Legislature(2017 - 2018)HOUSE FINANCE 519
11/09/2017 01:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska's Fiscal Future by David Teal, Director, Legislative Finance Division | |
| Presentation: Potential Saving from Reducing Healthcare Inflation by Representative Paul Seaton | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
November 9, 2017
1:05 p.m.
1:05:44 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:05 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Kelly
Cunningham, Analyst, Legislative Finance Division;
Representative Paul Seaton, Presenter; Representative
Louise Stutes; Representative Sam Kito III; Representative
Geran Tarr; Representative Dan Saddler.
SUMMARY
PRESENTATION: ALASKA'S FISCAL FUTURE BY DAVID TEAL,
DIRECTOR, LEGISLATIVE FINANCE DIVISION
PRESENTATION: POTENTIAL SAVING FROM REDUCING HEALTHCARE
INFLATION BY REPRESENTATIVE PAUL SEATON
Co-Chair Foster reviewed the meeting agenda.
^PRESENTATION: ALASKA'S FISCAL FUTURE BY DAVID TEAL,
DIRECTOR, LEGISLATIVE FINANCE DIVISION
1:06:39 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced his PowerPoint Presentation: "Alaska's Fiscal
Future" (copy on file). He indicated that the model he was
presenting was not strictly related to SB 26 which was not
on the [special session] call. He clarified that it would
demonstrate the impacts of the legislation on the call. The
model was designed to indicate the amount needed in tax
revenue.
1:07:48 PM
Mr. Teal began with slide 2: "What has changed since last
year?":
A lot has changed since you saw the fiscal model near
the end of last session,
1. DOR updated the revenue forecast (beginning of
special session),
2. Followed soon after by OMB's update of its 10-
year expenditure plan, and
3. Last week, the Permanent Fund released their
revised its earnings projections.
Since revenue, expenditures and earnings are three
major drivers in the fiscal model, you may wonder how
the revisions affect the projections.
Because it doesn't do much good to look at projections
unless you know what you want the output to show, I
want to spend a moment discussing what to look for in
any scenario. Essentially, that is just a way of
asking what conditions make a plan a success.
1:08:14 PM
Mr. Teal discussed slide 3: "Defining Success (Governor's
Goals)."
Defining success is an individual choice, but it is
useful to review the Governor's goals:
1. Deficits don't have to be eliminated immediately,
but they must fade away before the projection period
ends
2. No unplanned draws from the ERA (another way of
saying the CBR [Constitutional Budget Reserve] is
not depleted, since we assume that deficits are
filled from the ERA when the CBR is depleted)
3. PF stays ahead of inflation
4. PFDs of at least $1,000
Setting individual goals will help determine whether a
plan works and, more importantly, indicate how a plan
can be modified to make it work better.
Co-Chair Foster relayed that Representative Louise Stutes
had joined the meeting.
1:11:20 PM
Representative Thompson spoke to bullet 3 (slide 3) and
noted that the legislature had not inflation-proofed the
corpus of the Permanent Fund (PF) for two years and was now
considering putting only 25 percent rather than 50 percent
of royalties into the corpus of the account. He wondered
what Mr. Teal's thoughts were regarding the approach.
Mr. Teal agreed and stated that inflation-proofing was
defined as moving money from the earnings reserve account
(ERA) into the corpus. For some people that was important,
as the corpus could not be spent and therefore its value
was protected. Others believed that it was not recommended
to move money to an account where it became untouchable. He
believed it was not a clear case. He opined that the PF
should be inflation-proofed to some degree. Whether or not
all the money needed to be placed in the corpus was another
question.
