnel Cabinet; Kathy Stein, PricewaterhouseCoopers; and Michal Smith-Mello, Kentucky Long-Term Policy Research Center.
LRC Staff: Mark Roberts, Joyce Crofts, Alisha Miller, Karen Powell, Greg Freedman, Rhonda Franklin, and Peggy Sciantarelli.
The minutes of the April 27, 2005, meeting were approved, without objection. First on the agenda was discussion of the 2006 RFP for the services of a third-party administrator (TPA) for the public employee health insurance program. Representing the Cabinet for Health & Family Services were Mark Birdwhistell, Undersecretary for Health, and Mike Burnside, Undersecretary for Administrative and Fiscal Affairs. Christine Wilcoxson, Commissioner of the Department for Employee Insurance, represented the Personnel Cabinet. Mr. Birdwhistell noted that Mr. Burnside recently accepted a position with the Cabinet, having formerly been with the Finance & Administration Cabinet's Office of Material and Procurement Services.
The discussion began with a PowerPoint presentation by Mr. Birdwhistell regarding the key components and timeline of the 2006 RFP, which was released May 16, 2005. Copies of the presentation were provided to members of the Panel. Mr. Birdwhistell advised that because the RFP relates to an open procurement, he is not at liberty to talk about the merits of the requirements in the RFP or how it will be evaluated.
Key elements of Mr. Birdwhistell's presentation are summarized as follows. He said that the health insurance program will be self-funded statewide in 2006, in order to achieve stability and consistency and move from an illness model to a wellness model. The initial direction will be to keep the benefit design the same from January 1 through June 30, 2006, with either one or two vendors (TPAs) administering the program. The RFP provides for an initial contract term of 2½ years, followed by one-year renewals that could extend the contract to up to 10½ years.
Bids will be solicited for two strategies—contracting with a TPA that has a pharmacy benefits administrator (PBA), or contracting separately for a TPA and a PBA. Under either strategy, the PBA, COBRA/FLEX/HIPAA and Disease Management/Wellness administrators would be separate contract components, which would permit changes in those areas without having to rebid the entire contract. The RFP, as structured, will allow the maximum flexibility possible in order to attract bids from the best long-term contractors. The evaluation process will determine which strategy is in the best interest of the Commonwealth.
Minimum TPA requirements include three years' experience, experience with groups similar in size to the Commonwealth group, access to a national network, three years of disease management experience, and URAC accreditation. [NOTE: Originally, URAC was incorporated under the name "Utilization Review Accreditation The name was shortened to the acronym "URAC" in 1996 when URAC began accrediting other types of organizations such as health plans and preferred provider organizations.]. The TPA must be performance bonded and fully disclose all discounts and pricing arrangements, with all discounts accruing to the Commonwealth.
The RFP requires that the PBA currently cover at least two million lives. There are a sizable number of prospective PBAs that can meet this requirement. The PBA must have three years' experience, have experience with similar sized groups and have provided services to a similarly situated state or federal program, and be performance bonded. All discounts must come to the Commonwealth, and there must be full transparency of all pricing arrangements.
The provider network will be evaluated based on statewide access rather than county by county. Networks must meet minimum requirements of the Kentucky Office of Insurance. Scoring will consider the breadth of the network and disruption. Vendors with the most providers that match the current utilization pattern will receive the best score in the network evaluation. Network discount levels will also be evaluated.
The self-funded approach will focus on disease management and wellness. The RFP seeks creative approaches for management of certain chronic illnesses that are cost drivers in the Commonwealth group—e.g., asthma, diabetes, heart disease.
The market is moving in the direction of health savings accounts—the "consumerism" movement. Benefits for the first six months of 2006 will not involve HSAs or any changes to the benefit design. There is a significant component in the RFP built around the TPA's readiness and capability of administering various options that the Commonwealth may consider upon advice from the Blue Ribbon Panel and other groups that will be advising the Commonwealth.
Mr. Birdwhistell concluded his presentation, after which Mr. Burnside briefly reviewed the estimated timeline. He noted that bid proposals are due June 27, 2005. The evaluation will continue through July 25. The TPA contract(s) should be awarded the week of August 15 for the plan year commencing January 1, 2006.
Mr. Sproul asked who would decide whether the TPA's contract term should be extended. Mr. Burnside said that would be up to the Personnel, Finance & Administration, and Health & Family Services Cabinets. Mr. Birdwhistell said that if plan members have concerns, they could be voiced through the Employee Advisory Committee (EOC). He added that he did not think the three cabinets would go forward if the EOC had major concerns. Mr. Sproul asked how consumers would know that the EOC is the proper avenue for voicing concerns. Mr. Birdwhistell said that the Cabinets would be seeking input from EOC and the people represented by that group. He said that the Administration has been made aware of problems in the current benefit plan through the EOC and through concerns registered with the Office of Employee Insurance. Mr. Sproul asked who would decide which contracting strategy to pursue. Mr. Birdwhistell said that would be determined by the RFP evaluation committee.
Mr. Sproul asked whether the PBA requirement for full transparency of all pricing arrangements would pertain to prescription drug pricing negotiations. Mr. Birdwhistell said yes, absolutely. Mr. Sproul asked how alternative benefit options that might be recommended in the future by the Blue Ribbon Panel could be implemented if those alternative options are not part of the proposal submitted by the TPA. Mr. Burnside said they believe that the RFP is written with enough flexibility to accommodate whatever might evolve during the initial contract period. Mr. Birdwhistell said the RFP seeks the most flexible, robust administrator possible—that would have the administrative capability to handle any benefit options that might become part of the health insurance program. He added that, if necessary, the Administration might have to amend the TPA contract in order to permit plan changes.
Representative Moberly assumed the chair. Senator Denton asked whether the Cabinets share her concern about having a PBA that would be disconnected from the TPA. Mr. Birdwhistell said there are two schools of thought on the connection between PBAs and TPAs. He said that there would be information transference and data interfacing, regardless of whether the PBA was under separate contract or a subcontractor under the master TPA contract. He acknowledged that having the PBA under separate contract would entail some risk, in that there would not be a common administrator looking at the full spectrum of patient care; however, the Administration wanted to ascertain what prices and services could be obtained by allowing PBAs to bid independently.
