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November 2007

 

IDAHO SCHOOL DISTRICT COUNCIL

Statewide School Health Program Evaluation

 

Prepared by:

Bob Robinson

Chief Executive Office

Montana School Services Foundation

And

Actuaries Northwest

4570 167th Ave SE

Issaquah, WA 98027

425.643.8050

 

SWS HP Evaluation

The information contained herein is proprietary to the ISDC and Actuaries Northwest, and may not be copied or distributed without prior written authorization

November 2007

 

I. INTRODUCTION

The Idaho School District Council (ISDC) was formed to assist in the provision of affordable health care options to Idaho school employees through the Statewide School Health Plan (SWSHP). Since its inception over thirty-five years ago, the SWSHP has grown to provide coverage to over 100 public and charter schools with more than 35,000 members. 

The most recent renewal of the SWSHP resulted in medical premium rate increases averaging 15.7%, causing concern and frustration among the ISDC and many of its partners. As a result, the ISDC engaged Actuaries Northwest to evaluate their current health program with respect to:

• Strengths and weaknesses of the current program
• Areas of cost concern as well as plan efficiencies
• Program options to eliminate or add to help control premiums
• Strategies to increase the influence of the council governance structure
• Program options to enhance wellness and illness prevention

This report provides an overview of the existing health program, as well as analysis of numerous aspects of the program including benefit plan design, cost trends and pricing, and council governance. It incorporates membership, premium and cost data provided by Blue Cross and the ISDC staff, particulars of school district programs in other states, information obtained through interviews with key stakeholders, and current industry benchmarks. 

The final section presents findings and considerations available to improve the effectiveness and efficiency of the health program.

 

II. OVERVIEW OF THE CURRENT SWSHP

The Idaho Statewide School Health Program provides medical, dental, life and other benefits toschool district employees throughout Idaho. The Idaho School District Council (ISDC) acts on behalf of the school districts to contract for services and provide input with respect to strategic direction and renewal rating activities.

The SWSHP is administered by Blue Cross of Idaho, and has been since inception. Blue Cross services include enrollment and eligibility administration, benefit plan design, claims adjudication, prospective and renewal underwriting and rate development, case and disease management, and member communications. They also provide periodic reporting to the ISDC and member school districts.

The current financial arrangement can best be described as a retrospectively-rated risk sharing arrangement between Blue Cross and the ISDC. Under this arrangement, both Blue Cross and the ISDC may be eligible to receive refunds or be required to make payments depending on the financial results for the plan year. This financial arrangement has been in place for the last six years; prior to that, it has existed as an Administrative Services Only contract and as a fully insured contract.

Marketing and account management functions are primarily conducted by Western Benefit Solutions and a group of independent Blue Cross insurance agents, with many of these relationships spanning a number of years. Their responsibilities include presentation of renewal rates, health benefit decision support, member issue resolution, and periodic meetings with school districts.

Strategic guidance and consultative support to the ISDC Board are currently provided by Blue Cross marketing, underwriting and actuarial staff, along with representatives from Western Benefit Solutions.

 

III. ANALYSIS OF THE CURRENT SWSHP

A. BENEFIT PLAN DESIGN COMPARISON

An initial step in analyzing the current SWSHP is to compare the current benefit plan offerings available to Idaho member school districts against current industry benchmarks, as well as with those offered to school districts in other states. This section examines the benefit plan choices available, and also evaluates each of the individual benefit plan components.

Benefit Plan Choices

Our first comparison involves benefit plan choices. The current program offers a multitude of benefit plan design options, which we divide into four plan types:

• Indemnity plans – are categorized into Basic, Buy up or Buy down programs depending on district choices regarding deductible, coinsurance, out-of-pocket levels and prescription drugs, with limited provider network restrictions.
• Preferred Provider Organization (PPO) plans – are categorized into Basic, Buy up or Buy down programs using similar criteria to the indemnity plans, with defined in-network and out-of-network benefits and providers.
• Managed care plans – consist of HMO or POS-style benefit plans with more limited provider networks.
• HSA-Qualified plan – is a federally-qualified high deductible health plan to be used in conjunction with a Health Savings Account.

The broad range of plan types enables school districts to match plan designs to their philosophy regarding benefits. PPO plan designs appeal to the majority of school districts with access to a large network of medical providers and various plan design options. The managed care plans appeal to those interested in more comprehensive benefits with a more limited provider network, and those wishing a copay structure for member cost sharing. Finally, the HSA-qualified plan appeals to those districts moving towards a consumerism strategy whereby employees have a greater influence in how their health care dollars are spent.

Based on data received from Blue Cross, school districts offering one of the Buy Up plan designs can offer other plan design options to their employees as well, provided it fits into their benefit philosophy. Offering employees a choice in health plans is a real benefit to both the school district and the member, as it allows the member to elect the plan best suited to their personal needs.