Mr. Teal continued to slide 4: "Fiscal Model Output:
Comparing Revenue and Expenditures in FY 18 and FY 19
Versions." He read from prepared notes:
Revenue is from the DOR October 2017 forecast,
1. and is generally slightly lower than the 4
percent decline scenario we used last year.
a. Listened to discussion in SFC and elsewhere
and concluded that several legislators
believe the fall forecast shows an increase
in revenue.
b. That is true; the DOR presentation to this
committee on October 30 showed a cumulative
increase of nearly $1 billion in revenue
from FY 19 thru FY 27 (compared to the 4
percent decline scenario)
i. But nearly half of that gain was in FY
27, which was not in the projection
period of last year's model.
ii. The FY 19 thru FY 26 revenue gain in
DOR's slide was $529 million.
iii. but the DOR spring forecast excluded
about $65 million annually from
insurance premium taxes. DOR corrected
that in the fall forecast. $65 million
times 8 years is $520 million. i.e.:
the gain in the revenue forecast is
attributable to a technical correction,
not to an increase in oil revenue.
iv. The model included the premium revenue
last year (and continues to show it).
2. Bottom line: the model-to-model cumulative
decrease from the spring forecast is about $54
million. That amount is only about $7 million
annually, which isn't going to be visible in the
model.
3. Note the change in revenue: down in early years,
and then switches to positives in the out years.
Expenditures
1. Slide 4 also shows that projected expenditures
are up a cumulative $934 million from the spring
model run.
2. Revenue and Expenditures combine to make up the
deficit; you can see how the deficit increased by
nearly $1 billion between model versions. More in
early years, less as tax credits are paid off.
(note that positive numbers indicate a larger
deficit)
3. The conclusion is that the fiscal situation has
deteriorated under the new revenue forecast and
spending plan. Although the situation makes it
more difficult to meet fiscal goals than it was
last year, the change is not large enough to
affect policy direction. Many people comparing
model output from last year to this year would
not notice a difference in the graphs.
1:20:20 PM
Mr. Teal continued, stating that the third revision
involved PF Earnings:
Commissioner Fisher explained to you that Callan
[investment advisors to the state] had recommended
that the PF use a lower rate of return than the 6.95
percent used last year. We since received the Sept 30
projections from the PF, which uses an anticipated
return of 6.5 percent. As with the DOR revenue
forecast and the OMB spending plan, the model uses the
PF earnings projection as the base case.
You may be tempted to overstate the impact of this
change--0.5 percent on $60 billion means reduced
earnings of $300 million. But FY 17 was a very good
year for the PF and the model now incorporates the
higher fund balances that resulted from those strong
returns.
Beginning with a balance of $52.8 billion at the end
of FY 16, a 6.95 percent rate of return less dividends
would have left a FY17 balance of $55.6 billion.
However, the reported balance at the end of FY 17
is $59.8 [billion], an increase of $4.2 billion over
the expected amount. A 6.5 percent return on that
extra balance generates $270 million. So earnings are
down $30 million annually rather than $300 million.
And remember, the rate of return affects the balance-
and the payout-in the long term, but the payout is 5
percent of the balance, and is a moving average that
takes a while to phase in. The updated model shows
payouts to government that are identical in FY 19,
grow to be $26 million higher in FY 23, then begin to
fade and go negative after FY 26 as the effect of the
reduced earnings rate overpowers the effect of the
higher beginning balance.
So, the impact of the changes in PF projections is
very small during the projection period. It is up a
cumulative $116 million, which effectively offsets the
$54 million decline in revenue.
The biggest impact of the lower projected earnings
rate is that it is more difficult for the PF to keep
pace with inflation if you choose a 5 percent payout
rate. That may or may not be one of the goals you set
for yourself.
Co-Chair Foster acknowledged Representative Sam Kito III in
the audience[BW1][DP2].
1:24:31 PM
Representative Ortiz asked about the downgrade from 6.9
percent to 6.5 percent and whether it reflected a
considerable correction in the market.
Mr. Teal responded that Alaska Permanent Fund Corporation
(APFC) was not setting variable rates. The corporation was
saying that the balance would average out to a steady 6.5
percent average, or half a point lower than the previous
year's projections.