Senator Denton asked about the group size requirement for TPA experience and how many companies operating in Kentucky could meet the requirement. Mr. Burnside said the RFP requires the vendor to have at least 100,000 enrollees, including dependents, from a particular client and that at least two current vendors would qualify. When Senator Denton asked Mr. Burnside to identify those companies, he indicated he would prefer not to say until after the bids are received. Senator Denton said she is concerned that, since only two Kentucky companies meet the size requirement, the RFP is limiting the number of potential vendors and thus reducing the competitive advantage. Mr. Birdwhistell said this does not mean that only two companies can bid. He pointed out that Mr. Burnside was referring to two companies currently participating in the state employee group. Senator Denton said her question referred to companies operating in Kentucky, whether in the public or private sector. She went on to say she would not expect that many private corporations in Kentucky would have 100,000 lives to be insured, and she questioned whether companies that are not currently operating in Kentucky would have a sufficient provider network. Mr. Birdwhistell said that their market research determined that there are five or more companies already operating in Kentucky that would be capable of bidding.
Senator Denton asked what is required for URAC accreditation. Mr. Burnside said that since there are vendors in the audience today, rather than divulging that information now, the Cabinet would rather put it in writing and make it available to everyone at the same time. Senator Denton asked whether there is more than one issue subject to URAC accreditation. Mr. Birdwhistell said that URAC accreditation is an industry standard which is applied to utilization management companies and insurance companies. He said NCQA is another accrediting organization but that it was felt URAC would be the more appropriate standard for a self-funded approach that will focus on utilization management and disease management protocols. Senator Denton asked whether all the companies currently operating with the state group are URAC accredited. Mr. Birdwhistell said he did not know.
Senator Denton questioned the requirement that the PBA currently cover at least two million lives. Mr. Birdwhistell said that two million lives is a fairly small number from a PBA standpoint and that market research shows that a sizeable number of PBAs would meet the requirement. Senator Denton requested that the responses to vendors' questions relating to the RFP also be disseminated to the Blue Ribbon Panel. Representative Moberly concurred with the request.
Mr. Jones asked whether the one-year renewals are automatic after the initial TPA contract term. Mr. Birdwhistell said the renewals are not automatic but do not have to be rebid. If vendor services are going well and performance is within the contract standards, the state at its discretion can enter into a contract extension for each additional year.
Mr. Harbin asked what positives would result if the health plan is converted from a calendar year to a fiscal year basis, in light of the disruption this would cause in the school system. Mr. Birdwhistell said that it seemed to make a lot of sense from a budgetary reconciliation standpoint, without full awareness of the impact on activities in the school systems. He said they are still fact finding on that issue. Subsequent to the Blue Ribbon Panel's April meeting, the Administration met with education groups and heard concerns about the timing of open enrollment. He said the pros and cons of this issue need to be fully examined, as the Administration works with the Panel, in order to ensure that the right decision is made.
Mr. McKim asked about the types of accreditation which a TPA might have and whether requiring URAC accreditation would limit choice of vendors. Mr. Birdwhistell said the two accreditations that are most notable to him are NCQA [National Committee for Quality Assurance] and URAC. He said Kentucky is not the first state to ask for URAC accreditation and that he really does not think the URAC requirement has pared down the list of potential bidders.
Mr. McKim said that, according to a 1999 LRC report, the TPA under Kentucky Kare suffered from a lack of access to data. He asked whether the RFP ensures that the 2006 TPA will not experience a similar problem. Mr. Birdwhistell said it is his understanding that the Personnel Cabinet has upgraded its computer system to allow for the appropriate interfacing and receipt of accurate information from multiple sources. Commissioner Wilcoxson said that the Cabinet has built a premium reconciliation system, which is being used with the assistance of Anthem for the two regions that are currently self-funded. She said that effective June 1, 2005, the Cabinet will "go live" and will be billing and collecting the premiums, etc., for those two regions. She added that the RFP ensures that the TPA will be able to interface with the computer system. Senator Buford noted that the Commonwealth did not control the TPA for Kentucky Kare and had no authorization to research the TPA's records.
Representative Moberly said he is concerned that the RFP's dual requirements for 100,000 lives and URAC accreditation may diminish competition. He noted that at the Panel's April meeting it was indicated that some smaller Kentucky companies might be able to form partnerships to offer a proposal. He asked whether the smaller companies, in order to bid, would have to partner with a large entity—or perhaps partner with an out-of-state company that would want to use the smaller company's network. Mr. Burnside said that they have addressed that in a question-and-answer modification that was published on the web yesterday. He went on to say that they are looking basically for a prime vendor that can subcontract with any entity for any portion of the contract, as long as they identify that subcontractor up front. An entity that is not qualified now could partner as a subcontractor with a prime vendor who is qualified. Rep. Moberly said he is not sure that agrees with earlier statements that smaller companies like CHA or Bluegrass Family Health could partner and actually offer a proposal. He said there are a number of specific questions he will withhold at this time, given the sensitive nature of the process, but that he wanted to express his concerns—as others have—that there will be competitiveness in selection of the TPA.
Answering questions from Ms. Guice, Commissioner Wilcoxson said that a full open enrollment would not be necessary every year after the initial 2½ year contract is awarded. She added that if the current benefit design does not change in July 2006, there also would not be need for an open enrollment in April 2005. Ms. Guice said that her employer, the Administrative Office of the Courts, is interested in a web-based open enrollment but that she did not see a requirement for that capability in the RFP. Commissioner Wilcoxson said that the Personnel Cabinet, not the TPA, would conduct the open enrollment. She said the Cabinet will be testing a web enrollment program beginning July 1 and that they expect it to be successful. She noted that the web program would likely not be applicable, though, for the retirement systems.
Mr. Bailey asked whether the prime vendor would have to meet all of the RFP requirements, regardless of the qualifications of its subcontractors. Commissioner Wilcoxson said they would.