Because all plan options are offered through Blue Cross, the adverse selection risk associated with multiple options is reduced and can be accounted for in the pricing methodology.  The benefit plans offered to Idaho school districts not only provide a good range of plan types, but also a variety of design choices within each type. Based on our analysis, the number and variety of benefit design choices available through the SWSHP are as good as or better than many school district programs in other states.

 

There are a couple of items the ISDC may consider regarding benefit plan options. First, the growing number of uninsured families continues to cause concern across the country, and is especially an issue for school district employees. Some school health programs are offering a lower cost catastrophic benefit plan providing coverage to those unable to afford the available medical plans. The catastrophic benefit typically consists of a high deductible, reasonable coinsurance and out-of-pocket maximums, and some defined first dollar benefits. This benefit plan has been successful in other programs, as it offers peace of mind to currently uninsured school district employees at an affordable cost, and also adds typically healthy individuals to the pool.

Second, the dual option concept has been very successful, as it provides a level of choice of benefit plans to employees and a potential competitive advantage to employers. Given recent health care trends, the current buy up options required to participate in the dual option program may now be unaffordable to many Idaho school districts, making them ineligible for dual options; the ISDC should consider expanding the dual option program to all school districts, perhaps with some limitations regarding the maximum number of plan design options based on district size.

Benefit Plan Design

The next comparison involves a review of the benefit components offered within the medical plans, relative to other school district programs as well as current industry standards. Our focus is on the Indemnity and PPO plan types because they are the most prevalent among school districts, with some insights also provided for the HSA-Qualified plan; information for the Managed Care plan types was not available.

Below are the highlights of the analysis, with detailed information presented in Exhibit 1.

 

• Deductible / Coinsurance / Out-of-Pocket Limits – The benefit option matrix allows school districts a wide array of benefit plan choices with respect to deductibles, coinsurance and out-of-pocket limits, but also creates a significant level of administrative complexity. There are a couple of approaches to help reduce the complexity of the program:
• Identify those plan design components with limited or no enrollment, and “sunset” those components to prevent prospective groups from selecting those plans. Existing groups can be allowed to continue offering them to employees. Possible options may be the $100 deductible and $500 out-of-pocket limit. When identifying these, it is important to ensure a full range of choices remain available.
• Consider creating a defined set of benefit plans instead of all possible permutations available through a benefit matrix. These benefit plans could cover most or all of the existing designs in-force, but would help ensure sound relationships between plan design components and also control growth in the number of plans.
• Mental & Nervous Benefits – Many of the current plans contain limits on inpatient days and outpatient visits with respect to mental & nervous benefits. Many other plans have moved towards annual and lifetime dollar limits instead, as they provide better long-term control of medical trend.
• Emergency Care Benefit – Due to the high cost of emergency room services, many plans include an urgent care benefit with member cost sharing levels similar to an office visit.  This provides an incentive to reduce unnecessary emergency room utilization, often resulting in savings to both the patient and the plan.
• Physician Office Visits – The flat dollar office visit copays help patients budget for these services; however, the ISDC needs to continually monitor the level of patient cost sharing and ensure the flat dollar copay is appropriately adjusted to reflect medical trend.  Because of this, many other plans have moved back to a coinsurance arrangement for office visits.
• Diagnostic Services – Diagnostic and laboratory services are vitally important in early detection and prevention of disease, but their costs have been increasing faster than any other service. To help reduce the financial barriers to patients, many programs provide a first dollar allowance ranging from $300 to $600 per year, before deductible and coinsurance.
• Wellness / Preventive Care – The recent focus on employee wellness as a tool to combat medical trend greatly enhanced the importance of these benefits. The SWSHP benefit is below current standards with respect to coverage for wellness and preventive care benefits in the following areas.
• Most plans are waiving deductibles and copays for annual physical and routine exams to encourage utilization of these services, and instead offering annual allowances ranging from $100 to $300 with no member cost sharing.
• Many plans have also expanded coverage around the types of diagnostic screening and benefits available, often offering them at no or minimal cost to patients meeting age, gender or diagnosis-related criteria. Examples of these include colonoscopies and sigmoidoscopies.
• Prescription Drugs – The current SWSHP prescription drug plan is due for an update.  The vast majority of plans have moved away from the two-tier copay structure, with matching copays for retail and mail order prescriptions. Current prescription drug plan components include:
• Three-tier or Four-tier copay structures that separate prescription drugs into generic, formulary-brand, non-formulary brand, and lifestyle drugs.
• Copay-coinsurance hybrid plans that require members to pay a certain percentage of the prescription drug cost subject to a minimum and/or maximum flat dollar copay.
• Mail-order copays designed to have the member pay twice the retail pharmacy copay in exchange for three times the quantity or supply.
• Separate annual out-of-pocket maximums for prescription drugs, or annual benefit limits for lower-priced plans.
• Separate focus on specialty drugs, often with different member costs sharing and varying benefit levels depending on the supplier.
• HSA-Qualified Plan – The benefits under this plan follow the prescribed rules for a High
• Deductible Health plan (HDHP); however, there are a couple of items to note:  The individual deductible of $1,100 is the minimum level allowed for 2007 and 2008.  It is likely the minimum will be increased for 2009, which will require a change to this plan.
• The benefit summary shows wellness / preventive benefits being subject to deductible and coinsurance. The legislation for these plans allows 100% coverage for a broad list of preventive services, not subject to the deductible.

