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Interim Joint Committee on State Government


Minutes of the<MeetNo1> 2nd Meeting

of the 2005 Interim


<MeetMDY1> July 27, 2005


The<MeetNo2> second meeting of the Interim Joint Committee on State Government was held on<Day> Wednesday,<MeetMDY2> July 27, 2005, at<MeetTime> 1:00 p.m. in<Room> Room 149 of the Capitol Annex. Representative Mike Cherry, Co-Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Walter Blevins, Jr, Julian Carroll, Carroll Gibson, Ernie Harris, Alice Kerr, Elizabeth Tori, and Johnny Ray Turner; Representatives Adrian Arnold, Eddie Ballard, Joe Barrows, Sheldon Baugh, Carolyn Belcher, James Bruce, Dwight Butler, Tim Couch, David Floyd, Derrick Graham, J. R. Gray, Mike Harmon, Melvin Henley, Jimmie Lee, Gerry Lynn, Paul Marcotte, Mary Lou Marzian, Stephen Nunn, Tanya Pullin, Tom Riner, John Will Stacy, Kathy Stein, Tommy Thompson, Jim Wayne, and Brent Yonts.


Guests: Senators Tom Buford, Julie Denton, and Daniel Mongiardo; Representative Bob DeWeese; Erwin Roberts, Personnel Cabinet; Arlettta Kennedy; John Cubine and Alice Wilson, Auditor's Office; and Ed Ross and Gerald Hoppman, Finance and Administration Cabinet.


LRC Staff: Joyce Crofts, Alisha Miller, Karen Powell, Stewart Willis, Clint Newman, and Peggy Sciantarelli.


The minutes of the June 8, 2005, meeting were approved without objection, upon motion by Representative Lee.


First on the agenda was discussion of the final recommendations of the Blue Ribbon Panel on Public Employee Health Benefits. (A list of the recommendations,. numbered 1-48, was included included in the meeting folders.) The recommendations were proposed by the Panel's five subcommittees and were adopted at the final meeting of the Panel on July 19, 2005. Panel members participating in the discussion were Senator Tom Buford, Co-Chair of the full Blue Ribbon Ppanel; Representative Jimmie Lee, Chair of the Benefits Subcommittee; Representative Bob DeWeese, Chair of the Wellness Subcommittee; Erwin Roberts and Arletta Kennedy, Co-chairs of the Group Makeup Subcommittee; Senator Daniel Mongiardo, Chair of the Technology Subcommittee; and Senator Julie Denton, Chair of the Governance Subcommittee. It was noted that Representative Harry Moberly, who Co-chaired the Panel with Senator Buford, was not able tocould not attend today because he was out of state. After introductory remarks by Senator Buford, the subcommittee chairs addressed the Committee.


Representative Lee said that the Benefits Subcommittee looked at all aspects of the current health insurance benefits in the Public Employee Health Insurance (PEHI) program;, the benefits that may be offered in the future under athe self-insured plan;, and whether the plan year should be changed from a calendar year to a fiscal year. He said the Subcommittee proposed 23 recommendations. He also, but he noted that some of the recommendations that were proposed by more than oneadopted overlapped between subcommittees.


Representative DeWeese said that the Wellness Subcommittee had the responsibility to look at wellness, disease management, and the aging (50-plus) population. He said that wellness programs are definitely advantageous and would appear to be the next big movement toward controlling health care costs. He went on to say that disease management has to do with the comprehensive management and treatment of a disease and includes the best practices for a particular disease, as well as education of the patient. Tthe goal of wellness and disease management programs is to achieve the best quality care by keeping people out of the hospital and treating diseases early when it is least expensive. A key part of wellness is the health risk assessment. For a wellness program to be successful, there should be incentives, and the Subcommittee has recommended that the General Assembly consider budgeting for incentives in order to promote participation.


Personnel Cabinet Secretary Erwin Roberts said that one of the great benefits of the Blue Ribbon Panel was that a lot of good information was shared and has been made available to everyone. He noted that many of the presentations to the Panel can be accessed on the Personnel Cabinet web site. He went on to say that the Group Makeup Subcommittee's primary purpose was to look at the makeup of the health insurance group and determine what changes, if any, mightcould be made to  improve the group and make it more cost effective for the state. They focused much attention on adverse selection, which includes the "unescorted retiree" issue and flexible spending accounts for individuals who waive coverage—issues which are addressed in recommendations #6, #27, and #28. Ms. Kennedy said that the biggest issue before the Subcommittee is probably the "unescorted retirees," issue, which is addressed in recommendation #27, was probably the major focus of the Subcommittee. She also expressed appreciation that the Kentucky Education Association (KEA) was allowed to participate directly in the work of the Blue Ribbon Panel. Secretary Roberts said they are in the process of obtaining the necessary information from the retirement systems in order to pursue the study directed in that recommendation.