1:25:50 PM
Representative Wilson asked if the fact that assets had
been liquified would mean that companies would see a
percentage drop since they had not invested.
Mr. Teal responded that if it were not invested, those
companies would not earn the 6.5 percent. It was
complicated. He mentioned an article by Brad Keithley [Oil
and Gas consultant and journalist] which talked about the
increase in statutory earnings. He agreed that if money is
pulled out of the market to make payouts, then there would
be a lower return. Angela Rodell [CEO, Alaska Permanent
Fund Corporation] had testified before the committee that
APFC could handle the payout without any reduction in
return.
1:27:24 PM
Representative Wilson remembered asking the question to
APFC when they had appeared before the committee. She
expressed concern about the draw and whether the drop in
percentage would have occurred had the money not been
withdrawn or whether it was due to a change in the market.
Mr. Teal replied that Callan's response had to do with a
10-year expectation. He suggested that it did not have much
to do with the potential double draw of the previous year.
1:28:32 PM
Co-Chair Seaton thought an explanation of the article by
Mr. Keithley would be helpful. He asked Mr. Teal to explain
it briefly.
Mr. Teal replied that the article reported that statutory
net earnings were up by a $1.5 billion in the current year
and would be up in future years. He noted that there was
some confusion as to why revenue would be much higher if
the earnings rate were reduced. He explained that Mr.
Keithley was examining statutory net earnings which are an
accounting construct and regarded only the realized
earnings and not the total earnings. The large gain was due
to the APFC's sale of investments in anticipation of the
double draw. Although the double draw did not occur, the
markets were up and the sale produced gains, which appeared
as realized earnings.
Mr. Teal clarified that realized earnings were only
important when considering the statutory formula for paying
dividends. Fifty percent of statutory net earnings go to
dividends. The formula would say that dividends were going
up, which would be true but in a percent of market value
(POMV) payout with a split going towards dividends,
statutory earnings are no longer relevant. It would mean
dividends did not go up. He remarked that there was
discussion of the state being able to afford higher
dividends, but this did not take into account the sizeable
deficit in the state treasury. The largest impact of the PF
expected earnings reduction was its ability to keep pace
with inflation. He illustrated that 6.5 percent minus 2.25
percent, which is the rate of inflation, gave real earning
of 4.25 percent. There was a current payout of 4.7 percent,
which meant that the state was trying to pay out 4.7
percent when the state was only earning 4.25 percent,
making it difficult to keep ahead of inflation.
1:34:18 PM
Mr. Teal explained slide 5: "No POMV Payout":
Shows a "no POMV payout" scenario. Can also refer to
the scenario as "status quo" or "no plan". Whatever
you choose to call it, it is worth spending a few
minutes explaining some underlying assumptions:
1. Expenditures
a. OMB Expenditure Plan is reflected in the lines
in upper left graph (with w/o dividends).
b. The FY 19 holes are already built into the OMB
plan, so no correction is necessary.
c. The model adds $50 million per year for
supplementals, which are excluded from the OMB
plan.
d. The plan is aimed at maintaining the FY18 level
of service, so
i. agency operations grow with inflation,
assumed to be 2.25 percent annually, and
ii. debt, retirement, and other statewide
items are based on best available
information, including a $35 million
reduction in retirement assistance for FY
19.
e. Note growth--dotted line (w/o dividends) goes
from $4.4 billion to $5.6 billion
f. Capital was steady at $180 million last year,
now starts at $225 million plus inflation
g. O&G credits are up about $100 million per year
in early years, but are gone after FY 25-see
the slight dip
h. Cumulative increase in expenditures from prior
model is over $900 million (thru FY 26) or
about $120 million per year
Revenue numbers are straight from the DOR October
forecast, and the PF projections-both the rate of 6.5
percent and the increased balance-are also reflected
in the base scenario. As you know, you can change
expenditure growth and many other assumptions if you
choose to do so.
