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HomeMy WebLinkAboutCOUNCIL - AGENDA ITEM - 08/11/2004 - PRESENTATION OF THE FINAL REPORT OF THE COMPENSATIDATE: August 11, 2004 STAFF: Rick DeLaCastro STUDY SESSION ITEM FORT COLLINS CITY COUNCIL SUBJECT FOR DISCUSSION Presentation of the Final Report of the Compensation and Benefits Study Performed by Gallagher Benefit Services, Inc. and the Ad Hoc Council Compensation and Benefits Committee. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED Resolution 2003-147 created a two-person Council Committee comprised of Councilmembers Eric Hamrick and Kurt Kastein and Resolution 2004-054 authorized the City to enter into a contract with Gallagher Benefits Services, Inc. The Council Committee and the Consultant worked with various members of City staff to generate a final report containing recommendations regarding employee compensation and benefits plans/programs. Each year City staff conducts a comprehensive compensation and benefits analysis to determine the prevailing pay rates and benefit practices among employers comparable to the City. This annual process has provided City staff with specific market information and has identified areas where changes or adjustments to the City’s compensation and benefits programs needed to be made. During the 2004-2005 budget process, Councilmembers expressed concern regarding a number of issues, including the level of employee benefit premiums, the established practice of benchmarking other employers to provide market comparisons for the City’s compensation and benefits programs, the Council-adopted philosophy of setting pay range maximums at the calculated market 70th percentile, among others. These issues have been addressed by the consultant, Gallagher Benefits Services, Inc. A final report has been submitted by the consultant that includes recommendations regarding employee compensation and benefits plans/programs. The final report findings are now being presented to City Council by Gallagher Benefits Services, Inc. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc 08/05/04 TABLE OF CONTENTS I. Executive Summary ......................................................................1 II. Compensation Analysis................................................................3 III. Benefits Analysis ..........................................................................8 A. Methodology ...........................................................................8 B. Findings.................................................................................10 Appendix A – Figures 1 through 12 Appendix B – Medical Plan Comparison of Benefits and Costs (Cities) Appendix C - Dental Plan Comparison of Benefits and Costs (Cities) G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 1 08/05/04 I. EXECUTIVE SUMMARY Gallagher Benefit Services, Inc. (GBS), in partnership with Lee & Burgess Associates, was retained by the City of Fort Collins to review the City’s market analysis and employee benefits practices. This report is intended to reflect the findings of our review. We want to thank the City’s HR staff for its support in obtaining data, providing insight into its current practices and responding to questions that arose during the course of our review. We would also like to thank Great-West Life for responding to our requests for information during our analysis. The highlights of our findings follow. Sections II and III go into detail, in response to each of the Deliverables identified at the onset of the project. General ¾ The combined benefits and compensation package was determined to be, overall, comprehensive, and generally speaking at or above the 70th percentile of the City’s peer group of cities. ¾ The peer group that has been established for benchmarking purposes is largely appropriate. However, some suggested enhancements relate to broadening the universe of comparison to introduce an increased perspective relative to local practices. Compensation ¾ Compensation practices are consistent with the market, in accordance with the City’s policy. ¾ The City has been consistent since the early 1990’s in its pay policies and practices track with respect to the benchmark cities in the front range that have the same influence. Benefits ¾ In general, the medical benefits are better than many of the peer group of cities, and very similar to many higher ranked cities within the peer group. In terms of plan design, the level of benefits was also generally in line with prevailing practices. ¾ Dental benefits, while on the surface are very comprehensive, effectively are slightly below average, relative to plan design. The reason is that, while the in-network plan design affords very comprehensive coverage, the actual size of the network is such that nearly two-thirds of claims are being incurred out-of-network. ¾ Contributions for employee only coverage were below the majority of the peer group (more expensive for the employees) but employee contributions on a composite (per capita) basis were lower than the majority. ¾ The peer group is overly weighted with cities in the Denver metro area, which distorts to some degree the comparison of benefits, while ignoring prevailing practices locally. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 2 08/05/04 ¾ Given the similarity in coverage among three of the plans, it is suggested that the number of plans be reduced from four to three. Further, some incremental plan design changes are recommended to increase differentiation between plans, and to add features consistent with evolving trends. ¾ Given the level of subsidization for dependent coverage, it is recommended that employee contributions for dependent coverage be incrementally increased. ¾ While there are a number of favorable cost management features in place, a number of observations are suggested to strengthen and broaden these initiatives. ¾ There are opportunities to introduce some additional employee benefits at little or no cost to the City. ¾ With the recommended/suggested changes, the City could realize estimated annual savings of nearly $765,000, when compared to current expenditures. A large majority of these cost savings would be realized initially through a transfer of these costs to employees, with some cost savings eventually to be realized through more rational utilization and reallocation of costs to other employers. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 3 08/05/04 II. COMPENSATION ANALYSIS COMPENSATION Lee & Burgess Associates, LLC was asked to review the City of Fort Collins’ compensation practices in relation to the market approach of its selected peers. Further, we were asked to conduct the review separate from the review of benefits, which is consistent with the City’s current policy concerning the treatment for the two major components of Total Compensation. We have completed the review specifically focusing on base compensation plans and practices throughout the twelve selected peer organizations and provide the following observations and comments in response to the City of Fort Collins’ inquiries. We have reviewed how the organizations address the market and establish pay plans. To conduct the review, we used a combination of direct peer organization contact and information provided by the City to review the practices of each organization. Our findings indicate that: ¾ Three municipalities target the maximum of the salary range as the control point for pay ¾ All twelve use the average or the median of their respective selected peer markets to establish the range structure • Seven use actual salary in the market to determine their “market guide” that is used as the basis for calculating the range structure • Five use either the midpoint or the maximum of the market ranges as the basis for establishing the range structure Additionally, we have sampled current range structures and actual base salaries within the twelve select peer Cities using a group of hypothetical benchmark positions that appear in most of the municipal settings. The positions sampled include 20 jobs representing Management, Administrative, Professional/Technical, and Trades job families/occupational categories. Based on the sample, our findings echo that of the City’s Human Resources Director--the salary range structure, which has not been adjusted since 2002 has slipped from representing the 70th percentile of the selected market to points ranging between the 60th to the 65th percentile depending on the classification or position being analyzed. However, salaries have not slipped that dramatically–they range between 90% and 100+% of the 70th percentile of selected peer salaries except for those positions that tend to move up and down in the market regardless of peers selected or the years reviewed. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 4 08/05/04 DELIVERABLES Compensation A. Comment on whether the selected market benchmark of 12 Cities and other employer data obtained from the Colorado Municipal League and Mountain States Employers Council surveys is appropriate and in keeping with best practices. The twelve peer organizations the City has selected as benchmarks of the Front Range Market are the organizations that influence the pay trends within the area. We would recommend consideration be given to adding the City/County of Broomfield and Boulder, Jefferson, Larimer, and Weld Counties which have become key geographical and economic influences in the Front Range market since the early 90’s when the City of Fort Collins chose its selected peer group. Certainly, use of the Colorado Municipal League and the Mountain States Employers Council published surveys are appropriate and in keeping with the practices of the City’s peer organizations. The key difference is that the other cities tend to utilize these resources as a reference to maintain their Compensation Plans during the 12 to 24 month periods between custom surveys that most retain outside resources to conduct. In other words, the City of Fort Collins’ peers revalidate the benchmark organizations as well as the benchmark positions used to survey the market about every two to three years using an outside resource. Best practice for the City, taking into account the highly competent professional level of its staff, would be to utilize an outside resource, at least, every three to five years to review and revalidate the Compensation Plan as a whole. B. Provide an overview of the benchmarking practices of 12 selected municipalities as well as other public and private sector employers the City may wish to compare it self with in the future. The approach and methods used by the twelve selected peer organizations to establish benchmarks are virtually the same as the City of Fort Collins. All include a core grouping of Front Range municipalities--all look to each other for annual compensation information. Seven of the twelve also include Counties and Special Districts to provide a stronger statistical base as well as to address geographical influences and specialized positions. Selection of the benchmark positions for comparison varies by selected organization. All use a significant number of positions (50 to 100 positions) that represent municipality-wide responsibilities to collect market data. Many of the comparisons are the same positions. The key difference between Fort Collins and its selected peers is that most of its peers conduct a custom survey using an outside resource on the average of every two to three years to revalidate the selected market, the benchmark positions, and to review the philosophy surrounding compensation. Among many of the peers, compensation and salary administration are viewed as evolving in response to the G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 5 08/05/04 organization’s needs that change on an ongoing basis. Some of those changes include new compliance requirements, new services, new levels of services, revised approaches to providing service, growth and change in the community that either expands or contracts employment, as well as other service and organizational related dynamics. C. Provide guidance on the manner in which the City should proceed in future benchmarking projects. Our recommendation, to the City for maintaining its compensation plan as currently designed and administered or should it change, is to continue to utilize the universally standard approach that it currently has adopted both to identify its market competitors as well as to identify those jobs within the market that serve as an indicator of pay within job families/occupational categories. D. Provide reasons why the City should or should not expand its market to include other local organizations in benchmarking. The question of whether the City should expand its market is better addressed by looking at the pluses and minuses associated with expanding. The pluses for expansion: ¾ Stronger data validation ¾ Expanded market knowledge ¾ More diversity of representation within the core competitive market The minuses for expansion: ¾ Complexity of plan maintenance increases ¾ Private sector organizations do not provide information readily without a private third party involved to maintain confidentiality ¾ Possible increased cost to maintain ongoing market information because outside third parties may need to be added E. Provide reasons why the City should or should not include regional or national data from survey sources other than the Colorado Municipal League, Mountain States Employers Council and the special surveys conducted by the City’s Human Resources staff. In our opinion, the answers to this inquiry are the same as our reply to “D” above. Further, regional and national data apply predominately to management and senior professional positions that tend to be relatively stable within this market as well as nationally. And, should recruitment or retention concerns surface, special studies within specific disciplines on a wider basis are much more efficient and accurate. F. Comment on the impact of setting the compensation targets at the 70th percentile of the market on the City’s ability to recruit and retain qualified employees. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 6 08/05/04 Retention: The ability to retain employees is supported by the City’s turnover, which has been averaging approximately 6% during the past several years. Six percent turnover in one year, let alone a series of years, indicates a high degree of stability within the organization. This contributes greatly to the City’s ability to maintain new employee related management and development costs at reasonable levels while investing in the continuing education of longer-term staff. Additionally, exit interviews with those leaving have not indicated pay as the reason for leaving. Reasons voiced include relocation, another job, and/or another job that has more career potential and related matters. Recruitment: It is our understanding that budget constraints have impacted the ability of the City to recruit during the past two years other than to fill position vacancies. However, depending on salary administration policies within the salary range, recruiting appears to be relatively as strong as retention. Recent job offers (2004), above entry level, have required pay into the range rather than providing the ability to offer the range minimum to hire the desired candidate. However, this is in keeping with most of the peer organizations because experienced candidates are tending more and more to move laterally between organizations rather than being required to return to entry level or salary range minimums with an employer change. G. Provide commentary on the competitiveness of setting the targets for compensation at the 70th percentile. Highly competitive. Setting targeted pay at the 70th percentile of the market with the range maximum as the control point is highly competitive and places the City as one of the leaders within the public sector (its group of twelve selected peers) as well as within some disciplines of the private sector. H. Provide an overview of the impact of using the calculated 70th percentile of the market to set pay range midpoints, as opposed to pay range maximums. The impact of using the calculated 70th percentile of the market to set pay range midpoints depends on how and what numbers are used to establish the 70th percentile. ¾ If the midpoints of the current 70th percentiles are used to establish midpoints – the results will be the same or virtually the same as using the maximum. Why? Because the midpoint of the current 70th percentile of the market is a calculated derivative of the minimum plus the maximum of the salary range. Midpoint should not, but often is, confused with market control point, which is determined entirely by each organization in support its own strategic requirements. Coincidentally, many organizations use the midpoint as the target market or market control point. For example: Within the City’s selected peer group, Lakewood uses the average actual salary for a given position within the market to establish the range midpoint/market guide. Using the (average actual salary) market guide, the range minimum and maximum are calculated to establish the pay continuum. The final step in Lakewood’s range design is the establishment of the “market G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 7 08/05/04 control point” that is the 75th percentile of the given range – not the 75th percentile of the outside market. ¾ If the 70th percentile maximums, which are currently used, are placed at the midpoint of the range – the costs will increase at all points within the range, assuming a continued 36% spread between minimum and maximum. Most importantly, those positions that are currently paid at the maximum will become eligible for an additional 18% in pay increases adjusted upward annually and the minimum cost to hire an employee will increase proportionately. This assumes that the minimum and maximum of a given range are calculated using the recognized standard formula for range calculation: Range Minimum is equal to the midpoint divided by one-half of the total range spread and Range Maximum is equal to range minimum multiplied by the total range spread. We currently did not develop an estimate of this impact. I. Provide recommendations for whether or not performance bonuses or other incentives for excellent performers would be appropriate. We would not recommend bonuses at this point. The City is currently in the process of refining its performance management processes, which will provide the basis for establishing incentive programs in the future. The introduction of incentives (lump sum awards) in the public setting tends to impact management practices as well as work climate and culture. When the City can address these components of the work environment as a complement to the performance management mechanics of policy and evaluation – then we would recommend consideration of incentive programs. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 8 08/05/04 III. BENEFITS ANALYSIS A. Methodology The following information is presented in order to provide an understanding of the data, tools and processes that were utilized to assess the various benefit related issues identified by the Committee. Data was gathered from a number of sources, including: ¾ The City’s HR staff: G Operational details relative to organizational characteristics, administration and financing G Census data G Plan provisions G Contribution rates G Various claims, financial reports ¾ Carriers: G Various claims reports ¾ GBS: G Benchmarking information from existing clients that are included in the City’s current peer group of 12 municipalities: • Aurora • Littleton • Longmont • Loveland • Northglenn • Westminster G Benchmarking information from other GBS clients in the Fort Collins area: • Colorado State University • Larimer County G General knowledge of the marketplace, including evolving benefit trends and strategies ¾ Survey results: G Each of the 12 municipalities that are not current GBS clients: • Arvada • Boulder • Englewood • Greeley • Lakewood • Thornton G Poudre Valley Schools G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 9 08/05/04 Tools and other resources that were utilized include: ¾ Normative/claims data from other GBS clientele ¾ Select information from other carriers relative to discounts in place at metro Denver hospitals ¾ Input from other consultants in our Denver office, regarding their experience with other public/private employers regarding various benefits benchmarking practices ¾ Proprietary actuarial plan valuation software The data, tools and resources were then utilized to perform a variety of analyses, and to conduct comparisons as to plan design and employee contributions. The survey data was supplemented with an internal survey of fellow GBS consultants, in order to obtain a broad cross-section of benchmarking strategies and techniques. Of particular importance to this project is the methodology employed to determine how the City quantitatively compares to the other cities in the peer group, relative to benefits. A summary of our approach follows. First, we collected plan design and employee contribution information from each of the 12 municipalities comprising the City’s peer group. As many of these cities (as is the case with the City) offer multiple options, we used the plan with the greatest percentage enrollment as the comparative plan. We loaded key plan design features for the applicable plan for each city into our proprietary software tool. A relative value for the level of benefits provided by each city, in comparison to that of the City’s most prevalent plan, was measured. We then compared the employee contribution, in monetary terms, for each of these same plans on two different levels. First we compared employee contributions for employee-only coverage for the most prevalent plan. Next, we derived a weighted employee contribution for the most prevalent plan, taking into account the employee contributions and corresponding enrollment levels for each coverage tier for the most prevalent plan. For example, for a city with a two-tier classification (i.e., employee only and family), we aggregated the employee contributions for each tier, added the totals, and then divided that figure by the total number of enrolled employees. In addition, we evaluated the employee contributions under each of these scenarios as a percent of total premium. Each of these analyses were conducted to identify for the City how it compares to its peer group on what we see as distinct strata. Then, in an attempt to make an overall comparison, we translated the relative level of benefits into an estimated percent of out-of-pocket costs, and then combined this figure with the percentage employee contribution on a per capita basis, to arrive at an overall benefit value. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 10 08/05/04 B. Findings a. Comment as to whether the market as defined by the City’s current practice is appropriate and in keeping with best practices. The market as defined by the City consists of the following municipalities: - Arvada - Littleton - Aurora - Longmont - Boulder - Loveland - Englewood - Northglenn - Greeley - Thornton - Lakewood - Westminster The above list of entities represents a reasonable cross-section of comparable cities. However, with the cost and delivery characteristics being substantially different in the metro Denver area, this group is disproportionately weighted with metro Denver employers. While cities provide a valid universe of comparison, benefits are often viewed in the context of local practices. This is particularly true in the case of public entities, given their visibility in the community. As such, it is suggested that the list be expanded to include two additional subsets of employer information, in order to incorporate, in a general sense, the practices of other employers. The first would consist of other larger public employers that represent key geographical and economic influences in the Front Range market. In addition, it is suggested that the City continue to access and evaluate published benefit survey information in order to gain perspective relative to prevailing and evolving benefit practices of larger private sector employers. We view these assessments as secondary to the municipality peer group, but relevant for three reasons. First, while there are a number of positions for which the City competes directly with other municipalities, there are other positions that are not unique to municipal governments, but rather are more broad-based across the community. Second, with public employers being supported by taxpayers, the point of reference in assessing the reasonableness of benefits is other local employers. Through a general inclusion of published private sector data the City will be able to demonstrate its awareness of, and sensitivity to, prevailing practices in the community. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 11 08/05/04 Third, as is discussed in greater detail later in the report, an unnecessarily comprehensive level of benefits can result in a disproportionate cost being absorbed by the City. This can occur when employees’ spouses elect coverage under the City’s plans, opting not to cover their dependents/themselves under another employer sponsored plan. b. Provide an overview of the benchmarking practices of other municipalities and private sector employers against which the City may wish to benchmark itself. In reviewing the benchmarking practices of the other municipalities in the City’s designated peer group, all twelve limit their direct comparisons to other public entities. Six of the twelve limit their survey universe to other cities, while the remaining six survey both cities and counties. Two include the State of Colorado as well. In addition, these employers in select cases survey other employers relative to distinct employee classifications. For example, some also survey certain utilities, library districts or other special districts. Finally, all of these cities cite the Colorado Municipal League and the Mountain States Employers Council as additional survey sources. For the latter, it is indicated that they include both public and private sector information in their assessment. From the private sector perspective, it is typical that corporations will benchmark against a variety of groups. First, they typically will attempt to assess their direct competitors. In addition, they will assess relevant published survey data (local, regional and/or national, depending on the nature of the organization’s operations). To provide some additional perspective, we drew upon the extensive experience of all of the benefit consultants at GBS. As of the preparation of this report, our Denver GBS office is staffed with eleven consultants serving over 200 health clients. The prevailing practice, generally speaking, is to position benefits practices with respect to their internal budgetary constraints, along with evolving trends in the local and national benefits arena. As such, employers gauge their plans/contributions generally against other practices, but rarely do we see a specific effort undertaken to quantitatively value and rank benefits against a peer group. Then, an assessment is made within a broader total compensation context, as to what benefit design provisions will be established, in light of direct compensation strategies and direction. Coupled with observed recruiting/retention pressures, direct compensation and benefits are then balanced, within budgetary constraints. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 12 08/05/04 c. Provide guidance on the manner in which the City should proceed in future benchmarking projects. It is our recommendation that the City continue to use the peer group as a component of its overall comparison, but to also include other larger public employers that represent key geographical and economic influences in the Front Range market along with published benefit survey information. Any attempt to quantify/rank the benefits programs should be eliminated. Rather, the City should strive to provide a level of benefits which, when considered in conjunction with your direct compensation philosophy, will assure that the City is providing a benefits program which is adequate to support the recruiting and retention needs of the City, and ultimately, its citizenry. d. Provide reasons why the City should or should not expand its market to include other local organizations in benchmarking. We would refer you to item a. above for our response. e. Comment on the impact of setting the benefits target at the 70th percentile of the market on the City’s ability to recruit and retain qualified employees. While benefits, and more specifically, medical benefits, are an important consideration for recruiting and retention, the level of benefits needs to be viewed in the context of total compensation. For example, if an organization strives to be very competitive in its direct compensation approach, it is not necessary to, at the same time, be very competitive in the level of health benefits. It is more important that the direct compensation and benefit levels complement each other. Otherwise, you can provide an overly comprehensive total compensation package. Benefits generally tend to be uniformly designed across the entire population, due to a combination of regulatory issues and administrative considerations. Conversely, compensation levels can be more customized to attract various employee segments. As such, it is difficult to provide comprehensive benefit packages for certain classifications without doing so for all employees. In addition, comprehensive employee benefits can come to be viewed as an entitlement, and therefore can lose the desired effect as a differentiator. In turn, increased pressure is placed on direct compensation. The level of benefits should also be considered in the context of the type of employees that are most crucial to be able to recruit and retain. For example, medical benefits are generally more important to middle-late career hires. However, by providing a comprehensive benefit package, at the expense of an attractive compensation package, it can inhibit the recruiting and retention of the younger segment, which also may be crucial. Further, as the cost of benefits G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 13 08/05/04 increases with age, such a comprehensive benefits package may not only limit your ability to recruit the younger segment, it also will drive up the per capita benefits costs, further straining your total compensation budget. Based on feedback from the City’s HR department, benefits have not been an issue at all in inhibiting recruitment, nor in retaining employees. Conversely, it could be argued that the richness of your benefits may inhibit employees that otherwise are not motivated to perform at desired levels from looking elsewhere for employment. Therefore, notwithstanding the methodology in targeting a given percentile for purposes of benefits, we believe that a reasonably competitive, but not overly comprehensive benefits package, coupled with an effective compensation strategy, will more rationally and effectively allow the City to retain and recruit qualified employees. Positioning both compensation and benefits at the 70th percentile of the market is viewed as more generous than necessary. f. Provide commentary on whether the City’s current methodology of setting the benefit value and required employee contributions at the 70th percentile is in keeping with best practices. We would refer you to item b. above for our response. g. Comment as to whether or not the City’s benefit plan provisions and required employee contributions are valued at approximately the 70th percentile of the market and show methodology for establishing the measurement. As discussed in the Methodology section, we have assessed the level of benefits and employee contributions independently, as well as on a combined basis. Benefit Value In comparing benefits, it is important to note that local market practices dictate not only the cost of benefits, but the design and delivery of benefits. For example, with increased competition in the Denver/Boulder metropolitan areas, more aggressive discounts have enabled plan sponsors to delay making more aggressive plan design changes, although plan sponsors today are consistently looking to increase cost sharing as a means to both contain costs and increase employee awareness. Further, with the presence of Kaiser in these areas, plan sponsors have been more successful in retaining more traditional HMO benefit designs, which historically have been more comprehensive than point of service (POS) or preferred provider organization (PPO) plans. Thus, some caution should be exercised in making comparisons to public employers in these areas. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 14 08/05/04 That said, Figures 1 and 2 reflect the relative benefit value for the most prevalent medical and dental plans in place at each of the benchmark cities, in relation to the City’s most prevalent plan. Based on the output of our proprietary actuarial plan valuation software, the City’s POS 1 medical plan had a value that fell below the majority of the peer group cities. The City’s comprehensive dental plan was comparable to the majority. It is important to note that, in evaluating the benefit value for the City’s comprehensive dental plan, we looked at the actual utilization relative to the underlying plan design. Specifically, while the in-network benefit compares very favorably relative to the peer group, nearly two-thirds of the utilization is outside of the network. As such, the value of the benefit was reduced when the lower level of benefit that is realized outside of the network was taken into account. Employee Contributions Figures 3 - 10 reflect the employee contributions for the most prevalent medical and dental plans using two different bases of comparison: employee contributions for single (employee only) coverage, and the weighted average employee contributions across all classifications of coverage (per capita). In turn, each of these categories have been measured in two ways: as an actual dollar amount and as a percent of total premium. For the City’s POS 1 medical plan, employee contributions were higher than the majority as an actual dollar amount for employee only coverage but lower than most on a per capita basis. Similarly, employee contributions to the dental plans were higher than the majority for employee only coverage and average on a per capita basis. When assessing employee contributions as a percent of premium, the City’s POS 1 medical plan was average with reference to employee only coverage but significantly higher than the majority of the peer group on a per capita basis. Employee contributions as a percentage of premium for the dental plan is significantly higher than the majority of the peer group but average on a per capita basis. Overall Valuation Figures 11 and 12 reflect the ranking, when the level of benefits and per capita contributions, as a percent of total premiums, are combined. The City’s POS 1 medical plan is shown to be average among the peer group while the City’s comprehensive dental plan had less comparative value to the peer group plans. There are other metrics that could be used as a basis for comparison. For example, a combined weighting, taking into account all medical plans, could be developed. However, by limiting the analysis to the most prevalent plan, we G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 15 08/05/04 essentially identified the “featured” plan, - i.e., the plan that was deemed the best overall value by employees. In summary, the City’s most prevalent medical plan is very similar to many of the plans it was compared to and we generally view the City as falling within a reasonable range of meeting its target. The City’s most prevalent dental plan, when effective benefit levels and employee contributions are taken into account, while generally comparable, fell below the majority of the peer group. h. Provide guidance on the steps the City might take in order to reduce the rates of future cost increases. A number of specific steps have been cited in items i. and j. Beyond that, the following are offered for your consideration. ¾ Move away from fixed copays and 100% first dollar coverage – by paying 100% of covered charges for certain services on a first dollar basis, and through fixed dollar copays for services such as office visits and prescription drugs, employees are insulated from the real cost of health care, and as such, are less likely to behave as an informed, engaged consumer. Further, the City’s costs are leveraged, compounding the underlying rate of increase in plan expenditures. This leveraging effect is best understood through an example. Assume a prescription drug costs $20 today, with a $10 employee copay. If the cost increases to $21 (5%), and the copay remains at $10, the cost to the plan goes from $10 to $11 – or an increase of 10%. Notwithstanding the above, by using fixed copays, any