Overall, Idaho school districts have numerous choices of comprehensive benefits through the SWSHP, all with reasonable member cost sharing levels. However, there are elements that should be updated and revised to better align benefits with current trends and other similar plans. In terms of priorities, the wellness and prescription drug benefits should be addressed first, along with other minor benefit adjustments.

B. CLAIMS COST ANALYSIS

This section reviews historical financial results and analyzes recent claim cost trends in the SWSHP. Claim cost refers to the direct costs associated with providing medical services to a patient eligible for benefits under the program. Our analysis encompasses changes in the underlying population, comments on financial results, and a breakdown of trend components and cost drivers.

Population Changes

It is important to understand changes in the underlying population of the SWSHP, as it has a direct effect on claim costs. The tables below illustrate the key health insurance statistics. Our analysis uses point in time census data to compare plan years – the January census data for 2005, 2006 and 2007 represent the 2004-05, 2005-06 and 2006-07 plan years, respectively. The September 2007 census is our best estimate of the 2007-08 plan year.

Number of Employees By Status

	January 2005		January 2006		January 2007		September 2007
Status	# Ees	% Total	# Ees	% Total	# Ees	% Total	# Ees	% Total
Active	14,677	82.6%	15,033	82.3%	14,646	82.4%	14,765	82.1%
COBRA	96	0.5%	90	0.5%	95	0.5%	103	0.6%
Ret < 65	1,042	5.9%	1,134	6.2%	1,145	6.4%	1,209	6.7%
Ret 65+	1,954	11.0%	2,002	11.0%	1,893	10.6%	1,914	10.6%
Totals	17,769	100%	18,259	100%	17,779	100%	17,991	100%

Number of Members By Status

	January 2005		January 2006		January 2007		September 2007
Status	# Mbrs	% Total	# Mbrs	% Total	# Mbrs	% Total	# Mbrs	% Total
Active	27,411	87.8%	27,294	87.4%	26,296	87.5%	26,170	87.2%
COBRA	156	0.5%	151	0.5%	141	0.5%	155	0.6%
Ret < 65	1,314	4.2%	1,413	4.5%	1,402	4.7%	1,472	4.9%
Ret 65+	2,356	7.5%	2,368	7.6%	2,207	7.3%	2,219	7.4%
Totals	31,237	100%	31,226	100%	30,046	100%	30,016	100%

The two tables above depict the employee and member counts by status, with the following notable items:

• Total employee counts have grown slightly each year except for the 2006-07 plan year, due to the loss of Caldwell school district. We expect the population to remain stable given the current market share of the program.
• Pre-65 retirees represent a growing proportion of the total population, increasing from 5.9% of total participants in January 2005 to 6.7% in September 2007. This shift creates an overall increase in claim costs as these are older participants, and also increases the program loss ratio due to the implicit premium subsidy they receive.
• Unlike employees, the number of members has declined in each of the past four years from 31,237 down to 30,016. This also has an effect on claim cost as described next.

The following table presents some of the key population statistics needed to analyze health claim costs, split into active employees / COBRA and retirees, with findings below.

Key Population Statistics - Active Employees & COBRA

	Active Employees				COBRA
Statistic	Jan-05	Jan-06	Jan-07	Sep-07	Jan-05	Jan-06	Jan-07	Sep-07
Average Age	46.1	46.2	46.2	46.3	47.0	48.1	45.8	45.9
% Female Ees	72.9%	73.5%	73.8%	73.7%	81.3%	77.8%	68.4%	73.8%
EE Age/Sex Factor	1.29	1.30	1.30	1.31	1.39	1.41	1.33	1.35
Avg Family Size	1.87	1.82	1.80	1.77	1.63	1.68	1.48	1.50
Family Size Factor	1.57	1.54	1.52	1.50	1.45	1.47	1.33	1.31

• For active employees, there has been a slight increase in the average employee age and female percentage. These changes are reflected in the Age/Sex Factor, which is a measure of the relative cost of the population relative to an “average” population. This factor indicates that the active employees and their dependents in the SWSHP are expected to have claim costs 29-31% higher than an “average” population based on their demographic characteristics. While this seems high, it is comparable to other school district programs. The increase from 1.29 to 1.31 indicates higher claim cost trends related to general aging of the population.
• The average family size, or number of members covered per employee, is currently at 1.77, and is considerably lower than other school district programs. It has also declined from 1.87 in January 2005 to 1.77 in September 2007. This may reflect an increase in the number of uninsured dependents of school district employees, possibly due to affordability and current school district contribution strategies.
• Corresponding to average family size is the last item, which illustrates the effect of smaller family size on claims cost. Because fewer dependents are covered, we expect a reduction in claim cost measured on a per employee basis. The factor declined from 1.57 in January 2005 to 1.50 in September 2007.