The no payout scenario shows results very similar to
those of last year:
1. CBR depleted in FY 19
2. Continued deficits, often in excess of $3 billion
annually
3. We assume that deficits are filled with unplanned
draws from the ERA,
4. Unplanned draws deplete the ERA
5. high dividends and unplanned draws of $2.8
billion to $3 billion reduce the value of the PF-
not just real value, PF as a whole shows a
declining balance (of course, all ERA)
6. The important point here is: When the ERA is gone
(about ten years from now), dividends and/or
government no longer get the money they were
accustomed to.
Co-Chair Foster acknowledged Representative Geran Tarr in
the audience.
1:39:21 PM
Co-Chair Seaton spoke to goals. He wanted to ensure that
the system worked in a real-world scenario, and asked Mr.
Teal to apply a stress test to the model.
Mr. Teal replied that it was not exactly a stress test. He
relayed that 2008 and 2009 had been bad years for
investors. He explained that when running models, the most
recent ten years of earnings could be used which allowed
for some volatility in the earnings. Due to the two bad
years of 2008 and 2009, the ERA would come close to
vanishing. He continued that no ERA meant no payout and no
dividend. He surmised some who would say a dividend payout
must occur and that begged the question of how the state
would fund government without a CBR or an ERA, meaning the
state would be forced to take huge cuts in a fiscal year.
In a no-POMV payout scenario, [He pointed to the lower
left-hand corner of the chart where it read "Continued
deficits"] the CBR would be depleted in FY 19, and there
would be continued deficits from $2.7 billion to $2.8
billion reaching $3 billion annually, leading to unplanned
ERA draws. Mr. Teal pointed to red bars in the slide and
indicated that the state would continue to pay statutory
dividends. High dividends combined with unstructured draws
cause the actual balance of the PFD to decline. His
comments pertained only to the ERA, as the value of the
corpus cannot decline. The ERA would lose not just real
value [adjusted for inflation] but actual value.
Co-Chair Foster recognized Representative Dan Saddler in
the audience.
1:44:16 PM
Mr. Teal emphasized that when the ERA was gone - around
2028 - then the dividends and/or government would no longer
get the money they were accustomed to getting. He addressed
slide 6: "POMV Payout":
Slide 6 shows a projection under the Senate version of
SB26--planned payout of 5.25 percent in FY 19 and FY
20, and 5 percent thereafter, with 25 percent of the
payout going to dividends. I want to avoid calling the
scenario the Senate plan-it uses the new OMB 10-year
expenditure plan instead of reflecting the Senate's
intended spending path.
1. Deficits are filled by FY 27 (Goal 1 met)
2. Although the life of the CBR is extended, it is
depleted by FY 23
3. So we have some unplanned draws from the ERA
(Goal 2 not met)
4. PF does not keep pace with inflation-no surprise,
if inflation takes away 2.25 points of your 6.5
percent earnings, the real return is about 4.25
percent. A 5 percent nominal payout (4.7 percent
effective payout) is not sustainable. (Goal 3 not met)
5. PFDs are $1000 and growing with payout (Goal 4
met)
I am not saying the Senate plan fails to work.
Although this output shows unplanned draws from the
ERA and a PF that fails to keep pace with inflation,
remember that this is not the Senate plan; it is
simply the Senate version of SB26. The revenue limit
is disabled-it restricts the payout even when there is
a deficit, which simply replaces planned draws with
unplanned draws. That doesn't make any sense.
Note that the ERA grows despite the unplanned draws
and that the unplanned draws end as deficits begin to
shrink (and turn into a surplus in FY 27). That
indicates that the scenario is close to meeting all
four goals. For example, reducing expenditure growth
to half the rate of inflation produces a scenario that
meets all four of the Governor's goals.
That is the end of the slide deck. Altogether, the
three updates make it more difficult to find a
solution to our fiscal problem:
1. Revenue is down
2. Expenditures are up
3. PF Earnings are down (but that does not translate
to lower payouts for dividends and government during
the projection period thanks to a higher starting
balance).
