Purpose

The Management Audit Committee directed program evaluation staff to undertake an evaluation of the state’s health insurance plan.  The Committee asked for a review of the plan to determine how employee costs compare to those of similar plans, and to determine whether the plan’s placement affects the state’s ability to offer a competitive plan.

Background

In 1967, the Legislature created the State Employees’ and Officials’ Group Insurance Board of Administration (EGI) and gave it autonomous authority to administer and manage a group insurance program.  Currently, the health plan insures approximately 24,000 individuals, including active employees and their dependents from the executive, judicial, and legislative branches of state government (52 percent); the University of Wyoming (19 percent); the state’s seven community colleges (10 percent); and retirees and their dependents from all of those entities (18 percent).  COBRA participants and Wyoming Community Development Authority employees and dependents complete the pool.

The EGI plan is self-funded, meaning the plan bears the financial risk of participant health care costs.  Plan funding comes from a combination of state and employee premium contributions that cover both the costs of claims and administrative costs.  The state makes a monthly contribution of $225 on behalf of each active employee.  Employees who insure their dependents pay an additional amount for family coverage, while retirees pay the full premium for the coverage they select.  In FY00, the state paid about $26 million in premium contributions; employees paid about $23 million toward premiums and an additional $14 million in deductibles and co-insurance.

The seven-member EGI board includes two gubernatorial appointees, the State Treasurer, the state’s human resources administrator, and three members elected by employees covered by the plan.  The board is responsible for all plan decisions, including premium levels, plan benefits, participant eligibility, and grievance resolution.  It employs a director and administrative personnel to manage the plan, and contracts with a private company to administer claims and with a benefits consultant for expert advice.  Total administrative expenses for the health insurance plan in 1999 were less than six percent of plan costs.

The EGI plan is considered a comprehensive major-medical plan with most expenses subject to a deductible, a co-insurance percentage, and an annual out-of-pocket maximum.  All prescription drugs require participant co-pays, which do not count toward the deductible or the annual out-of-pocket maximum.  Participants are free to choose their medical providers under the fee-for-service plan, but receive a higher level of reimbursement if they use network providers under the plan’s preferred-provider option.

Results in Brief

We found that EGI participants, particularly those with families, pay higher out-of-pocket costs than they would in comparator plans.  Facing these higher costs, employees may insure dependents (who are often younger and healthier) at lower cost elsewhere.  This means EGI does not receive premium income from those individuals least likely to incur significant medical claims, which in turn compounds the problem of higher costs for those who remain in the plan. 

We identified fundamental limitations in the EGI administrative structure, including a lack of policy direction, limited administrative resources, variable expertise, and administrative isolation.  These factors limit the board’s ability to undertake the analysis and strategic planning necessary to develop a plan design and funding approach that will address the problem of higher costs.

Principal Findings

EGI participants pay higher out-of-pocket costs than in-state and out-of-state comparator plans we reviewed, especially for dependent coverage.  For those who elect dependent coverage, annual out-of-pocket expenses can be as much as $6,400; an amount that is double what is paid in most of the comparator plans.  We identified several reasons why EGI participants pay more for health insurance, including a lower employer contribution, an older pool, and inherent limitations in the plan’s ability to manage costs.

Since plan costs are comparatively high, employees may be able to obtain dependent health insurance at lower cost on the private market or, if they are married, through a spouse’s plan.  We believe this is the primary reason the EGI pool is older and has fewer dependents than our comparator plans.  An older pool has a compounding effect:  it raises costs to the plan and increases average premiums, so eligible persons who are younger and healthier can obtain cheaper coverage on the private market.  When they leave the plan, the pool becomes less healthy, claims costs increase, and the cycle continues. 

We believe aspects of the plan’s design create disincentives for younger and healthier individuals to participate in EGI.  However, the EGI administrative structure is not positioned to address plan design issues and is unable to strategically manage the plan, as would be necessary to address the complex problems summarized above.  Statute assigns the board transactional duties, designed to keep the health plan solvent.  The EGI board performs these duties, but lacks the staff and information resources, policy direction, and expertise to identify and implement long-range strategies to improve employee benefits at stable costs.  Further, the plan’s organizational autonomy impedes the state’s ability to enact total compensation planning, which the Legislature identified as a goal in the 2000 legislative session.

Recommendation

We recommend the Legislature establish a strategic framework to administer group insurance.  The problems identified in our evaluation require a proactive solution, but limited policy direction, isolation, and insufficient resources and expertise diminish management’s capacity to address these issues.  To most efficiently address these structural weaknesses, we suggest disbanding the current autonomous policymaking board and creating a professional plan function within the Department of Administration and Information to manage the plan.  This structure would integrate the program with overall compensation planning and would facilitate policy direction from the Governor.  However, for the plan to operate strategically, plan managers, wherever they are organizationally situated, will also need to enhance administrative capacity and expertise.

Agency Comments

The majority of the EGI board members have no objection to the report’s recommendation.  They recognize that the employer must make decisions on the plan’s organizational structure.  Restructuring the plan has often been considered in the past, and the board believes it is appropriate to resolve the issue.

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