change that is made from time to time is more visible, and therefore, more problematic, in communicating with employees. ¾ Consolidate benefit credits – currently the City offers distinct benefit credits for medical and dental. As such, there is less employee flexibility as to the use of those credits, and more importantly, creates somewhat of an entitlement mentality for the respective benefit programs. The City may wish to consolidate these respective credits into a single amount. In turn, it would ease the sensitivity among employees to increased cost sharing, while empowering the employee to make more informed consumer-based decisions. For example, an individual might elect to waive dental coverage, and instead use the extra credits to support a higher flexible spending account contribution, in turn enabling the individual to opt for a lower cost medical plan with higher out-of-pocket expenses. The result is more choice for the employee, more efficient use of resources and increased consumerism. Within the context of the City’s credit methodology, we support the continuation of the partial cash-out of unused credits upon waiver of medical coverage. It is important, in order to protect the integrity of the self-funded G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 16 08/05/04 program, that the value of the cash-out upon waiver be restricted to a pro-rata share of the total credits available. At this point, the cash-out of $44 per month is viewed as being appropriate and consistent with best practices. That said, the City may wish to consider eliminating the cash-out upon waiver of dental benefits. If this were to occur, it would be logical to do so in conjunction with consolidating the medical and dental credits, as discussed above. ¾ Introduce some automatic indexing features – for example, the City could establish a policy and then communicate that policy to employees, whereby certain plan design elements will automatically be adjusted, as certain cost thresholds are reached. This not only takes the surprise out of plan design changes, but encourages employees to be more actively engaged in managing health care costs. ¾ Introduce salary-based employee contributions – while this does not directly impact the underlying costs, it is a way to ration limited resources based on affordability. As costs continue to increase, there is pressure to continue to offer coverage that is affordable. ¾ Wellness Program – The City currently administers a wellness program, and has proposed to enhance the program. We view wellness programs as a logical and appropriate component of an overall cost management strategy. This is especially true for organizations that have low turnover. In particular, a solid wellness program should have the following components: ¾ A health risk appraisal ¾ Follow-up counseling/intervention ¾ Educational/informational programs addressing key/prevalent risk factors, identified through both health risk appraisals and analysis of claims data ¾ Incentives for initial and ongoing participation ¾ Linkage with demand management and disease management programs ¾ Ongoing program reporting & evaluation Based on the outline of the proposed plan, it would appear that these components have been addressed. Care should be taken to assure ongoing program reporting and evaluation. It is unclear as to whether/how this program will be financed. It is important that adequate resources be budgeted to support these initiatives. Such costs might be addressed through reallocation of existing budgetary resources or through appropriation of additional resources. Cancer was the second leading contributor to the City’s medical claims in 2003, while accidents and injuries ranked third. Particular emphasis should be paid to these conditions in designing the wellness program. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 17 08/05/04 It is exceedingly difficult to quantify savings attributable to wellness programs. Over time, we would expect a well designed and administered wellness program to have a favorable impact on the rate of increase in health care claims costs. ¾ Evidence-based medicine/medical practices – the insurance industry is looking to encourage the use of evidence-based medical practices by the provider community. It is felt that such a movement will increase both the efficiency and quality of health care. Progressive insurers and network administrators are beginning to promote and educate physicians on the use of, and adherence to, evidence-based practices. Eventually, consistent compliance likely will be used as a factor in contracting with physicians. In discussions with Great-West Life (GWL), no formal initiatives have been undertaken in this regard. The City should include evidence-based medicine initiatives in its evaluative processes in the future when selecting/contracting with vendors. Further, it may be of value to eventually consider benefit differentials within future plan design, in order to encourage participants to use such providers. Cost Impact: It is premature to provide an estimate of potential cost savings. ¾ Surplus spending – it is our understanding that the City has established funding for 2004 at a level artificially less than projected costs, with the balance to be absorbed by reserves in excess of the City’s reserve policy. There are two consequences of note in this regard. First, the current policy, which calls for maintaining reserves for incurred but not reported (IBNR) claims costs equal to 10% of annual paid claims is less than what we generally observe, and less than what we would recommend. At that level, a worse than expected claims year is less easily absorbed, which can cause more dramatic changes in plan design or employee contributions than might otherwise be desired. We would suggest that the City establish a more conservative reserve policy. Reserves are typically established to cover liabilities that exist at any given time with regard to a self-funded program. These liabilities consist of two components: claims that have been incurred but not paid (commonly referred to as IBNR reserves) at any given time, yet which remain the responsibility of the City; and the corresponding administrative expenses that can be expected to process the claims. Based on the 2003 claims lag study provided by GWL, a reasonable estimate for the IBNR liability would range from 12.5%-14.5% of annual paid claims. The administrative costs associated with this liability might be expected to range from 3%-5% of annual paid claims. Thus, minimum reserves necessary to fully fund these “terminal” liabilities would need to range from about 16%-20% of annual paid claims. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 18 08/05/04 Second, while spending down surpluses to support ongoing program costs eases budgetary pressures in a given year, it compounds the effect of inflation in subsequent years, when surpluses are exhausted. For example, assume a projected cost of $100 for 2004, and assume actual funding of $90, with the remaining $10 being supported by surplus spending. In the next year, if costs increase by 10%, total costs will be $110. However, funding requirements, absent continuing subsidization, will increase from $90 to $110, or an increase of 22.2%. As such, it is recommended that the City reassess its reserving policy and current reserve position. Then, as part of its budgeting and forecasting for 2005 and beyond, a strategy should be developed that will enable the City to balance its funding, budgetary and employee needs. i. Provide a menu of cost containment options, including projected cost savings that the City could consider when addressing medical cost increases. Beyond the specifics identified in item j. below, the City may wish to consider the following: ¾ Continue to promote & expand disease management initiatives – with the demographics of your employees, chronic diseases and health conditions tied to lifestyle will be key contributors to health care costs. Disease management, which focuses on developing behaviors and lifestyles geared to managing current and potential disease states, holds a key to holding down future cost increases. These programs should be aggressively communicated and administered. Plan design differentials specific to given disease states, to the extent possible, might also be explored. In particular, in reviewing the leading diagnostic categories for claims utilization among City participants, musculoskeletal is the leading contributor to claims costs, which presumably would include lower back pain. Respiratory conditions was the fourth leading contributor to paid claims in 2003. Psychological/substance abuse claims were higher in 2003 than might be expected on average, accounting for 3.5% of paid claims. GWL currently offers disease management programs that address all of these areas. The City should proceed with discussions with GWL relative to how to strengthen the disease management focus. Further, the City’s wellness program should be designed to be sure these programs are coordinated and complementary. Cost Impact: We do not believe it is reasonable to expect immediate cost savings, but that future trends will be mitigated. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 19 08/05/04 ¾ Prescription drug – based on information provided by GWL, the provisions being passed along to the City relative to prescription drug benefits are less than competitive, in today’s marketplace. The discounts being received at both retail and through mail order are not in line with current competitive pricing. Moreover, no manufacturers’ rebates are being passed along to the City. The City, in conjunction with its upcoming renewal, should at a minimum seek to obtain more aggressive pricing for both retail and mail order prescription drugs, and to seek 100% pass-through of manufacturers’ rebates. GWL indicates that the City is realizing the effective value of contemporary arrangements through “offsets” that GWL is applying to the City's administrative service fees. Renewed fees should be requested under the current arrangement, but with a request for full transparency. In addition, a request should be made for a net pricing for administrative services, along with stand-alone PBM pricing. That would allow the City to assess the true costs and effectiveness of its administrative service fees and pharmacy benefit management (PBM) arrangement. If it is determined that the net arrangement is not competitive by today’s standards, the City should consider carving out PBM services and purchasing such services directly from qualified PBM vendors. Cost Impact: Assuming that the underlying cost for administrative services would not be affected, it is projected that overall annual savings of as much as $60,000 could be realized by securing more contemporary, aggressive PBM pricing. ¾ Higher stop-loss exposure – currently the City purchases re-insurance, limiting its exposure to $120,000 on any claimant during a plan year. In turn, the City employs a policy to maintain reserves equivalent to 10% of annual paid claims. Given the overall claims volume and size of the City, in general terms it is our view that this re-insurance level is possibly lower than might be reasonable from a risk management perspective. Given the fact that, on average, stop-loss re-insurers seek paid claims loss ratios of 65%-70%, for every dollar of stop-loss premium avoided, the City could retain and/or realize savings of 30%-35%. Given the above, the City may wish to increase its per claimant exposure. To offset this exposure, the premium savings could be used initially to increase reserves in a manner consistent with the City’s risk tolerance. Once this threshold is reached, the City then will realize savings, both through reduced premiums and through increased earnings on reserves. Cost Impact: The direct cost savings associated with reduced stop-loss re-insurance will depend on the ultimate coverage purchased. In addition, initially there may be no hard dollar savings, as the savings in premiums may be used to supplement existing reserves. That said, in general, the City could expect to realize retained savings of 35%-40% of every stop-loss premium dollar, taking into account fixed cost efficiencies and retained earnings. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 20 08/05/04 ¾ Treatment/accounting for other employer groups – various other related employer groups are included in the City’s benefits programs. It was indicated that the City’s policy is to administer benefits for these groups on a self-supporting basis. In addition, retirees covered under the City’s plans are similarly to be assessed rates that are self-supporting. For small groups (less than 50-75 employees/retirees), this is infeasible, in that there is no statistical credibility, based on claims experience. As such, in order to attempt to fulfill this policy, we would suggest that rates be determined for these groups, based on the group’s overall experience, but adjusted by the demographics (age & sex) of these participants. For the Poudre Fire Authority, there are enough employees to allow for statistically credible claims experience, to a degree. For a group of this size, we would suggest that the City experience rate the group based on its own experience, but establish a lower, internal stop-loss, or pooling point. As such, only claims up to this threshold would be attributed directly to the PFA, and claims over and above this threshold would be absorbed by the City. In turn, the City would assess a pooling charge as part of the PFA’s rates. This pooling charge would be retained by the City to supplement its reserves, thereby enabling it to absorb those claims that exceed the PFA-specific pooling point, but fall below the City’s overall stop-loss attachment point. Cost Impact: Over time, this should not have any cost impact. However, on an ongoing basis, it will allow the PFA to experience more stability in its rates, while still allowing the City to, within reason, retain its operating policy relative to these groups. j. Provide recommendations specific to the following: ¾ Should the City continue to offer four plan options? In general, for an organization of your size, offering four plan options is not unreasonable or inappropriate. However, in offering choice, care should be taken to assure that there is enough distinction between plans to suggest real choice. Plans typically can be distinguished by networks, plan design, cost or delivery system. For further perspective, see the following bullet. ¾ Which of the plans, if any, should be eliminated and why? While we do not suggest it is necessary to eliminate options, it is suggested that you consider eliminating POS 1. The pricing between POS 1 & 2 is virtually identical, and POS 1 participants would still retain access to identical benefits in-network, as well as an enhanced out-of-network benefit. We would not expect any real cost impact. At the same time, the City may wish to modify PPO 1 as follows. The modification would involve the introduction of a consumer driven health plan, which has gained popularity recently, both as a result of evolving trends and legislative development. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 21 08/05/04 Under a consumer driven health approach, employees are asked to take on increased cost sharing requirements through increased deductibles and co- insurance, while being provided additional information relative to the delivery, quality and costs of health care. It is felt that, by incorporating more significant, yet reasonable, financial requirements into the plan design, employees will be motivated to be more actively engaged in the health care consumption process, and that, over time, more prudent lifestyle changes and health care utilization will occur. This approach was further expanded through recent legislation. As part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Health Savings Accounts (HSAs) were created. An HSA is a portable, custodial account that can be established only in conjunction with coverage through a high deductible health plan (HDHP). An HSA can be funded with employer and/or employee funds, and unused account balances may be carried forward into future years, including retirement. As such, we would suggest that you consider modifying the PPO 1 plan as follows, in order to meet the HDHP requirement: G Deductible: $1,000 - applies to all covered charges (including prescription drugs), except preventive care, which would continue to be generally covered as under POS 1 G Coinsurance: 80%/60% (in-network/out-of-network), subject to an in- network out-of-pocket maximum of $2,500 (in-network) Based on current enrollment in PPO 1, it is projected that annualized savings of $54,000 would be realized as a result of these changes. The City could then use some/all of the realized savings to make a contribution to a corresponding HSA for each PPO 1 enrollee. The employee could then make additional pre-tax contributions (up to statutory limits) through salary reduction. If it is determined that this plan change is too dramatic relative to current PPO 1 enrollees, the City could retain PPO 1 and introduce a new option. In addition to potential short-term and longer term cost savings, this approach also has a second benefit. As mentioned above, unused account balances can be carried forward, to be available to offset future health care expenses. As such, it provides an automatic, tax-efficient means for employees to pre- fund retiree health expenses. This likely will be desirable for some employees, and also may enable employees to retire earlier than otherwise might be the case. Given how the City currently handles retiree health coverage, this could have a favorable impact on benefit costs (irrespective of potential compensation savings). As older employees retire, their corresponding claims costs will be removed from the active experience, and potentially replaced with the claims experience of a new employee, which on G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 22 08/05/04 average, would be expected to have a more favorable demographic risk profile. The City’s current practice of providing no direct or indirect retiree health subsidy policy is both reasonable and recommended, presuming it is not otherwise inhibiting more strategic human resource initiatives. In fact, the City may want to consider making PPO 1 (in its current state or as modified) the only health plan option available to retirees. This would serve to mitigate the degree of adverse selection the plan will experience with regard