Similar results for the COBRA population are presented, but have little effect on overall claim costs due to the relatively small and consistent number of covered participants.

Key Population Statistics - Retirees

	Retirees < 65				Retirees 65+
Statistic	Jan-05	Jan-06	Jan-07	Sep-07	Jan-05	Jan-06	Jan-07	Sep-07
Average Age	60.8	60.9	61.0	61.0	73.1	73.3	73.4	73.6
% Female	61.0%	62.8%	61.9%	61.8%	63.8%	63.7%	63.8%	64.0%
Ret Age/Sex Factor	1.88	1.88	1.88	1.89	2.69	2.69	2.69	2.70
Avg Family Size	1.26	1.25	1.22	1.22	1.21	1.18	1.17	1.16
Family Size Factor	1.24	1.22	1.20	1.20	1.21	1.18	1.17	1.16

The retiree statistics follow many of the same patterns as active employees, specifically the increasing average age and decreasing average family size. This creates a similar effect on retiree claims cost.

The population of the SWSHP has remained stable over the past few years, but does have some characteristics requiring attention. First, the effect of population aging should be accounted for in cost projections and renewal rate calculations. Also, the continual reduction in average family size may indicate a growing issue of uninsured dependents of school district employees, and should be addressed.

Historical Financial Results

A summary of the historical financial results are presented in Exhibit 2, using information obtained from the Income and Incurred Claims reports provided by Blue Cross. There are a couple of items to note with respect to the financial results:

• Retiree financial data was not available separately for pre-65 and 65+ retirees, so the financial results could not be split. These two retiree groups often have very different characteristics and financial results, particularly with respect to Medicare reimbursement, which could not be reflected here.
• Loss ratios for the retiree population are consistently lower than for active employees, and this difference has increased over the past three years. This could reflect an unanticipated premium subsidization of active employees by the retirees, plus potential overpayment by retirees in recent years.
• The results for the 2004-05 and 2005-06 plan years were significantly below the target loss ratio of 91%, while the 2006-07 plan year was above it.

While this aggregate information provides some general background with respect to claim cost, it is necessary to delve further into the underlying cost drivers to better understand claim cost increases and trend.

Cost Driver Analysis

To help understand changes in claims cost, it is necessary to analyze the underlying cost drivers affecting trends. Claim costs are affected not only by the usual medical trend components, but also due to changes in characteristics of the population and the benefits elected. The table below summarizes the change in claim costs by cost driver for the most recent two years, based on historical claims cost totals and evaluation of population and plan design changes.

	Active EEs/COBRA		All Retirees		Total SWSHP
Cost Driver	2004-05 to 2005-06	2005-06 to 2006-07	2004-05 to 2005-06	2005-06 to 2006-07	2004-05 to 2005-06	2005-06 to 2006-07
Base Medical Trend	8.5%	11.2%	0.4%	5.3%	7.8%	11.1%
Demographics Effect	1.2%	0.5%	-0.5%	-0.4%	1.2%	0.2%
Family Size Effect	-2.2%	-1.0%	-1.6%	-1.5%	-2.2%	-1.1%
Plan Design Effect	-1.1%	0.3%	-0.7%	-0.2%	-1.0%	0.3%
Total Medical Trend	6.2%	11.1%	-2.3%	3.1%	5.7%	10.5%

The table illustrates that overall trend is affected by numerous drivers, including:

• Base Medical Trend – underlying changes in utilization rates and cost per service, assuming all else is equal.
• Demographics – measures the effect on claim costs of changes in the age and gender mix of the population
• Family Size – measures the effect on claim costs due to variations in the number of dependents covered by employees
• Plan Design – measures expected changes in claim costs due to school groups and employees changing benefit plans.

If we look at the change from 2004-05 to 2005-06 for the active population, we identify the total medical trend of 6.2% is comprised of a base trend of 8.5%, an additional increase of 1.2% due to aging of the population, a reduction of 2.2% due to smaller family sizes, and a reduction of 1.1% due to school districts and employees electing less rich benefit plans.

Based on this analysis, we can see that the increase of 6.2% was materially reduced by population and plan design changes, and that base medical trend was actually much higher.

Looking at the most recent plan year, the SWS health program base trends are higher than other comparable school district programs, though it is difficult to compare them across states. The other cost drivers typically move depending on the rate increase – the higher the rate increase, the greater the reduction in family size and benefit reductions. This holds true historically for the SWSHP as well, and the 2007-08 rate increase will likely lower them even further.

 

Trend Component Analysis

Another technique to analyze claim cost changes is to evaluate changes in the two primary cost drivers of trend, namely utilization and cost per service. Utilization reflects the use of medical services, measured on a per member per year basis, which can be influenced by the ISDC and member school districts. Cost per service reflects the amount paid by the plan for each medical service provided, usually as a result of provider contracts negotiated by Blue Cross. Exhibit 3 contains a breakdown of these components for each type of service for active employees based on data obtained from the Blue Cross online dynamic reporting tool (data was not available for retirees). Below is a summary of the results.