Mr. McKim asked whether a TPA's subcontractors would be required to meet the same standards of quality as the TPA. Mr. Burnside said that the TPA will be held responsible for meeting all requirements of the RFP and for performance under the contract; separate contract components will be issued to the TPA and not directly with the subcontractors. Mr. Birdwhistell said the standards for the master contract carry forward into the subcontracts—there is no compromising of the standards, and the master contractor is still responsible. Mr. Burnside said there is a distinction between accreditation and performance standards. He said the subcontractor is going to have to perform to the level of standard required in the RFP, but that the TPA—the master contractor—will be responsible for making sure that happens. Mr. McKim said, then, that there might be an accreditation standard that would prevent a company from bidding directly on a disease management/wellness contract, for example—but that accreditation standard would not necessarily apply if the company was being subcontracted by the TPA. Mr. Burnside said that is correct.
Mr. Bailey noted that the RFP for the Medicaid contract has been out for bid since last September and that the contract has not been issued yet. He expressed concern whether the time frame for the group health insurance plan is realistic. Mr. Burnside said that delays in the Medicaid contract have not necessarily been the fault of the evaluation committee. He said that enough people will be involved in evaluation of the health insurance contract to get it done within the specified time frame. Mr. Bailey asked what would happen if, for some reason, a contract glitch caused a two-week delay. Mr. Burnside said there are no guarantees but they think they will be able to proceed as scheduled. Senator Denton asked what would be the latest date for the contract to be in place in order for the plan year to commence January 1, 2006. Commissioner Wilcoxson said they are planning for an October open enrollment and that she honestly does not foresee a problem. She said she did not think a one-week delay would impact open enrollment. Mr. Birdwhistell said he feels they are on target, that a week here or there would not be the end of the world, and that he is confident they will be ready for open enrollment in October.
Senator Denton, following up on Mr. McKim's question, asked whether it is correct that subcontractors would not have to meet the requirement of 100,000 lives. Mr. Burnside said that is correct. Senator Denton said she had heard concerns that the retirement systems has been segregated from retired teachers and active workers in the state health insurance group. Commissioner Wilcoxson said that all participants are in the same group.
Senator Mongiardo asked whether a list is available of companies that potentially could bid on the RFP. He said he would like to know which potential bidders have a network in Kentucky. Mr. Birdwhistell said they will share this information with the Panel if they can legally do so under procurement law. Senator Mongiardo said he believes there are only one or two companies in Kentucky that have a full provider network across the state. He said that if an out-of-state company that does not have a network in Kentucky wins the contract, that company will have to contract with Kentucky providers and negotiate reimbursement levels that may impact the quality of the health care they will be able to provide—not only to state workers but to everyone in the state. Mr. Birdwhistell said that an out-of-state company would have to already have a network in place in order to win the contract. Senator Mongiardo asked how many companies currently have a statewide network operating in Kentucky today. Mr. Birdwhistell said that several companies—more than five—have network capacity in Kentucky and meet the requirements of the RFP. He said they will share that information also if it will not violate procurement law. He went on to say that this does not mean that all of those companies have a statewide network in Kentucky. Many companies have access to national networks, and that could be a component of a bid by those companies. Mr. Birdwhistell and Mr. Burnside reminded the Panel that they have to be cautious in what they say, because vendors are present, and those not present will not have benefit of the discussion today.
Senator Mongiardo said that, between Medicaid and public employees, the state controls a huge market share of potential customers of health care providers and has the ability to "ratchet down" reimbursement. He went on to say that this would allow the company that wins the bid to come in at a lower bid. The company could renegotiate with providers that want to be in the network. Medicaid and Medicare pay hospitals 84 percent of the cost of patient care. If public employees are included as part of the Medicaid/Medicare public entity, quality would suffer when less than 100 percent is paid toward the cost of patient care. The Blue Ribbon Panel has the responsibility to look not only at cost but also quality of care. Mr. Birdwhistell said that the Administration is also concerned about quality. He said they are focused on trying to generate as many economies of scale as possible and getting the best possible price for administration of the health plan. The program will be focusing for the first time on quality assurance and quality metrics, preventive care, and moving from an illness model to a wellness model. He said he does not feel that, by taking advantage of a broader state purchasing power, quality of care will be compromised; rather, there will be a focus on improving the quality of care.
Senator Mongiardo said that many of the Fortune 500 companies have formed a voluntary program called Leapfrog, which is developing incentives to push computerized physician order entry as a way to reduce medical errors and, in turn, significantly reduce costs. He asked whether anything in the RFP would develop incentives of this kind for Kentucky. Mr. Crouch said there are questions in the RFP that ask what type of incentives should be proposed. He said these are more developmental type questions in order to get feedback from vendors and consider what the best options are.
Mr. McKim asked whether, if the PBA is separate, would a disease management/wellness program be able to network with the PBA to promote utilization of the most effective medications. Mr. Birdwhistell said the RFP requires that the PBA give real-time information to the master TPA for clinical care management decisions. He said the fact that there is a possibility of having a separate PBA in no way compromises clinical care management. Mr. McKim asked who would determine whether a drug is formulary or nonformulary, and whether such decisions could consider long-term disease management and wellness. Mr. Birdwhistell said that under a self-funded plan the Commonwealth is ultimately responsible for making decisions. He said that, in his view, there would be a pharmacy and therapeutics committee comprised of professionals in the field who would advise how to make those decisions, not only from a cost standpoint, but also from the standpoint of clinical interaction and efficacy. He said the beauty of the self-funded approach is that the formulary will be consistent across the state.
Representative Lee said he would envision that there might be regulations involved in order to provide oversight by the General Assembly when there are benefit changes or significant formulary changes.
Senator Mongiardo asked how much self-funding of the health insurance program is expected to save, under the best case scenario. Mr. Birdwhistell said it is too early to say—that it will depend on the bid responses and provider discounts. The presentation on the RFP concluded.
Next on the agenda, Kathy Stein, managing consultant from PricewaterhouseCoopers (PWC) gave a presentation entitled, "Overview of Health Care Benefits Cost Drivers." Copies of her PowerPoint presentation were provided to members of the Panel. (Mr. Birdwhistell had to leave due to a prior commitment. Shawn Crouch took his place at the speakers' table, representing the Cabinet for Health & Family Services.)
Ms. Stein said that the baseline actuarial analysis for the public employee health insurance plan is in process; consequently she cannot provide absolute numbers in specific areas for the cost drivers but will provide observations of what is being seen in the initial data and evaluation. She said that PWC has completed a study of the impact of self-insurance on the public employee health insurance program, as well as stop loss. A summary of key elements of her presentation follows.