Senator Mongiardo said that the cost of health care is the number one domestic problem facing the nation and that there will not be a dent in the cost until it can be determined how to overhaul the health care delivery system. He went on to say that the only way to set up a health care delivery system to incorporate wellness and prevention—for everyone—is through the use of information technology, so that doctors have at their fingertips the latest research on how to treat disease. The Technology Subcommittee has recommended that the state should be the leader in driving the change necessary to implement information technology in order to improve the quality of health care and significantly reduce cost. The Southeast Kentucky Community Access Program (SKYCAP) of the University of Kentucky Center for Rural Health, using information technology and lay health care navigators, in one year reduced the costs associated with in the top five diseases by 60 percent in 10,000 uninsured patients, as well as reducing and reduced emergency room visits by 92 percent and hospitalizations by 87 percent. O; over a period of five years, the cost reductions achieved by the program were approximately 40 percent. The state needs to develop incentives and determine new ways to speed the implementation of information technology.


Senator Mongiardo also spoke about Senate Bill 2 (2005), which created a board to develop a statewide e-health network and establisheds a research collaborative between the University of Kentucky and the University of Louisville to studyfigure out ways to change the health care delivery system. He said the Technology Subcommittee has also recommended establishment of a "Sorry Works!" pilot project to reduce the cost of malpractice. It is, modeled after successful programs implemented at the Lexington VA Medical Center, the University of Michigan, and two hospitals in Illinois.


Senator Denton said that the Governance Subcommittee looked at responsibility for oversight of the health insurance plan and tried to be practical in making its recommendations. She said they considered ways to improve fiscal oversight, in order to ensure that the health insurance funds will not be raided, and also looked at ways to improve communication. She added that the Subcommittee fully supports the final adopted version of its recommendations. (NOTE: Senator Denton was not present when the subcommittee chairs made their opening remarks. Her comments were made later in the meeting.)


Senator Buford said that the LRC actuary for the House of Representatives, David Wille, has identified six recommendations withhich have a potential for increasing costs. He also spoke about the advantages of having a wellness program withthat has continuity, which will be aone of the prime benefits of beingthe self-insured plan. Representative Lee noted that the Panel has recommended retaining that benefit, co-pay, and co-insurance structures similar to those currently in place after June 30, 2006 be retained after June 30, 2006.


Representative Yonts asked whether any of the recommendations relate to coverage for out-of-state retirees or creation of a prescription registry. Secretary Roberts said there is anoted th recommendation (at #19) recommends  that there be a provider networks be available for for retirees who live outside of Kentucky. Senator Mongiardo said that a prescriptions registry would fall under the auspices of Senate Bill 2 (2005). In addition to information sharing, it would allow for tracking of narcotics. He added that incentivizing hospitals and doctors to implement information technology as quickly as possible will help not only state workers but will also thehelp Medicaid program, private health insurers, and small businesses. Representative Yonts suggested checking with King County in Washington state, where government and private employers are collaborating on a where there is a four-county e-health pilot project underway which is a collaborate effort between government and employers.


Senator Harris asked about the 2006 RFP and the expected completion date for the study on "unescorted retirees." Secretary Roberts said the recommendation specifies that the study be ready by January 2006. He said that the RFP has been released and that the goal is to have a contract by the middle of August. There was additional discussion of the "unescorted retiree" issue and its political and fiscal implications.


Representative Cherry asked about the recommendation to change the current employer contribution to flexible spending accounts, for those waiving coverage, to an HRA and to reduce the employer contribution incrementally over five years. He asked for an explanation of "reduce incrementally." Representative Lee said the minimum and maximum contributions and the amount of the incremental reductions would have to be decided by the General Assembly. He noted that a study supplied to the Blue Ribbon Panel indicated that the average state employee uses about $200 per month of the $234 employer contribution to the flexible spending account. Secretary Roberts said that a study of other states showed that the average contribution to flexible spending accounts was only $50-$100.