Trend Components Analysis Summary (2005-06 to 2006-07)

Type of Service	Utilization Trend	Cost Per Service Trend	Total Cost Trend
Hospital Inpatient	4.6%	19.2%	24.6%
Hospital Outpatient	5.6%	-3.7%	1.7%
Physician	6.0%	6.4%	12.8%
Prescription Drugs	4.0%	7.3%	11.6%
Additional Medical(1)	6.6%	2.7%	9.5%
Other Medical(2)	9.3%	-7.9%	0.7%
Unknown	-94.3%	-84.7%	-95.2%
Total	5.2%	6.5%	12.0%

The overall trend of 12.0% differs from the 11.1% in the prior analysis due to the gathering of data from different sources, but does not affect the directional results of the analysis.

There are a few key results to discuss.

• SWSHP utilization trends generally range from 4% to 6% for the major types of service (hospital inpatient, hospital outpatient, physician and prescription drugs), with the highest increase in physician services. These utilization trend rates are considerably higher than national averages, even after accounting for aging of the SWSHP population. This result points to potential opportunities for the ISDC in plan design modification, wellness, member education, and health management to help control this component in the future.
• Though utilization trends are high, it is encouraging to see higher trends for lower intensity types of service (physician and hospital outpatient). Greater increases in physician and hospital outpatient utilization relative to inpatient hospital may reflect efforts by Blue Cross and providers to shift treatment to lower intensity settings, which can help reduce overall claims cost.
• The trends in cost per service are slightly higher than national averages, except for hospital inpatient services. The increase of 19.2% may be caused by shifting of lower intensity treatments to more appropriate settings, but more often reflects significant increases in hospital reimbursements as a result of new provider contracts with Blue Cross. It would be worthwhile to discuss this finding with Blue Cross to better understand the reasons for the increase.
• SWSHP prescription drug trends are above national averages and those of comparable school districts. Although pharmacy costs are by far the easiest component to analyze due to the quality and consistency of data, the amount and type of prescription drug data and reporting available through Blue Cross sources was minimal.
• The overall cost trend of 12.0% is above similar programs in other states, and is primarily driven by hospital inpatient, physician and prescription drug costs. However, note that it is in line with the Blue Cross trend estimate applied when determining the 2007-08 renewal rate increase.

Overall, claim cost trends have been increasing over the past few years due to a variety of factors, with current trend levels well above industry benchmarks. While Blue Cross can provide a significant amount of data through some excellent reporting tools, this information does not seem to be distributed to ISDC members on a regular basis. In addition, there is currently no mechanism in place to help the ISDC identify emerging cost trends and evaluate potential means to influence their effect on the program.

 

C. ADMINISTRATIVE COST REVIEW

This section reviews the current administrative costs of the SWSHP. For the purpose of this report, “administrative costs” refer to any expenses paid by the SWSHP that do not flow directly to the facilities, physicians or other entities providing care to its members. In effect, it is the complement to the true claim loss ratio. For the SWSHP, it consists of all payments made to Blue Cross other than reimbursement of medical claims, which is a broader definition than that currently used.

• Administrative costs encompass numerous types of expenses. For the SWSHP, our analysis categorized the non-claims expenses as follows:
• BC ID fees to administer the SWSHP (eligibility and enrollment, claims administration, communication materials, underwriting, etc.)
• Fees required to administer and meet notification requirements with respect to COBRA and HIPAA regulations
• Commissions paid to insurance brokers and agents
• BC ID contribution to general reserves, or profit

While insurance company profits are generally separated from administrative expenses for financial reporting, they are still considered a non-claims expense to the SWSHP; therefore, they are included under administrative costs.

To better understand the true administrative cost of a program, it is helpful to view the financial results from the perspective of the insurance company. Exhibit 4 illustrates the Blue Cross financial results based on information contained in the settlement statements and supporting documentation for the five years ending August 2006. The following table provides a summary of the results:

Plan Year	Net Premiums (000's)	Claims Expenses (000's)	Admin Fees (000's)	Admin Fees as % Net Premiums
2001-2002	$60,.825	$53,636	$7,189	11.8%
2002-2003	$69,321	$60,959	$8,362	12.1%
2003-2004	$79,882	$69,000	$10,883	13.6%
2004-2005	$85,054	$74,988	$10,066	11.8%
2005-2006(est.)	$91,503	$80,988	$10,515	11.5%
2006-2007	N/A	N/A	N/A	N/A
Total	$386,586	$339,572	$47,014	12.2%

Net premiums were calculated by netting out any year end settlement refunds received by the ISDC, and claims expenses were adjusted by the prescription drug rebates. The remaining premiums after claims expenses are considered administrative fees.

• Actual administrative fees represented between 11.5% and 13.6% of premiums. Over the past five years, administrative fees totaled just over $47 million, or 12.2% of premiums.
• The average administrative fee percentage is within the reasonable range of percentages for similar programs. School district programs partnering with Blue Cross in other states often run between 12% and 18% of premium costs. The MUST program in Montana is currently running well under 10%, but has a very different program structure.