The provision and utilization of health care services is changing very dramatically, globally, and is impacting all stakeholders. The availability of e-health, changing treatment patterns from genomics, and empowered consumers have changed everything and need to be taken into consideration relative to the public employee health insurance program.
Without changing to a self-funded basis, it is projected that premiums for public employees in Kentucky will increase more than 36 percent in 2006. Trends show that in current fully-insured arrangements claims costs are exceeding premiums received. Price inflation, a key component of the medical trend, is impacting all types of services. As data for the public employee program is analyzed, unit prices for hospital services need to be examined. Pharmacy costs are also rising quickly. Other key components are cost shifting and the aging population. "Baby boomers" are impacting the health care system dramatically, and pre-65 retirees are the most expensive group for which an employer provides benefits. Malpractice, as well as changes in utilization and technology, are having a dramatic impact.
Outpatient hospital costs are growing rapidly. Other health care cost drivers include rising inpatient hospital costs, driven by increased expenses per stay; pharmaceutical costs; and physician services. Pharmaceutical costs are projected to account for 12 percent of all health care expenditures in 2005, but that figure is higher for the state group population. Physician services are the slowest growing component of health care costs, and this seems to hold true also for the state group. In 2003, 54 percent of the growth in private insurance spending was related to hospital costs. Prescription drugs accounted for 20 percent of the growth and physician services, 26 percent.
In the state group population, as well as nationwide, drug costs are increasing as a result of utilization changes, price inflation, and the availability of higher cost drugs. For 2002, the total number of prescriptions dispensed was 3.1 billion. Prescriptions per capita for the state group was significantly higher than the nationwide per capita of 10.6 percent. Based on preliminary data in the Commonwealth's two self-insured regions in 2005, the most often prescribed drugs were antidepressants, high-end antibiotics, cholesterol-lowering drugs, and gastrointestinal, asthma, and diabetes medications. Clearly, the state group has chronic disease and wellness issues that need to be addressed. Whether drugs will be covered under the medical component or the pharmacy component is a critical issue that PWC will be looking at. Preliminary data also shows low utilization of the mail-order prescription benefit. This benefit should be examined for opportunities to encourage greater utilization and thereby improve the group's trends. A study by the National Institute for Health Care Management in 2001 indicates that the percent of change in sales and number of prescriptions from 1999-2000 increased significantly for the 50 most heavily advertised drugs, compared to all other drugs.
Other issues impacting the Commonwealth's plan are demographics and lifestyle issues. The October 2004 report of the Kentucky Group Health Insurance Board indicated that approximately 20 percent of the plan population is retired. The health care requirements of the older population affect overall cost for the group and need to be considered. According to PWC actuaries, members between the ages of 50 and 65—especially males—are the most expensive segment of the plan population. Research shows also that health risks/behaviors result in excess medical costs. Overall, annual medical costs can be reduced by $215 per each risk that is reduced and $304 per each risk that is avoided.
Traditionally, vendors were evaluated on their discounts alone, but this has changed. The new approach is medical management that focuses on controlling demand in a way that makes sense and that is of high quality. Employers are shifting toward a consumerism strategy, essentially saying that they want to empower their employees, give them more responsibility for making their own health care decisions, give them the tools, support, and education to assist them. Half of major employers have or plan to add a high-deductible plan and to make greater use of technology to administer benefits and distribute health information.
PWC is employing a data-driven methodology in studying the Commonwealth's health plan, using Kentucky's data warehouse and focusing specifically on the group's experience. The cost driver analysis of the public employee health insurance program is focusing on unit costs for medical services; demographics; health status; prevalence of chronic disease in the plan population; types of services being utilized; core medical and prescription drug plans; disease management and wellness; and voluntary benefits. PWC anticipates that the draft report of the cost driver analysis will be completed the week of June 13 and presented to the Personnel Cabinet the week of June 20. Key metrics from the report are expected to be delivered to the Blue Ribbon Panel the week of June 27. This concluded Ms. Stein's formal presentation.
Senator Buford raised the issue of how hospitals calculate their costs, which are often reimbursed at less than 100 percent of actual cost. Ms. Stein said that hospital cost structures have changed dramatically, considering the need for capital acquisitions, nursing shortages, cost-shifting from the uninsured, etc. She said all of these considerations figure into the hospital balance sheet.
Senator Buford asked how the percentage of expenditures for pharmaceutical costs in the state group compares to the national percentage of 12 percent. Ms. Stein said it is between 18 and 23 percent. Senator Buford asked about the number of prescriptions per capita in 2002 for the state group. Ms. Stein said she has not seen 2002 data but that preliminary observation indicates about 18 prescriptions per capita. When Mr. Jackson asked whether there is more recent national data on the number of prescriptions per capita, Ms. Stein said the benchmark figure for most organizations for 2004 is about 10.4.
Senator Buford asked whether any state plans are allowing prescription purchases via the Internet. Ms. Stein said she is not aware of any state plans doing that but that she will check again to see if she can find some examples.
Representative Moberly asked whether the Commonwealth's usage of the most heavily advertised drugs follows the national pattern. Ms. Stein responded affirmatively. She added that preliminary data shows that antidepressants rank third in usage for the state group and that gastrointestinal/anti-ulcer drugs had the highest usage.
Ms. Mitchell-Smith asked for an explanation of "1% leveraging" (page 5 of presentation). Ms. Stein said that that refers primarily to health care provider negotiations. She said that over the last several years health care systems have been consolidating and becoming more powerful in negotiating price and that this has added a percentage point to overall cost.
Representative Moberly asked whether actuaries try to estimate the cost impact of medical errors. Ms. Stein responded affirmatively. She said that this is likely to be emphasized more and more by employers across the country. Depending on the data source, it is difficult for an individual employer to do but could potentially be done for a group as large as the Commonwealth's. She said that PWC may be looking at error rates and quality indicators after they have data that is sufficiently detailed.
Mr. Bailey asked how Kentucky compares with other states with regard to its aging population. Ms. Stein said she does not know the specific ranking but can get that information. She agreed with Mr. Bailey when he suggested that the age factor affects pharmacy utilization.