Representative Cherry asked whether legislation will be forthcoming relating to the Panel's recommendations. Senator Buford said that he and Representative Moberly had not specifically discussed legislation but that some of the Panel's recommendations will require legislative action.


Senator Blevins mentioned the University of Kentucky wellness program model, which is referred to in recommendation #42. He said that gum disease and tooth decay are the most prevalent diseases in the population andis gum disease and tooth decay, which are also among the top 10 reasons for emergency room visits. He went on to saysaid that research shows that heart disease and strokes can be caused by infections in the oral cavity. He said he believes—not just because he is a dentist—that any wellness program should assess dental health and that the state would be "missing the boat" if itsthe health plan does not include a component for providing oral health care. He noted that Kentucky Kare included provisions for preventative dental care. Senator Buford agreed with Senator Blevins' concerns and said that staff would need to find out how this issue is treated in the University of Kentucky model.


Representative Thompson asked whether the Panel had analyzed what other states are doing relative to the employer contribution paid toward for single coverage. Representative Lee said that they had looked at other states. He noted said that some states contribute more toward dependent coverage and also pay higher salaries than Kentucky. He said that providing fully paid individual coverage for employees is one of the cost drivers in the health insurance plan that will have to be considered in determining what approach to take regardingrelative to the employer contribution. Representative Thompson asked whether the Commonwealth has been successful in reducing administrative costs in theself-insuring two regions of the state that are self-insured in the currentin the 2005 plan year has been successful in reducing administrative costs. Representative Lee said there is only limited information currently available from those regions but that thus far there appears to be someit indicates a cost savings in pharmaceuticals. Senator Buford said that, according to Mr. Wille, has observed that preliminary numbers indicate that the TPA administrative cost per member in the two self-insuredose regions ranges from $29-$31, compared to an average of about $55 per member average for plans that are not self-insured.


Representative Henley said that when he was mayor of the city of Murray in 1978, he set up a self-insurance plan; and a few years later,, when he was serving on the Board of Regents, Murray State University implemented a self-insurance plan when serving on the Board of Regents of Murray State University, they implemented a self-insurance plan. He said that both plans have been very successful and include incentives for wellness and that he believes self-insurance is a very good way for the state to begin holding down costs. He went on to say that both groups would include "unescorted retirees" and that he thinks the state will eventually have to require everyone who participates in the retirement system to also join the state group during active employment. Representative Henley also commended Senator Mongiardo and stated that he thinks information technology is the key to the future of medical care.


Representative Marcotte commended the entire Panel for their efforts and thanked Representative Wayne, in particular, for suggesting creation of the Blue Ribbon Panel.


Senator Carroll also added his congratulations to the Panel. He spoke of an Internet program inaugurated in the Health and Family Services Cabinet that would allow doctors to see which drugs have been prescribed to a patients. He said he was surprised to learnhas learned, however, that there is no requirement that doctors use the system in order to be Medicaid eligible. He . He asked whether the Panel had looked at that program and the fact that the technology is not being used to require that physicians use the system. Senator Mongiardo said that one of the barriers to the implementation of Senate Bill 2 was that some doctors resist changing from the old style system and. He said  that overcoming the human barrier will be an issue challenge. He went on to say thatAlso, software implementation is expensive. It costs probably an average of $100,000-$150,000 for a doctor's office, and in the 10 Appalachian regional hospitals the cost will be the cost will cost  about $50 million over a period of three to five years. Everyone must come together to figure out how to lower that hurdle—e.g., through incentives, grants, low-interest loans, tax breaks, etc., and also by informing patients which physicians and hospitals have such a system in place. If Kentucky's statewide network becomes a prototype for the rest of the nation, corporations like Microsoft and IBM might be willing to help fund initial development.


Senator Carroll commended the Panel for its attention to wellness. He said he is convinced that wellness is the only shining light to deal with the cost of health care in the future. He went on to say that he had done some research recently and found that Kentucky state government insures 100,000 employees and Medicaid recipients within Franklin and the six surrounding counties. There is no better place to start a well-run wellness center than at the state capital, and a wellness program should drastically affect costs in both the Medicaid and PEHI programs. Representative DeWeese said that the shift toward wellness is the paradigm for health care. Additional discussion followed on the benefits of wellness programs.


Representative Wayne thanked the Panel for its good ideas and hard work. He asked whether consideration was given to expanding membership in the health insurance pool to entities outside state government. Secretary Roberts said that, other than the "unescorted retiree" issue, there was some discussion regarding expanding the group to universities and colleges.