to retiree coverage. Adverse selection refers to the fact that in general terms, the more choice provided, the more a given individual will gravitate toward the level of coverage that best meets his/her personal conditions. This is counter to insurance principles, which call for the pooling of a wide variety of risks, such that premium can be collected from those with no/fewer claims in order to support those that have higher claims costs. ¾ Should co-pays, covered services, deductibles and coinsurance levels be adjusted, and if so, how? Include an actuarial costing of the potential plan impact. In reviewing the plans, we offer the following suggestions. These suggestions are based on comparisons with your current peer group, general market place trends and specific claims experience of the City. Medical G POS – beyond the potential elimination of POS 1, we offer the following: • The current office visit copays are consistent with prevailing trends • The inpatient hospital copay is reasonable • Outpatient hospital costs, including outpatient surgeries, accounted for nearly 20% of paid claims in 2003, approaching the 22.9% attributable to inpatient hospitalizations. We suggest that you subject outpatient surgery in both a facility and office setting to a 10% coinsurance. This will increase employee awareness as to underlying costs, and provide for a more dynamic plan design that automatically addresses cost inflation. Cost Impact: It is estimated that this will result in annual savings of approximately $140,000. • Convert the diagnostic lab and x-ray cost sharing from the current $15 copay to a 10% coinsurance. This will increase employee awareness as to underlying costs, and provide for a more dynamic plan design that automatically addresses cost inflation. Cost Impact: It is estimated that this will result in annual savings of approximately $135,000. • Increase the out-of-network deductible from $200 to $400. Cost Impact: The immediate dollar impact is not material, but ensures that there is a meaningful incentive to remain in-network. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 23 08/05/04 • Overall, prescription drugs accounted for 19% of paid claims in 2003. This is a little higher than might be expected, in light of the fact that very few retirees are covered under the City’s plans. We suggest that you adopt the same provisions for prescription drugs as is currently in place for PPO 1 & 2, without the deductible. This will increase employee awareness as to underlying costs, and provide for a more dynamic plan design that automatically addresses cost inflation. This will also address a benefit disparity relative to an evolving class of specialty drugs, including injectables. These drugs can be very expensive and do not rationally fall within the current three-tier copay structure. Cost Impact: Initially, the savings are not expected to be material, and would be expected to approximate annual savings of $35,000. However, as costs increase, the magnitude of the savings will increase, when compared to a fixed copay plan design. G PPO – beyond the discussion as to modification of PPO 1, we offer the following: • Increase the in-network deductible for PPO 2 from $200 to $400 (along with a corresponding increase in the out-of-network deductible). Cost Impact: Estimated at savings of $24,000 annually. • Increase the in-network out-of-pocket maximum for coinsurance (excluding deductible) from $1,250 to $2,000 (along with a corresponding accommodation for out-of-network services). Cost Impact: Estimated at savings of $90,000 annually. • Cover preventive services as is generally the case under the POS plans. Cost Impact: It is estimated that in the first year, this would cost $50,000. We would expect that this number would drop incrementally in the next year, and then level off thereafter. Dental Given the significant percentage of out-of-network utilization, we suggest the introduction of a passive PPO arrangement for both plans. Under this approach, the City retains the value of negotiated discounts, but reduces the penalty for employees who are not able/willing to use network dentists. The plan design that we suggest, which is a blend of current in and out-of-network provisions, is as follows: ¾ Base plan ¾ Preventive services: 80% ¾ Basic services: 50% ¾ Comprehensive plan ¾ Preventive services: 90% ¾ Basic services: 80% ¾ Major services: 50% G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 24 08/05/04 Cost Impact: The cost for these changes is estimated at about $75,000 annually. ¾ Should the required employee contributions be increased and if so to what level? Medical Employee contributions currently are established to, in general, result in the employees paying 10% of the total premiums, regardless of tier. Due to a decision by the City to spend down reserves, the contribution rates are actually incrementally understated. So, in effect, employees are actually paying slightly less than 10% of the total premiums. As noted above, the City is reasonably competitive with regard to employee contributions for single coverage, in actual dollar terms. Conversely, on a weighted average basis, the City ranks high with regard to employee contributions relative to dependent coverage. This has two effects. First, the direct cost to the City is higher, given the higher contribution. Second, with the comparatively low cost for employees to cover dependents, the City covers a disproportionate number of dependents, when compared to other employers. For example, 73% of City employees enrolled in the POS 1 medical plan cover one or more dependents. Conversely, among the other peer cities, only one has a higher dependent penetration. We recommend that the City begin to eventually increase the percentage of dependent costs that are absorbed by the employee to somewhere in the vicinity of 25%-30%. This could be accomplished incrementally, to decrease the magnitude of the impact to employees. Cost Impact: By increasing the dependent portion of the employee contribution to 15%, we estimate an annual cost savings of $330,000. The cost savings at this level are essentially attributable to the shift of the contribution to the employee. However, as the percentage of dependent costs absorbed by the employee continues to increase, an additional savings will be realized, as fewer dependents (particularly spouses) are covered under the City’s plan, and instead establish coverage under another employer’s plan. We also would recommend that the same percentages of costs be borne by employees covering dependents under PPO 1. That is, employees would be responsible for 15% of the dependent portion of the premium. Cost Impact: Annual savings are estimated at $68,000. As the City revises its contribution strategies, it will also want to look at the underlying experience of each plan versus the corresponding price tags G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 25 08/05/04 assigned to those plans. It is important to balance funding requirements with price tags that will encourage employees to make prudent elections. For example, currently PPO 2 is being subsidized by PPO 1. It is important to determine if and to what extent this practice is desired and appropriate. Dental Currently, the City pays 100% of the premium of the basic dental program for all categories of coverage. Further, it pays 87.5% of the premium for single coverage under the comprehensive option, and 75% of the dependent portion of the applicable premiums. The contributions for the employee’s portion of the total premium is viewed as appropriate. We would suggest that the City consider a cost sharing for the dependent portion of the basic option using the same 75% cost sharing as is the case with the comprehensive dental option. Cost Impact: Annual savings are estimated at $7,900. Further, we would suggest that the City eliminate (at least prospectively) dental coverage as an option for future retirees, with current retirees to be grandfathered, if necessary. ¾ Is Poudre Valley Hospital allowing the most appropriate discounts? How could the discounts be increased? In contacting GWL, we were advised that the discount arrangement in place at Poudre Valley Hospital (PVH) is considered proprietary (a common practice among carriers). In order to arrive at an estimate of the discounts being realized, we analyzed claims data from 2003 and 2004 year-to-date. Based on our analysis, we are estimating that the City is realizing a discount of about 7% off inpatient charges and 5% off outpatient hospital charges. Based on our experience and claims data from our other clients with employees in the Fort Collins area, these discounts are comparable to those that have been negotiated by other payors/vendors. Notwithstanding the effective discount off billed charges, average allowable daily charges provides a more relevant basis of cost comparison. Using the data provided by GWL, we derived an estimated allowable daily charge for PVH of $3,488 in the eighteen months ending with admissions during May 2004. In comparison, we have observed an average allowable daily charge for Denver network hospitals of roughly $2,200 per day for 2004. Please note that this figure is a general weighted average cost for all facilities in the Denver metropolitan area and that it will fluctuate