Senator Mongiardo asked whether there is any information to indicate that the trend toward HSAs and high-deductible plans is shifting costs to a later stage in the disease process and, if so, does that increase the ultimate cost to treat a disease. Ms. Stein said she has not seen a study that absolutely shows that shift.
Dr. Cooper asked whether any data shows that wellness programs lower cost or provide other incentives for members of a group plan. Ms. Stein said many employers are implementing incentives to participate in wellness programs, such as a gift or a difference in deductible or contribution levels. She said she has some applicable statistics that she plans to present to the "green team" discussion group tomorrow but would also be willing to share with the full Panel. She said there are two levels of incentives—one for completing a health risk assessment, and another for actually complying with a disease management program. Dr. Cooper said that costs for his health insurance group has increased even though utilization has been low. Ms. Stein said that disease management programs do not make an impact if no one uses them. She said, typically, very large insurers' disease management programs reach out to probably three or four percent—or at best 10 percent—of an employer's group population; in reality, most employers need to reach out to about 30 percent and become actively involved in managing those programs.
Mr. Loving asked whether PWC will be looking at the disparity in hospital costs throughout the state. Ms. Stein said they will definitely look at that issue when they examine networks through the RFP process and also as part of the data analysis.
Representative Moberly asked Ms. Stein whether she agrees that cost shifting is going to become worse in the future, as health care costs increase, more people are uninsured, and with changes in Medicaid likely. She said she thinks that cost shifting is a critical component that will continue to make costs for the insured go up, as the uninsured/underinsured population grows. She went on to say that Medicare is probably not as big an issue in that regard, because the Medicare program is working to improve reimbursement to providers in certain types of cases. Costs for Medicaid or other programs that do not receive full reimbursement are being shifted to the commercial payor, and that cost shifting will continue to grow. This concluded the discussion with Ms. Stein.
Next on the agenda Erwin Roberts, Personnel Cabinet Secretary and panel member, gave an overview of the October 2004 Annual Report of the Kentucky Group Health Insurance Board. He provided the members with copies of his PowerPoint presentation, which is summarized as follows.
The report is prepared annually for the Governor, General Assembly, and Chief Justice of the Supreme Court in accordance with KRS 18A.226(5)(b). The report, which summarizes experience for the Public Employee Health Insurance Program for 2003, was prepared by Mercer Human Resource Consulting on behalf of the Board. It provides Board recommendations and commentary and summarizes legislated health insurance benefits mandates. The Board focused on four primary categories: consumer information and education; health benefit provisions; program governance, including the unescorted retirees issue; and program administration, including improvements in the program's current vendor/insurer management process.
Consumer information and education - The Board recommended that the Commonwealth: investigate ways to promote plan members' access to quality information and cost data regarding providers, and the cost and relative value of alternative health services and prescription drugs; implement initiatives to educate plan members regarding the impact of healthy lifestyles, management of chronic health conditions, and how to make informed health care decisions; and promote initiatives that support healthy lifestyle behaviors.
Health benefit provisions - With the exception of dependents' contributions, PEHI benefit provisions are more generous than the median of the large employer and state government employer markets nationally. Some board members feel that the benefits should be viewed in terms of total compensation and, therefore, should be above the median in order to attract and retain employees. The Board recommended that the Commonwealth: view the competitiveness of the benefits in the context of total compensation; explore ways to minimize employees' expenditures when revenues become available; and study health reimbursement accounts (HRAs) to determine if these accounts would provide a benefit to employees and reduce employer cost.
Program governance - The number of retirees and covered dependents grew from 14 percent of PEHI members in 1999 to 20 percent by the end of the first quarter of 2004. This population significantly impacts PEHI program costs. The impact is exacerbated by entities with retirees who participate in the program while their active employees do not. The cost of "unescorted" retirees in 2003 was estimated to have increased total program cost by $21.8 million. In order to protect the financial integrity of the program, the Board recommended that entities whose retirees participate, but actives do not, will be responsible for the actuarial difference in program cost contributed by their retirees. The Board also recommended that the submission deadline for its annual report be changed from October 1 to December 1.
Program administration – To encourage insurers and TPAs to provide good quality service, performance guarantees with monetary penalties have been incorporated into health insurance contracts. The Board feels that this effort can be improved if audits are conducted by the Commonwealth or a third party periodically to verify performance results. The Board recommended that the Commonwealth conduct audits to validate financial and performance results reported by insurance carriers and TPAs; and that meaningful penalties should apply to substandard performance.
Concluding his presentation, Secretary Roberts briefly discussed charts for 2003 showing the Commonwealth's monthly premium contribution for those electing coverage, claims and premium payment data for 2001-2003, and enrollment by tier from 1999-2004.
Representative Moberly asked whether the Board looked at data from other states relative to total employee compensation, and whether Kentucky salaries are below the median. Secretary Roberts said they did look at other states but that he is not sure how salaries ranked. He said there have been a lot of salary changes throughout state government and that they would have to look at whether there have been improvements in overall median salary.
Mr. McKim said he is troubled that fewer employees are electing dependent coverage. He said this probably means that, because employees/teachers cannot afford dependent coverage, there are potentially chronic conditions that are not being treated at an earlier and less expensive stage—which in the long term is very expensive for the health insurance group.
Mr. Jackson asked whether there is any data to indicate whether some of the employees choosing single coverage have enrolled their children in KCHIP (Kentucky Children's Health Insurance Program). Secretary Roberts said they do not have that information but will look at that. Mr. Jackson asked about plans to inform and educate PEHI members. Secretary Roberts said this is a work in progress but that they are looking at ways to interact more directly with employees—e.g., through health insurance coordinators, written forms, the Personnel Cabinet web site, and public forums.
Mr. Jones asked whether other avenues are being explored to minimize the cost to employees, other than depending on revenue becoming available. He said something needs to be done to lower members' out-of-pocket expense. Secretary Roberts said that lapsed flex plan monies and the savings that will hopefully result from self-insuring could possibly be used for that purpose.
Senator Mongiardo asked how many employees who currently have health insurance would qualify for KCHIP. Secretary Roberts and Ms. Wilcoxson said they do not have any data at this point. Senator Mongiardo said it would be more cost effective for the state and could result in significant savings if employees who qualify could insure their children under KCHIP. Mr. Crouch later clarified that the state has looked at the KCHIP issue previously but that, unfortunately, the federal government will not provide matching funds for KCHIP recipients whose parents are state employees.