Representative Marzian said the recommendations are excellent and that she hopes some of them can be enacted in the 2006 regular session. She asked whether the health insurance industry maintains claims data according to disease groups. Senator Buford said that insurance companies keep that information confidential but that self-insuring will enable the state to have that data from its own experience. There was subsequent discussion regarding the importance of having utilization data and how policy decisions by the legislature can have a dramatic impact on cost savings.


Senator Tori said that some of the Panel's recommendations are wonderful. She asked whether there has been any cost analysis. Senator Buford said that Mr. Wille has reviewed the recommendations for their cost impact and that 13 recommendations are expected to reduce costs.


Representative Lee said that the final report of the Blue Ribbon Panel is still in process. He said also that Representative Moberly looks forward to working with the House State Government and Appropriations & Revenue Committees and their Senate counterparts to develop whatever legislation may be necessary to implement recommendations. Representative Cherry thanked the speakers and said that the Committee looks forward to dealing with these issues in the 2006 regular session.


Per a referral from LRC, the Committee next discussed the Auditor's management letter concerning the Finance and Administration Cabinet (FAC), in reference to the statewide single audit for the year ended June 30, 2004. The Division of Financial Audit in the State Auditor's Office was represented by John Cubine, Director, and Alice Wilson, State Audit Branch Manager. The Finance and Administration Cabinet was represented by Ed Ross, Executive Director, Office of the Controller; and Gerald Hoppmann, Executive Director, Office of Policy and Audit.


Mr. Cubine said that the statewide single audit reviews the receipt and expenditure of federal funds. He went on to say that for FY 2004 Kentucky received about $7 billion in federal funds, involving about 25 different federal agencies and approximately 52 Kentucky agencies. The portion of the audit being discussed today relates only to the Finance and Administration Cabinet.


Ms. Wilson said that for FY 2004, there were 16 comments/findings for the Cabinet, compared with 23 for FY 2003. There were five findings and recommendations on reportable conditions relating to internal controls and/or noncompliance; the remaining findings and recommendations were on "other matters" relating to internal controls and/or noncompliance. She explained that a reportable condition is based on the auditor's judgment of something that significantly affects the agency's financial statements and ability to record or process transactions. "Other matter" findings pertain to a weakness in the agency's control functions that would not materially impact the financial statements but would still be a problem, and which could involve compliance with federal requirements. Ms. Wilson reviewed financial statement findings 04-FAC-1 thru 5 (pp. 9-20 of the Auditor's Letter):


·        The FAC should develop and implement a formal policy to govern security of the Management Administrative and Reporting System interface files.


·        The Office of Financial Management should implement procedures to ensure the data provided for the year-end investment income accrual is accurate and complete.


·        The FAC should ensure all agencies conduct accurate and timely fixed asset inventory counts.


·        The FAC should formalize and consistently apply the program modification process for the Commonwealth's cash and investments system.


·        The FAC should strengthen logical security procedures surrounding the complete assets management reporting and accounting system.


Ms. Wilson also reviewed finding 04-FAC-16 on "other matters" (p. 40 of the Auditor's Letter):


·        The FAC should improve policies and procedures for the statewide cost allocation plan.


Mr. Ross provided the Committee with copies of his July 27, 2005, letter to Representative Cherry and Senator Thayer, summarizing the Cabinet's response to the Letter from the Auditor. Mr. Ross said that the Cabinet takes all of the Auditor's recommendations seriously and has implemented most of them, as indicated in the response letter.


Representative Yonts asked whether there had been an evaluation of whether state contracts are being properly classified in the MARS system—e.g., commodity contracts, personal service contracts, or memoranda of agreement. Mr. Cubine said that would not have been part of the financial audit. He said that the Division of Performance Audit has been doing some work on state contracts, has issued one report, and has another forthcoming. He said that if the financial audit had found a particular transaction that was misclassified, it would have been noted but that aspect would not have been a focus of the audit. Representative Yonts said that a committee review in LRC last year found that as many as 10,000-50,000 contracts were potentially misclassified. He said that a huge volume of contracts potentially escape oversight review if they are misclassified. Mr. Cubine said that he would discuss the matter with Michael Meeks of the LRC staff.


Representative Cherry announced that Senator Thayer would chair the next meeting, scheduled for September 28. Business concluded, and the meeting was adjourned at 2:46 p.m.