Using membership information for the past two years, we can determine the average administrative expense on a per employee per month basis. The results are shown below.

	2004-2005	2005-2006(est>)
Administrative Fees	$10,065,601	$10,514,964
Total Employee Months	189,205	193,944
Admin Fees PEPM	$53.20	$54.22

There are two observations regarding these results; first, the annual increase in PEPM administrative fees of just under 2% is in line with other similar programs. Second, the PEPM fee of $54.24 is still within a reasonable range for peer groups of the SWSHP.

A major component of administrative costs is commissions paid to Western Benefits Solutions and the independent Blue Cross agents managing school district accounts. The table below illustrates commissions paid for the five years ending August 2006 in total dollars and as a percentage of net premiums, as well as the percentage increase from year to year. Note that this may not include consultative or other fees paid.

Plan Year	Commissions	% Premium	% Increase
2001-2002	$315,387	0.52%	N/A
2002-2003	$336,723	0.49%	6.8%
2003-2004	$398,887	0.50%	18.5%
2004-2005	$400,036	0.47%	0.3%
2005-2006(est.)	$457,517	0.50%	14.4%
2006-2007	N/A	N/A	N/A
Total/Average	$1,908,550	0.49%	9.7%

Although the percentage of premium has remained constant at around 0.50%, commissions have increased an average of almost 10% per year over the period. Many multi-employer programs are experiencing this due to the combination of significant premium rate increases and commissions based on percentage of premium. There are other methods to compensate brokers and agents that better align the expense with the services provided, including fixed fee, per employee, or percentage increases based on an index other than premiums.

To conclude, the administrative fees currently charged by Blue Cross are within reasonable limits compared to other similar groups. However, most similar programs base their administrative fees on a PEPM basis rather than as a percentage of premiums, since medical trend rates are not a reasonable foundation for administrative fee increases. Also, the commission structure could be reviewed to determine whether alternative compensation is available. It is important for the ISDC to understand the administrative cost components included, and ensure they remain appropriate and competitive.

 

D. RATING METHODOLOGY ANALYSIS

The ISDC looks to Blue Cross of Idaho to calculate premium rates for school district renewals and new business opportunities. The current renewal rating methodology process has two stages; the calculation of aggregate premium rates for the SWSHP as a whole, and the determination of rates for each renewing school district. In this section, we review and provide comments on both stages.

Aggregate Premium Rates

The first stage involves determining the required renewal rate increase for the entire SWSHP. The current aggregate premium rate calculation follows a standard actuarial rating methodology consisting of the following steps:

• Identify and aggregate SWSHP medical and prescription drug paid claim costs for the most recent historical twelve month period (“experience period”).
• Apply the expected medical and pharmacy claim cost trend for the period between the experience period and the upcoming plan year (“projection period”) to determine total expected claim costs for the projection period.
• Add the expected non-claims related expenses for the projection period, including administrative fees, to determine the total required premium for the projection period.
• Compare the total required premium for the projection period to the total premium for the current plan year to determine the required aggregate renewal rate increase.

This methodology is typical for a program this size, as it uses actual SWSHP claims experience to determine future expected claims costs. However, there are some questions to address regarding the aggregate rating methodology.

• First, there is usually a significant gap between the experience period and the projection period.  It is important to consider other potential changes occurring during this time beyond the medical and prescription drug cost trends. Changes in the underlying demographics of the group, changes in plan design elections, and historical trend rate adjustments can all affect the projected claims cost and should be accounted for in the renewal calculation.
• Although they are a component of the SWSHP medical benefit, prescription drug claim costs can behave much differently than the core medical benefit. Therefore, prescription drug costs are often calculated separately from medical with their own IBNR adjustment and trend rate.
• As noted earlier, the projected claim cost trend is a key assumption in any renewal rate calculation. For groups the size of the SWSHP, it is often helpful to have a better understanding of the underlying factors affecting the trend rate as well as a historical perspective on how close previous trend assumptions were to actual results.

 

School District Premium Rates

The second stage of the renewal methodology determines the required rate increase for each school district, keeping in mind that the total across all districts must cover the required aggregate renewal premium from the first stage. Based on discussions with Blue Cross and the information received, the renewal rate for a given school district is calculated using the following steps.

• Aggregate the historical premium and claim costs by district for each of the most recent three plan years, and adjust them to current levels by accounting for prior rate increases, claim trend rates, and pooling of claimants with annual claims exceeding $25,000.  Determine the loss ratio for each of the prior three years.
• Calculate the loss ratio for the current plan year, typically incorporating data from September through December.
• Calculate a weighted loss ratio for each district using the following weighting schedule:

Loss Ratio Time Period	Weighting
Current Plan Year	15%
Prior Plan Year	50%
Two Plan Years Ago	20%
Three Plan Years Ago	15%

Three categories of Board roles are shown, but existing member Boards can and do fall across the entire spectrum. Some key characteristics of each category are presented in the table below, with our opinion of the current ISDC Board noted with an asterisk. Note that member Boards can have characteristics across different categories.