Senator Mongiardo, referring to the 2001 loss ratio of 90.2 percent (chart on page 15), asked whether the 10 percent profit went to the insurance companies. Secretary Roberts said yes but that the gap has been closing on the loss ratio, which was 95.1 percent in 2003, and going self-insured would cut out that practice. He said it is his understanding, that some carriers may have underbid their cost. Mr. Thompson, new member of the panel member, representing Anthem Blue Cross/Blue Shield of Kentucky, said that the 10 percent possibly could be the administrative expense of answering the phone, handling claims, etc. Thus every dollar and more would be used for administration, which would leave the carrier in a negative financial position if that were the case.
Mr. Sproul asked whether there is any information regarding how many state employees do not have health insurance for their children. Ms. Wilcoxson said the employee would have to provide that information. She noted that the enrollment percentages do not show how many may have coverage through a spouse or other entity. Secretary Roberts said one option they are looking at is a survey to gather information from plan members. Mr. Sproul said it is important to know whether spouses and children are covered in the state group. Senator Buford noted that state employees are working longer and many no longer have children at home. Senator Mongiardo added that there are 110,000 uninsured children in Kentucky and that approximately 80 percent of them are eligible for KCHIP but have not applied.
Representative Moberly asked whether the Board discussed the flex benefit for employees who waive coverage. Secretary Roberts said he does not recall seeing that in the report.
Representative Lee asked whether the Board had looked at any data relative to their recommendation to view benefits in terms of total compensation. Mr. Loving said that the Board recommended that this issue be looked at in the future, because the relevant data was not available at the time the report was completed.
Representative Lee spoke of the continuity and stability that self-insurance will provide for purposes of a wellness program and utilization review. Secretary Roberts said that they hope to also have an in-house wellness program in conjunction with self-insurance.
Senator Buford asked whether it would be possible for the Personnel Cabinet, perhaps with assistance of the regional carriers, to provide a regional comparison of the highest and lowest costs for the most common three or four medical procedures. He said the lowest costs would probably be in Louisville, Lexington and northern Kentucky, where there are a lot of hospitals and more competition. He also spoke about the necessity for certificates of need for additional strategically placed hospitals in order to create competition. Secretary Roberts said they plan to look at rates in the future. This concluded discussion of the Group Health Insurance Board report.
Representative Moberly announced a correction to the list of Blue Ribbon Panel discussion groups (red, orange, green, blue, and violet teams) that will begin meeting at 9:00 a.m. in the morning. He noted that Arletta Kennedy is designated as co-chair with Secretary Roberts for the "violet" team. He also said that authorization has been sought from LRC for the individual teams to meet independently in the future on days other than when the full panel meets. Senator Buford said that authorization is also being sought for the team meetings to meet outside of Frankfort, for their convenience.
Next on the agenda, Michal Smith-Mello, Senior Policy Analyst for the Kentucky Long-Term Policy Research Center, gave a PowerPoint presentation entitled, "Trends in Health Care and Benefits and Possible Strategies for Improving Quality of Care While Containing Costs." Printed copies were provided to the members. Ms. Smith-Mello said she is also project director for a state planning grant from the Health Resources and Services Administration to study the uninsured population in Kentucky. Highlights of her presentation are summarized as follows.
Health care has been a crisis in and of itself for a long time, but the role it is now playing in public budgets is significant and one that states in the past have not had to contend with in such a dramatic fashion. Per capita health care spending has doubled since 1990. National health care spending is up from $696 billion in 1990 to $1.6 trillion in 2002; its share of the U. S. Gross Domestic Product (GDP) is up from 12 percent in 1990 to 14.9 percent in 2002.
Factors driving health care costs upward include: technology and medicine's enthusiasm for it; rising rates of utilization; aging of the population—which has a minimal impact today but will likely have significant impact in the future; advertising of pharmaceuticals and health care; consequences of hospital/medical errors; and administrative costs. Employer-based health insurance premiums have averaged a 10 percent increase annually since 2001. By 2004, average annual premium cost for employees only was $3,391, and $9,075 for family coverage. The dramatic increase in national health expenditures in the late 1980s and early 1990s created a backlash, and that backlash was "managed care" through the 1990s. When prices started to accelerate again, Uwe Reinhardt, a prominent health economist, blamed it on rejection of managed care.
Kentucky health expenditures are higher than national health expenditures, as a percent of Gross State Product (GSP), which cannot be compared with GDP. Kentucky has a higher rate of disability, is moving toward having an older population, and also has a large Medicaid population where illness is prevalent. Hospital care is responsible for 24 percent of the total growth of national health expenditures from 1992-2002; physician and clinical services, 21 percent; prescription drugs, 16 percent; and other personal health care, 14 percent. A very small percentage of the growth is attributable to nursing home and home health care. New drugs and treatments have enabled people to stay healthy longer. Kentucky has the highest patient acuity rate in the nation—i.e., the persons who enter nursing homes are sicker than most people in the nation because they stay with their families for a longer period. In 2002, hospital care accounted for 31.3 percent of national health expenditures; physician/clinical services, 21.9 percent; and prescription drugs, 10.5 percent. From 1999-2002 there was a big increase in the prescription drug component of national health expenditures.
Benefit costs have risen due to the rising expectation of lower out-of-pocket expenses and unfettered choice. In 2003, 59 percent of working age adults said they are willing to limit choice for lower out-of-pocket costs, compared to 55 percent in 2001. Benefits, not wages, have become the focus of collective bargaining. There have been substantial increases in the cost of doing business. For example, $1,500 of the cost of a GM car can be attributed to health care. Cornerstones of the U. S. economy are being downgraded due to long-term financial obligations to retiree health benefits. More costs are shifting from the private to the public sector. Public expenditures for health care rose from 41.8 percent of total costs in 1992 to 44.2 percent in 2002. Private employers are shifting more costs to employees and retirees or eliminating coverage altogether. Employees/retirees are paying higher premiums, deductibles, and copayments. The uninsured rate is rising. Since 2001, there are five million fewer U. S. jobs with health insurance. Two-thirds of the uninsured are from low-income families. Half or more of bankruptcies in the U. S. are linked to health care costs that are not defrayed by insurance.
