A couple weeks ago I mentioned that DeKalb’s financial consultants made recommendations for medical cost containment deserving of their own post.
Here it is, finally. Turns out it’s not just the recommendations after all and it’s very long, so grab a cuppa something and make the jump when you’ve got time to hang out for awhile.
Part I: History & Trends
I decided to recap so you can get an idea of the quality of stewardship of taxpayers’ money around here and maybe understand, if you don’t already, how the financial consultants’ advice might seem like a clear bright light in the middle of the Twilight Zone to somebody who’s been watching city government for a few years.
DeKalb has long offered healthcare coverage to its employees, but from 1993 to 2008 the city was self-insured, meaning staff made estimates for the coming year, put General Fund money and others’ contributions into a special fund, and paid claims directly.
Here’s who was covered, according to the FY2008 budget narrative (PDF p. 107):
The City provides comprehensive medical and dental coverage to its employees, their dependents, retirees and elected officials. Active employees pay two percent of their base wage for single coverage and an additional two percent for family coverage if desired (four percent total); retirees and elected officials pay reduced amounts for similar coverage.
(FYI, “employees” include DeKalb Public Library employees.)
FY2009 and ’10 budget narratives are more specific about retirees: They paid a flat $175 per month “premium co-pay” for single coverage or $460 per month to include dependents – even in the face of yearly increases in the costs of the program.
The miniscule “co-pay” — plus participation of retirees and dependents that the city was not contractually obligated to include — contributed to a huge unpaid liability. This liability was never published and perhaps not even calculated until the Government Accounting Standards Board phased in new rules for reporting retiree health coverage programs, AKA Other Post-Employment Benefits (OPEB). DeKalb first detailed OPEB funding progess in its FY2008 Comprehensive Annual Financial Report (PDF pp. 90, 115) and this was picked up by financial consultants Executive Partners, Inc. (EPI) in their report released May 2009. The unpaid liability at that point was $29.4 million, and the consultants warned it would continue to spiral upward “to infinity” if the city did not get it in hand.
The OPEB was not the only bad news at the time. In FY2007 the city’s Health Fund expenses jumped by $1.6 million, mostly driven by a sharp rise in claims; and the following year shows a similarly elevated expense level.
Since DeKalb did have coverage to protect against single claims of more than $100,000, the expenditure increases could not have been just about catastrophic illnesses. Factors included double-digit annual jumps in medical costs, the addition of about two dozen employees to the workforce (PDF p. 117) and a growing pool of retirees. Because revenues were already failing to meet projections, DeKalb could not cover the increases needed in employer’s contributions so, as you can see below, the large deficits ate up reserves.
The numbers come from annual budgets. FY2013 figures are estimates but the rest are actual.
Speaking of actual, DeKalb obtained actual health insurance through IPBC, the Intergovernmental Personnel Benefits Cooperative, in 2008. The benefits of membership to date, however, are unclear.
Here you can see graphically the huge FY2007 leap in expenditures. A new level of expenses was established from then on, as shown by the blue highlighting of the claims/premiums line. It was FY2010 when premiums replaced claims in the budgets.
I like to emphasize them not only because claims/premiums drive expenses the most, but also because changes to other expense categories make the total almost meaningless. For example, joining IPBC eliminated roughly $200,000-$300,000 in reinsurance and administrative costs, but wellness benefits and deferred compensation payouts have since been added to budgeted services, and transfers to and from this fund vary year to year.
I cannot explain the dip in contributions for FY2011 except to guess there was a miscalculation.
Did joining the cooperative tame claims? This is not possible to determine with the data available to me. Claims and premiums are two different things (though I do find it weird they match up in amounts during the transition) and costs are impacted by staff reductions and increases as well as actuarial science.
The bottom line, though, is that continued, significant yearly increases spell trouble for the city in the current local reality of flat-lined revenues. More efforts at cost containment are needed, and the financial consultants (yes, the same folks from 2009) have come up with ideas.
Part 2: Latest Recommendations
DeKalb is not in the same place it was when financial consultants Executive Partners, Inc. (EPI) presented their 2009 financial report and recommendations. Our town is not currently in budgetary crisis as it was then. However, according to this same team of consultants the city is headed toward another — within five years, they say — if it doesn’t adapt to the reality of zero growth in revenues for the foreseeable future.
I’ve covered some of the latest EPI recommendations here, here and here. Using the report presented at the June 11 council meeting (PDF pp. 83-92) and notes from the April 13 meeting video, I’ll summarize medical cost containment.
EPI’s Peter Burchard opened his presentation at the April 13 meeting with council by pointing out that DeKalb currently spends more on healthcare for its employees than it does on its water utility, and 3-1/2 times more than on the airport; it is also facing another 4-1/2 percent increase in premiums in the coming year. The report predicts that within 3-4 years DeKalb’s costs will jump another $1 to $1-1/2 million if the city fails to take aggressive action.
DeKalb has a broker (Gallagher Benefit Services) and a carrier/payor (Blue Cross-Blue Shield) through IPBC. EPI ran into a problem with them.
When asked, neither GBS nor BCBS could provide DeKalb with reports that describe how they are addressing contractual terms and the use of standard medical claim cost containment practices. We believe that these common industry reports are not available because GBS and BCBS do not perform a substantive and measurable medical claim cost containment service.
EPI suggests that Blue Cross pretty much just pays claims and passes on cost increases with little regard to what the customer must absorb – especially in the case of customers like DeKalb who are described as “too small to count.” DeKalb could challenge these practices by making the contractors responsible for doing what the contracts already say they are doing, primarily through renegotiating fees and tying payments to performance.
Burchard also contributed the startling statistic that 50%-90% of claims are processed incorrectly; even if reality lies at the lower end, it still yields fertile ground for cost containment opportunities. That goes ditto for catching waste, fraud and abuse (up to 30% of claims) and addressing the inappropriate use of emergency rooms (70% of ER visits are reportedly unnecessary).
Another area rife with possibilities is wellness, because according to the report 50%-75% of DeKalb’s health care dollars are spent on preventable, chronic conditions. Preventive medical screenings, disease condition management and smoking cessation programs are just a few examples of efforts that could pay off in savings.
Savings could total 5%-15% depending on what ideas the city decides to implement.
Key to the success of cost containment recommendations is conscientious, systematic leveraging of DeKalb’s membership in IPBC due to the united buying power of 65 municipalities and several thousand employee participants. In fact, EPI is urging DeKalb to take a leadership position in these efforts.
The consultants also suggest a dedicated focus on cost containment in the form of a part-time healthcare and wellness specialist under Human Resources. Done right, the specialist could more than justify his/her salary, just as the proposed procurement specialist could.
Part 3: Closing Comments
What I’d like to do now is bring this back around to the big picture. This is about more than saving some bucks on insurance.
DeKalb is in a bad rut. Its motto for at least a decade was “grow or die.” It became used to consuming a generous, sometimes even explosive yearly growth in revenues and it doesn’t know how to cope, much less thrive, in the current era of stagnation.
In 2009 and now, the consultants have tried to get DeKalb to think beyond the next budget to at least three years out and preferably five. Why? Well, one good reason is to counter DeKalb’s tendency to hire as many people as one annual budget allows without working out the results of several years of COLAs and Step raises and the increased costs of benefits.
Finding and maintaining the right size for our means would help stop the cycle of coming up short and having to abandon other needs such as capital investment and replacement of outdated equipment. There are also human tolls in the old model that we don’t talk about nearly enough.