Characteristic	“Endorser”	“Active Manager”	“Plan Sponsor”
Program Ownership	Health insurer*	Combination	Health Trust
Relation with Insurer	Customer	Partner*	Partner
Risk Arrangement	Fully-insured	Shared arrangement*	Self-funded
Vendor Contracts	Through health insurer*	Combination	Direct
School District Contracts	With Health Insurer*	With Health Insurer	With Trust
School District Relations	Insurer Agents/Broker*	Combination	Internal Staff
Influence in Program Direction	Little*	Some	Full
Decision-Making Authority	Minimal*	Involved in key decisions	Complete
Board Market Knowledge	Low*	Moderate	High
Board Time Commitment	Low*	Moderate	High
Need for External Expertise	Low*	Moderate	High

Internal Staff	Varies, but typically increases with Board involvement

• The first five characteristics relate to the underlying structure of the health program. With respect to program ownership, we describe the current SWSHP as “a Blue Cross of Idaho health program endorsed by the ISDC” rather than “an ISDC health program administered by Blue Cross of Idaho”. Our rationale for this stems from the fact that all school district contracts are with Blue Cross, all school district relationships are through agents and brokers paid by Blue Cross, and that all vendor contracts for services such as pharmacy benefit management and disease management are through Blue Cross. The telling fact is that the current SWSHP could continue to operate without the ISDC, under the auspices of Blue Cross.  It is important to note that this structure is similar to Blue Cross-sponsored school programs in many other states.
• The sixth characteristic reflects the management of the relationship between the program and the member school districts. Currently, health insurance account management is handled by Western Benefit Solutions and independent insurance agents, with little direct communication between the ISDC and the school districts. This corresponds to the “Endorser” category.
• The next two characteristics deal with the Board’s influence regarding program direction and key decisions. Our analysis indicates low levels of influence in both cases, consistent with the “Endorser” category. It appears that most of the suggestions, underlying analysis and recommendations with respect to directional changes are presented by Blue Cross and Western Benefit Solutions, and are essentially ratified by the Board. Likewise, key decisions regarding renewal rate increases are based on Blue Cross analysis and recommendations, with limited ability to negotiate by the ISDC. In essence, the role of the Board is to receive communications and ratify the decisions.
• Often, the Board’s influence is directly related to its levels of expertise and commitment.  The next characteristic reflects the usual level of Board insurance expertise under each category.  Health insurance is a complex and dynamic industry with a considerable learning curve, and most Board members already have full-time careers within the education system. With the transition to a new executive director and the introduction of board members new to the industry, the overall level of expertise in the ISDC Board is lower than it has been historically.  This places the Board at a disadvantage when negotiating contracts or renewal rate increases, or when asked to make or ratify decisions with sometimes limited information. Typically, this expertise grows with experience, but can be greatly enhanced with additional education. In addition, the ISDC Board does not currently have an expert “in their corner” to offer market knowledge, insights and suggestions. Most of the expertise is aligned with Blue Cross or Western Benefit Solutions, and these organizations have their own goals with respect to the program.
• The next characteristic, the time commitment of Board members, also affects its categorization. In our experience with similar organizations, the commitment ranges anywhere from eight to eighty hours per year for each member, including time spent at Board meetings.  It is primarily influenced by the complexity of the program and overall commitment to education and issue evaluation, and is usually more a reflection of historical Board involvement than the commitment of the Board members themselves. The ISDC Board currently falls in the “Endorser” category.
• The final characteristic relates to internal staffing. For similar organizations, the staffing level is driven by a couple of key factors: the sharing of responsibility for services between the Board and the health insurer, and the handling of these services internally versus through outsourcing. The current health program delegates many of the administrative, contracting and management services to Blue Cross and Western Benefit Solutions; under this structure, the ISDC staff of 1 ½ employees seems sufficient.

Based on these characteristics, the current ISDC Board primarily falls into the “Endorser” category.

Future Role

Our observations from the Board meeting and stakeholder interviews identified a desire by some members to increase the Board’s awareness and involvement in the health program. The underlying motivation seems centered on increasing its control and influence over the program, and also becoming a more informed consumer. If the Board considers increasing its role, it is important to define the level of involvement with respect to the characteristics above, and understand any corresponding changes in the commitment level of the Board members.

 

IV. FINDINGS AND CONSIDERATIONS

In this section, we summarize the findings and considerations discussed throughout the report, with a brief description of the reasoning behind them. There are a number of issues covered, so the Board will likely need to not only determine if action is required, but also which items should be addressed first.