The national percentage of workers in small firms (3-199 workers) who are covered by their employer's health benefits has dropped dramatically, from 57 percent in 2000 to 50 percent in 2004; although the percentage has changed little for large firms (200 or more workers). In Kentucky there are 80,000-85,000 firms that employ 50 or fewer workers. The cost of health benefits for those firms is rising at a breathtaking pace—approximately 25-30 percent—and is affecting their ability to be competitive or stay in business. In Kentucky in 2002, 58.5 percent of employees in firms with 50 or fewer employees were not enrolled in health insurance; 31.6 percent of employees in firms with more than 50 employees were not enrolled. This has led to the rising uninsured rate at both the national and state levels.
Large private sector employers are making changes in retiree health benefits; they are increasing retiree contributions to premiums, increasing general cost sharing, and increasing dependent contributions. The general trend has been downward for private sector establishments offering health insurance to retirees.
Average state cost for public employee family premiums in the 50 states increased from $359.92 to $610.51 in 2003; average employee cost increased from $108.21 to $167.02. Contrary to what has happened in the private sector, the percentage of state governments offering health insurance to retirees, both under and over age 65, increased from 1997 to 2002.
The monthly state contribution, as well as total aggregate premiums, for health insurance for Kentucky public employees has increased steadily over the years. From 2002 to 2004, the number of retirees among Kentucky PEHI members grew, although the total number of members has decreased; and retirees, by and large, have higher medical costs. In 2003, the premium share paid by Kentucky public employees for the most prevalent family coverage plan was higher than other states in the region and significantly higher than the national average. Families comprise a declining portion of overall enrollment in the state group. Family coverage is cost prohibitive; as a result, the pool is becoming less efficient because it is losing healthy members.
The number of covered lives in the state group remained virtually unchanged from 2001 to 2003, but medical claims cost increased substantially. The average number of prescriptions per person increased from 2000-2003, which can be attributed to the large number of older persons in the insured pool. In the same time period, the number of inpatient days and emergency room visits grew, illustrating the trend of increased utilization.
In October 2004 the Kentucky Group Health Insurance Board reported that avoidable hospital admissions in 2003 cost the PEHI program $15 million; readmissions cost another $11.4 million, and complications from previous treatment, $22.9 million. These are areas where the program needs to look for savings. The prevalence of chronic conditions in the PEHI program was very high in 2003, compared to benchmarks; likewise, emergency room usage was significantly higher than the national average.
The fiscal landscape shows a mounting federal deficit and unsustainable fiscal policies. Entitlements are currently the primary focus of budget cuts. The longstanding trend toward federalism is likely to continue. States will probably be expected to pick up more of the tab in the future. The states are showing the nation "how to do it right," and there are a lot of examples to look at when designing the PEHI program structure. States are still struggling to balance their books, partly because of state-financed Medicaid. Public employee pension and health care benefits are expected to continue consuming a growing piece of the public pie. Things are beginning to change, however. The annual increment in expenditures has gone down to about seven percent. If the public cost of health care benefits cannot be contained, it will crowd out other very critical items, including education. Employer-sponsored benefits are at real risk, and many employers are modifying or jettisoning them.
It is important to bring more young members into the state health insurance pool in order to spread the risk and minimize long-term costs. Past policies have discouraged younger, healthier workers and family plan "take up" because of the extraordinarily high costs. South Carolina pays the full cost of family health benefits for employees. Kentucky has a lot of lower paid state workers who cannot afford to buy this coverage. The pool should be family friendly and include incentives not to leave the pool. In order to spread the risk, active employees of cities, counties, regional universities, etc., —not just their retired members—need to be "escorted" into the pool.
Potential cost-containing tools include: raise beneficiary costs; shift to HSAs or "consumer-directed plans"; provide incentives for healthy behavior; return to the managed care model, avoiding mistakes of the past; and compile, analyze and communicate data to achieve continuous improvement—i.e., identify cost drivers, design wellness incentives, and educate employees to expand their understanding of provider and product quality and costs. Another potential cost-containing tool is to use the state's incredible market share to raise the quality bar by compelling a shift to evidence-based medicine, measuring patient satisfaction and use of preventive care, considering "pay for performance," and exploring multi-state purchasing pools. West Virginia, for example, is now part of a multi-state purchasing pool and expects to realize a $25 million savings over three years. Additional possible cost-containment tools to consider are a disease management strategy and indexing of charges to employees based on salary. The Congressional Budget Office so far has found insufficient evidence of reductions in health spending that can be linked to disease management, which involves a lot of front-end cost. However, a recent NCSL publication discusses the experience of Washington state, which has realized savings from management of substance abuse treatment. This concluded Ms. Smith-Mello's presentation.
Ms. Smith-Mello urged the Panel to invite her colleague on the state planning grant, Dr. Julia Costich, Chair of the University of Kentucky's Department of Health Services Management, to talk to the Panel about health insurance. She said that Dr. Costich played a prominent role in structuring the University of Kentucky's health plan and was also a member of the state Health Purchasing Alliance before it was eliminated.
Senator Buford said it might be interesting to examine the possibility of bringing students in public colleges and universities into the state health insurance pool, although he acknowledged that it might not be practical.
Mr. Remmers referred to the graph showing the employee/employer shares of family monthly rates in 2003. He said that in order to present a balanced picture, information about employee/employer shares for the other three tiers of coverage is needed. Ms. Smith-Mello said she did not believe this was included in the survey source but that she would check again and try to provide that information.
Senator Buford commented that in many states employees are paying a larger share for single coverage in order to subsidize family coverage. He said he believes the Personnel Cabinet has been discussing this as a possible option for the state group. He also noted that many states do not include "couple" coverage in their plans because it is costly.
Representative Moberly asked Ms. Smith-Mello whether her research found negative information regarding consumer-directed plans in general. She responded that these plans have been criticized a lot. She went on to say that HSAs, for example, entail a lot of exposure to risk. They are being offered to a lot of people but not very many are taking them. In her opinion, HSAs are relatively new products, and consumers do not know enough about them yet in order to make a wise decision. If the young healthy people who might choose HSAs are removed from the pool, that will weaken the pool. The health care crisis is so new that the responses to it are weak, at best. The general movement is back toward managed care.
