Can an Employee Health Insurance Cooperative Benefit Your Organization?

Presentation of a Feasibility Study: A Self-Funded Health Insurance Cooperative

February 28, 2007

Presentation Overview Why This Study? The Current Situation: Ever

Increasing Small Group Health Insurance Premiums and Pricing Volatility Threaten the Sustainability of Health Benefit Programs

An Alternative: Spreading Risk and Maximizing Economies of Scale Through a Self-Funded Health Insurance Cooperative

Benefits of a Cooperative

Estimated Costs

Potential Obstacles

Next Steps

The Study Initiated at the Request of McHenry County

Municipalities to Research Joint Purchasing Programs for Health Insurance Benefits

Set Out to Answer the Question: Would a Cooperative Health Plan Provide Better Value and Stabilized Pricing for Municipalities Versus Their Current Individual Health Plans?

Conducted by MCCG Ad Hoc Committee on Health Insurance from September 2005 to October 2006 Art Osten, Village of Fox River Grove Dorothy Pfeuffer, Village of Lakewood Claudett Peters, Village of Johnsburg Janelle Crowley, City of Woodstock Robert Ivetic, McHenry County Roberta Rogers, Village of Lake in the Hills Anna Bicanic Moeller, MCCG

The Study Consultants Assisting with the Study and Providing Cost

Estimates for a Self-Funded Health Insurance Cooperative: Mike Wojcik, Dennis Bautista and Bonnie Cochrane from the

Horton Group Catherine Loney from GCG Financial

These Consultants Were Asked to Assist With the Process Because of Their Experience with Public Health Insurance Cooperatives

Utilized demographic and health plan information from 13 municipalities and McHenry County (1,700 Employee Lives in Study and Cost Estimates)

Village of Cary Village of Barrington HillsVillage of Fox River Grove Village of JohnsburgCity of Harvard Village of HuntleyVillage of Lakewood Village of Lake in the HillsCity of Marengo City of McHenryVillage of Prairie GroveVillage of Spring GroveCity of Woodstock

The Study Final report for McHenry County and the

thirteen McHenry County municipalities was distributed in November 2006, presented to the study group January 17, 2007 and presented to approximately 40 municipalities outside of McHenry County on February 26, 2007

Process opened to municipalities outside of McHenry County to increase economies of scale and maximize purchasing power

The Situation: Ever Increasing Small Group Premiums and Pricing Volatility Many organizations face double-digit increases for

premiums and fluctuating costs from year to year making budgeting for health insurance difficult

Costs are increasingly shifted to employees or benefits are reduced to cut costs

According the Kaiser Foundation: Healthcare premiums for family coverage rose 87% in last 6 years

Average premium increase was 7.7% in 2006* 8.8% for small firms 7% for large firms 8.7% for fully-insured 6.8% for self-funded

2006 average cost (PEPY) per employee per year = $8,447**

MCCG Study average cost PEPY= $11,288 5 year forecast (2012) assuming trend of 11.9%***

average cost PEPY = $19,805

* Kaiser Foundation ** Milliman Study *** PricewaterhouseCoopers

Spreading Risk and Maximizing Economies of Scale Through a Self-Funded Health Insurance Cooperative Cooperatives Have Been Used by Local Governments for

Years Several local government health insurance cooperatives

have been in existence for over a decade in N. Illinois Other cooperative arrangements such as IRMA and

McMRMA have been effective in spreading risk and containing costs for members

Premiums pooled to cover claims up to a specific amount example: pool covers all claims up to $100,000 per individual and $1,000,000 aggregate. Any claims above these amounts are covered by stop loss reinsurance

Premiums are determined by the participating municipalities each year and are based on three factors: Community rate Individual organization’s risk level Types of plans offered to employees

All participants share in fixed costs such as administrative fees, network access fees and stop loss insurance

Spreading Risk and Maximizing Economies of Scale Through a Self-Funded Health Insurance Cooperative

The cooperative is formalized through bylaws, which are created and approved by the participating municipalities

The tighter the rules and the group, the better the rates (ie a 3-year minimum for participation).

Stability is important for long-term success

20% to 25% reserve policy recommended

Expected Benefits of a Self-Insured Health Insurance Cooperative It’s Better to be Bigger

Larger groups have a larger population to spread risk

Larger groups have greater leverage in negotiating fixed costs such as administration and reinsurance expenses

Larger employers historically have lower increases when compared to small group plans

According to American College of Physicians- Small employers pay the highest premiums for health care coverage and experience the largest annual premium increases and their employees pay higher deductibles than large employers

Expected Benefits of a Self-Insured Health Insurance Cooperative Municipalities share administrative expenses that

minimize these costs to individual organizations In an individual fully-insured plan, 22% to 32%

of premiums are embedded administrative fees and fixed costs- source Congressional Budget Office and the Horton Group

Brokers charge at least 3% of premiums in fees- source-Blue-Cross / Blue Shield Group Markets Producer Agreement Compensation Schedule- January 1, 2003

Large employers pay closer to 12% in fixed costs and administrative fees- source American College of Physicians- “Small Business Pooling Arrangements and Association Health Plans 2003”

Expected Benefits of a Self-Insured Health Insurance Cooperative Smaller communities have access to

services and plans otherwise not available to them Greater reporting Bigger discounts

Incentives to use wellness and preventative care programs to keep claims down, thus keeping employees healthier

Greater control, oversight and transparency in how premium dollars are allocated. Less guessing when budgeting for health insurance costs.

Estimated Costs for a Health Insurance Cooperative for McHenry County and Municipalities

2007 Cost estimates provided by the Horton Group

Cost Estimates Based on 1700 Employee Lives Rates determined by the three factors of

community rate, risk level of the individual organization and type of plan (HMO, rich PPO or moderate PPO)

Premium Allocation:

74% for Expected Claims 15% for Reserves 11% for Fixed Costs and Administrative

Fees

Allocation of Premium

$2,505,729.64

15%

$1,852,881.36

11%

$12,528,648.21

74%

Expected Claims

Fixed Cost Expenses

Contribution to Reserves

Estimated Costs for a Health Insurance Cooperative for McHenry County and Municipalities Cost Estimates Show a 7.81% Decrease in

Overall Premiums from 2005 to 2007 $16,887,259.21 for 2007 versus

$18,317,104.92 in 2005 ($1,429,845.71 less than organizations paid as a whole in 2005)

Savings achieved through maximizing economies of scale and shared administrative expenses among a large group

Long-term savings can be achieved by focusing on disease prevention and wellness programs

Potential Obstacles Blue Cross / Blue Shield will not lease access to

their network to cooperatives with organizations that have fewer than 151 employees

Fear of Change- Employees Resistant to Change

How to Deal with Union Contracts

Concept may be viewed as a vehicle to permanent decreases or zero increases in premium costs, which may or may not be true

Next Steps March 21, 2007 at 10 am at the

Village of Fox River Grove Develop Strategy for Creating the

Cooperative Determine Timeline and Steps for

Cooperative Gather Demographics Draft Intergovernmental

Agreements Create By-Laws Select Providers Launch Program

Thank You