Benefit Plan Design

• The SWSHP benefit plan offerings are as good as or better than school programs in other states. 
• Continuing reductions in the number of SWSHP dependents covered and the most recent rate increase may reflect unaffordable premium rates and/or school district contribution strategies.  To counter this, the ISDC should consider offering a catastrophic benefit design to all school districts.
• Dual option programs have been successful in enhancing choice among school districts across many states, but are only offered to SWSHP schools choosing a Buy up plan design. The ISDC should consider expanding the dual option program to all school districts.
• The ISDC should update their benefit plan designs to reflect current industry standards and trends. In our opinion, prescription drugs and wellness benefits should have top priority due to their effect on current and future claims cost.

Claim Costs

• The SWSHP member population exhibits similar characteristics to other school programs with respect to general aging and increases in the proportion of retirees. However, the current low level and declining family size is a significant issue that should be addressed.
• The claims loss ratios for the retiree population are considerably lower than expected, which creates a potential subsidy between the retirees and active employees. It also suggests the retirees, who often pay their own way, have been paying more than they needed to over the past couple of years.
• SWSHP medical trends are well above other school programs, with one key component being trends in utilization across all service types. The ISDC should consider available strategies to moderate future utilization trends.
• Trends in cost per service are higher than industry averages, especially for hospital inpatient and physician services. The ISDC should discuss the grounds for these increases with Blue Cross to better understand their effect.
• Cost trends for the prescription drug benefit were higher than other comparable programs. The ISDC should consider studying the underlying cost drivers and potential solutions to moderate future trends.
• The ISDC does not have a mechanism to identify and deal with emerging cost trends, and should consider options to accomplish this.

 

Administrative Costs

• Administrative fees paid to Blue Cross represent between 11.5% and 13.6% of premiums, which is within a reasonable range for similar Blues-administered programs in other states.
• For the 2005-06 plan year, administrative fees were calculated at $54.22 PEPM, which is reasonable for the services provided. The ISDC should discuss converting the administrative fee to a PEPM or PMPM basis, rather than as a percentage of premiums, to better relate administrative fee increases with the actual cost.
• Commissions paid to brokers and agents have increased considerably over recent years.  The ISDC should consider evaluating alternative compensation schedules to better equate the payments with the services received.

Rating Methodology

• The aggregate rating methodology employed is rational for a program of this size and is relatively easy to administer, but does not appear to consider all the factors necessary when calculating renewal rates. The ISDC should review the aggregate methodology to ensure it accounts for all relevant factors.
• Given the importance of the trend rate in the renewal calculation, the ISDC should request supporting documentation from Blue Cross on the development and application of trend rates used in renewal pricing.
• The ISDC should consider modifying the credibility weights used to calculate school district-specific rate increases. The current methodology does not appropriately assign credibility to the various sizes of school groups, often resulting in overstatement or understatement of loss ratios.
• Three tiers of rate increases do not provide enough differentiation in premium increases between school districts, creating unnecessary subsidization and limiting the renewal rate changes for the best and worst performing districts. The ISDC should consider increasing the number of tiers or exploring alternative rating methodologies.

Wellness and Population Health Management

• Blue Cross currently provides a wellness program to SWSHP members, and has just launched an enhanced wellness program for an additional fee. However, there is limited knowledge or awareness among the ISDC and the membership of this program. The ISDC should review the current program to enhance their understanding and identify additional opportunities.
• A population health management program can classify members within the “continuum of care”, and apply targeted programs to provide the most appropriate level of care at an effective cost. Blue Cross currently provides disease and case management services to SWSHP members, but does not appear to publish any reports documenting its progress or success. The ISDC should consider requesting more frequent and formal reporting with respect to these programs, and also identify opportunities to enhance its effectiveness.
• The demographics and corresponding illnesses of the SWSHP population suggest there is significant opportunity to reduce claims cost through wellness and population health management.

Council Governance

• The structure of the ISDC Board is similar to other school health programs with respect to Board structure and purpose. The ISDC may wish to consider increasing the Board member term from two to three years, given the complexity of the health industry and corresponding learning curve.
• The current SWSHP can best be described as “a Blue Cross of Idaho health program endorsed by the ISDC”, rather than “an ISDC health program administered by Blue Cross”.  This description is based on the contractual, account management, and vendor relationship attributes of the program, and is similar to Blue Cross school programs in other states.
• The role of the ISDC Board in the current program falls into the “Endorser” category. Under this category, the ISDC Board supports the program and participates in major decisions, but does not have significant management or influence over it.
• With the introduction of new board members and transition to a new Executive Director, the overall level of expertise in the ISDC Board is lower than it has been historically. This places the Board at a disadvantage during negotiations or making of key decisions. The Board should consider opportunities to educate Board members on key aspects of the program.
• The ISDC Board should consider having an expert “in their corner” to offer market knowledge, insights, and suggestions, as well as to ensure that program partners are performing as expected.
• The ISDC Board expressed a desire to become more involved in the management, direction and control of the program. In our opinion, this is an extremely worthwhile goal, but must be adopted with a strong understanding of the commitment and involvement necessary to attain it.

V. EXHIBITS

 

EXHIBIT 1: BENEFIT PLAN COMPONENT ANALYSIS