After managed care was soundly rejected, health care costs have increased. Representative Moberly said he thinks there is a general idea that consumer-driven care will result in better decisions and less utilization. He questioned whether encouraging less utilization would lead to better decisions, since people might be less inclined to seek preventive care. He said that changing to a self-insured program will enable the state to design the health plan but that it will be important for any consumer-directed parts of the program to emphasize strong preventive care. Ms. Smith-Mello agreed. Representative Moberly told Ms. Smith-Mello that she has presented some interesting and provocative research and that she could be very helpful to the Panel. When he asked whether she would be able to testify at some of the discussion team meetings, she said she would.
Mr. Sproul asked about health care administrative costs. Ms. Smith-Mello said that private insurers have very high administrative costs—roughly 15 percent of their total cost—which may appear on the surface as obstacles to paying claims. She noted that administrative costs for Medicare and Medicaid are about four percent. She suggested the Commonwealth should focus on holding down administrative costs for the self-insured plan.
Senator Mongiardo said his office has five full-time employees who deal with insurance matters and that payment by the insurance companies is a terrible problem for providers. He went on to say that it seems to be a conflict of interest to have the insurance company be both the payor and care manager, since their way of management in the past was to say no to everything. This saved money but did not promote good health care. He raised the idea of having two separate entities—one to act as payor and another to see that the patient receives appropriate health care. He asked whether there are any entities that actually look at a patient from the standpoint of the type of treatment and preventive care that is needed. Ms. Smith-Mello said that is what disease management structures are doing, presumably. She said that the Employee Benefits Research Institute's analysis of various private-sector case studies also looked at that issue. She said she can see that it would be conceivable to have two separate entities. Senator Mongiardo said that his mother died of colon cancer; yet neither his doctor nor insurance company has contacted him to suggest a preventive colonoscopy. He said that is the nature of the health care delivery system today—those who are educated about what to do help pay for those who do not know what to do. He suggested that there should be a system that says, "this is what you should be having"—not only for state employees but for everyone. He went on to say that the cost reduction that everyone is seeking will not happen without prevention. What should be looked at is a mechanism to promote prevention and which should probably be disjointed from the payor. Self-insurance may provide an opportunity to do that. Ms. Smith-Mello said she believes it should provide a significant opportunity. She said that is what she was trying to get at when she spoke of taking advantage of the state's market share to raise the quality of services and leverage greater preventive care—things that never materialized previously under managed care. Senator Mongiardo suggested the possibility of linking preventive measures to incentives for the employee.
Representative Lee said that whether one company or separate entities handle wellness programs and administration of the self-insured plan, it is important to have wellness program outcome guarantees built into the contract so that those outcomes can be tracked over a period of time through the gathering of data and utilization review.
Mr. Loving asked whether states, such as South Carolina, that pay 100 percent of family coverage also pay for health coverage of retirees under 65. Ms. Smith-Mello said she would have to delve deeper to find out. Senator Buford said that Mark Roberts of the LRC staff is going to obtain a copy of South Carolina's plan, which he anticipates does not cover retirees' health insurance.
Mr. McKim asked whether there is any research that looks at parameters for appropriate utilization. Ms. Smith-Mello said that is a tough issue and she doubts that anyone has been able to exactly pinpoint the threshold—which would differ according to income and health status. She said that Dr. Costich might be able to provide some useful information.
Mr. Harbin said that many of the states to which Kentucky is compared do not include retirees in their group plans. He said that in Missouri and Pennsylvania, for example, retired teachers are taken care of by the local districts. In Connecticut retirees receive $108/month for medical coverage. Virginia offers $2.50 per year of service. He went on to say that some of the high utilization in the state group may be due to the inclusion of retirees. When Ms. Smith-Mello said that the overwhelming majority of state governments are offering health insurance to retirees both under and over age 65, Mr. Harbin pointed out that the level of coverage may be very limited. Ms. Smith-Mello suggested that Kentucky's plan may be overly-generous, but Mr. Harbin disagreed. He concurred with her that it is a common assumption that state governments compensate public employees with generous benefits to make up for lower wages.
Mr. Remmers stressed the importance of focusing on the right problems. He said that administrative costs for the Commonwealth have been, at the high, eight percent in the last five years; the low was last year, when the administrative cost was a negative number and the insurers were subsidizing the cost of the plan. He went on to say that in the current year the costs are probably in the neighborhood of five percent or less and that in a self-funded environment the administrative cost should be about five percent. Claims were running at about 14 percent for several years but are estimated at 31 percent for next year. Mr. Remmers said he feels that the role of the Panel is to understand "what is the pie doing"—i.e., largely claims in the state group environment—versus what each party is paying. He said his organization (Humana) has been trying to engage consumers in a helpful and empowering way over the past four years and has about a quarter of a million people in plans with a claims trend of about five percent. The utilization patterns for purposes of preventative help are up in that population. Physician visits are about constant. Hospitals visits are down. Prescription drug utilization is up, but the types of drugs being used are down in terms of cost. He said the state group is a microcosm of the nation in terms of cost pressures. He challenged everyone to have an open mind.
Mr. Crouch said that thought has been given in the past to adding other healthy groups to the state health insurance plan. He went on to say that under a self-insured plan, addition of any group would add incremental cost, unless a premium is charged that would exceed the cost and that adding members would not improve risk in any way, unless reinsurance is purchased. Ms. Smith-Mello agreed that adding members adds cost but said that the public sector picks up costs for the uninsured in other ways. She went on to say that hospitals are routinely absorbing huge numbers in charity care. Whether through charity cases or the Medicaid environment, for example, it needs to be recognized that these costs are passed on in unseen ways. Mr. Crouch said the Commonwealth needs to look at solutions to get the maximum number of people insured—looking also at other options such as insurance through a spouse's employer. This concluded the discussion with Ms. Smith-Mello.
Representative Moberly reminded the members that they will gather at 9:00 a.m. in the morning and then break up into discussion teams. Senator Buford announced that there would be a continental breakfast available at 8:30 a.m. and that dinner for the members is now being served for the members in Room 125. Business concluded, and the meeting was adjourned at 5:40 p.m.