with the overall severity and intensity of care provided and also depends on the hospitals utilized. As a sole provider in the community, there is no competition that can be used to negotiate more aggressive discounts. Consequently, the City (directly, or through its carrier) can meaningfully expect to secure more aggressive pricing G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 26 08/05/04 only if additional volume can be offered, or if a reduced volume is perceived as a threat. Correspondingly, one option available to the City would be to threaten to exclude PVH from the existing network of providers, thereby resulting in lesser/no coverage for services. While there are a number of hospitals in the surrounding areas that would suggest that this is logistically feasible, it is likely to be impractical, both from a political and employee relations standpoint. Conversely, there may be some merit in exploring the alternative, whereby you can create a scenario where PVH stands to realize additional volume. According to the Great West Life information 64% of hospital charges and 71% of hospital days were incurred at PVH. On an annualized basis, this means that approximately $600,000 in covered charges might be expected to be realized by facilities other than PVH. As such, this may represent enough of an opportunity to encourage PVH to consider more aggressive pricing, in exchange for more of an “exclusive” arrangement. For example, through plan design, the City could adopt a 3-tier benefit structure, where a participant realizes the highest benefit available only if they obtain services from PVH, a lesser benefit at another network provider and the lowest benefit if completely out-of-network. To take this concept to the practical extreme, an exclusive provider arrangement could also be considered. PVH would be considered the only in-network provider, with the only exceptions being out-of-area emergency care, or in cases where PVH determines that it is appropriate and authorizes care at another facility through some form of referral process. The City would need to determine whether this is desirable from a philosophical and employee relations perspective. Further, at a fundamental level, there would need to be discussions as to administrative feasibility. Then, it would be necessary to enter into negotiations and conduct a cost benefit analysis to determine if, through a combination of increased discounts and plan design provisions, a net savings can be achieved and justified. k. Include an overview of how the City’s competitiveness would be impacted if recommended changes to the medical plans were implemented. How would the percentile be impacted? Based on the suggestions set forth above, we do not anticipate that any materially negative impact would be experienced, relative to the City’s ability to attract and retain employees. This assumes that the City offers a compensation package that appropriately complements the benefits program. Based on our findings cited above, the City generally would be expected to fall within the same general rankings. Further, depending on how the City proceeds in the future relative to its benchmarking effort, comparison to its current position may be rendered largely irrelevant. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 27 08/05/04 l. Provide a timeline/overview of how the recommended changes should be implemented. Generally speaking, we believe most of the changes suggested in item j. could be accomplished in anticipation of the 2005 plan year. This assumes that GWL could support the efforts relative to the introduction of the HDHP/HSA. Alternatively, all elements could be implemented except for the HSA, recognizing that employees still could pursue an HSA individually and realize comparable tax savings through personal tax return accommodations. The feasibility of implementing these changes for 2005 relies in part on the City’s desired approach. If it wishes to engage employees through focus groups, advisory committees, etc., this may prove more problematic. This ultimately is a function of the City’s philosophy and culture. Any provisions relative to network/plan design changes surrounding negotiations/partnerships with PVH are not viewed as feasible, in anticipation of the 2005 plan year. However, if such an effort is determined to be desired, the remaining changes should not mitigate or negate any efforts along those lines. Negotiated PBM improvements could be achieved for 2005. However, if competitive bidding for PBM services is deemed appropriate, that effort would need to occur in 2005, presumably to be effective in 2006. Regarding wellness/disease management programs, it appears that the efforts already undertaken would facilitate implementation for 2005. m. Outline changes or new programs that could be implemented with little or no cost to the City that would be seen by employees as favorable and would offset the increased costs to employees.repeat provision] There are a number of programs that the City may wish to consider or explore, as a way to provide additional benefits and added value to employees. Areas to consider follow: ¾ Public transportation/parking – the City currently provides free passes for employees who wish to use public transit. In addition, parking costs are subsidized for certain employees. Federal tax laws permit employers to allow employees to make salary reductions (up to indexed annual maximums), much like a dependent care spending account, and then to reimburse valid expenses with these pre-tax dollars. In turn, the City realizes incremental tax savings as well. The City should consider the introduction of these programs to supplement the degree to which funding does not fully meet the cost to employees for these expenses. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 28 08/05/04 ¾ Group home/auto insurance – a number of insurers provide group auto/homeowner insurance to be purchased through payroll deduction. The rates for insurance, while still specific to each employee’s individual circumstances, reflect discounts over individual rates for the selected carrier. Further, there is little in the way of additional employer administration required. Generally speaking, these programs realize fairly low participation. However, as there is no cost for the City, and little additional administration required, the City may wish to consider this elective benefit offering. ¾ Group pet insurance/discount programs – the City participates in a program called Work Options. A benefit available to the City’s employees through this membership is assistance for pet care, both in the form of veterinary discounts and referral services. It is our understanding that the City previously had offered this service to its employees, but discontinued it. Further, certain carriers offer voluntary pet insurance on a group basis. To the extent this coverage has been offered, observed participation has been very low. The City should consider reinstating the benefit available through Work Options. It also may wish to explore the potential for pet insurance to be offered to employees through payroll deduction. ¾ Group purchasing discount programs – it is possible, through certain vendors, to pass along volume discounts to employees for certain products/services. In particular, the City could extend volume discounts for computer equipment. Further, it is possible for employees to purchase this equipment on an installment plan, with installments paid through payroll deduction. These types of programs may be worth further exploration. ¾ Pre-funding retiree health – with the increasing costs associated with retiree health insurance, increasing number of employees are delaying their retirement, and are inquiring about ways to possibly pre-fund their future retiree health care expenses. A variety of vehicles exist that allow for the tax- efficient pre-funding for public employers. While the details of such vehicles and approaches is beyond the scope of this study, the City may wish to explore the viability of such an approach. In particular, notwithstanding additional employer expenditures, there may be value in exploring reallocation of existing expenditures. Examples of such expenditures might be unused leave and current pension contributions. G:\MEETING\SS 2004\0811\Benchmarking Report_1.doc Page 29 08/05/04 n. Provide an impact analysis, including detailed cost projections, from both taxpayer and employee perspectives, of any changes recommended. We have identified the estimated cost impact of various recommendations throughout our report. The following table provides a summary of recommended changes, along with cost impact, to the extent quantifiable. Recommendation City/Taxpayer Impact Employee Impact* PBM Negotiations $60,000 annual savings Dependent on cost sharing POS plan design change $310,000 annual savings $310,000 additional cost PPO plan design change $64,000 annual savings $64,000 additional cost Dental plan design changes $75,000 annual cost $75,000 annual savings Change in medical employee contributions $398,000 annual savings $415,000 additional cost Change in dental employee contributions $7,900 annual savings $7,900 additional cost *Does not include savings that employees can realize to varying degrees through provisions under IRC Section 125.