A tougher situation is not good news, but I think you
can see that updates to the three primary drivers have
not changed the story the model tells.
That statement applies to the House and Governor's
proposals as well. Higher expenditures-including
dividends-in the House proposal require about $700
million in additional revenue to meet all four goals.
The Governor's new proposal-may want to call it the
compromise proposal to differentiate from the
Governor's original bill-occupies the middle ground:
it uses the same expenditure plan (OMB) and dividends
as the Senate version of SB26 (so about $400 million
per year lower expenditures than the House), and uses
an employment tax that generates about $320 million
annually to meet the goals.
There may be some disagreement on the assumptions used
to generate scenarios, but the mechanics of the model
are sound. That said, the model does not persuade
people to address the fiscal issue from the revenue
side or the expenditures side. It is not intended to
do that. Choosing a fiscal path for Alaska is not a
merely a calculation issue; it is a highly charged
philosophical debate.
From our perspective, there are several competing
views on what is right for Alaska. All parties are
trying to put Alaska on the right fiscal path; they
just disagree on what that path looks like. The
differences may not be easy to resolve, but there is a
common denominator in all three plans. It is virtually
impossible to meet the four goals without using
earnings of the PF. Unfortunately, we have now reached
the point that a sustainable POMV payout is not
sufficient to fill projected deficits without
increasing revenue or constraining expenditures.
You are not here to discuss SB26, but the model is
ready to help you evaluate the need for, and the
impact of, changes to policy or assumptions. Although
that often works better in small informal groups, I
have the model here and we can run through any changes
you wish to see.
Potential scenarios:
1. SB26 at half inflation (311,477)
2. House (House26, OMB+125, HB115) (254, 364)
3. Compromise (SB26 at OMB, with tax (257, 369)
1:52:53 PM
Co-Chair Seaton referenced a plan that would take half the
inflation rate. The scenario meant that every agency would
need to make a 1.25 percent cut in services it provided
each year. Every agency would have to cut to make up for
inflation. He asked for confirmation.
Mr. Teal replied that it was correct but worse than what he
had described. It would be true if everything increased at
the rate of inflation. He relayed that when there were
Medicaid costs and other healthcare costs increasing, the
money that would otherwise go to agencies would be
absorbed. He emphasized that as healthcare costs grew, less
headroom would be available for agencies. The agencies
would not get money at half the rate of inflation but might
end up with reductions. The attempt was to bend the
expenditure curve downward. Medicaid was a program that ate
a large portion of the budget. He thought it would be
interesting to look at other healthcare costs, such as
municipal employees, state employees, retirees, and school
districts. He reported that the Legislative Finance
Division (LFD) decided to look at how fast healthcare costs
were increasing. He emphasized that the presentation to
follow was not proposing a way to reduce healthcare costs,
but to look at the growth in them and how important it
would be to focus on reducing them.
1:56:58 PM
Representative Ortiz remarked that the capital budget
scenarios were embedded in the current model. He asked for
an explanation.
Mr. Teal answered that it was, starting at $225 million in
[FY]19 and growing at 2.5 percent annually from there.
Representative Kawasaki spoke to the capital budget and
deferred maintenance. He remarked that during the recent
20-year lookback it had emerged that in the previous 20
years the state had been unable to confront the issue of
deferred maintenance. He stated they were talking about
having a capital budget that was the smallest it had been
in decades. He asked whether Mr. Teal agreed that the
budget gap was understated.
Mr. Teal answered that deferred maintenance was a huge
problem facing the state that was not going away. He stated
addressing it required a long-term approach - it would not
be fixed in 5 years to 10 years. He thought it would take
$100 million to $200 million per year to make a dent in the
deferred maintenance backlog. He continued that the problem
was one body was looking at constraining expenditures,
whereas the House plan effectively said that it did not
like that vision of the future and preferred higher
dividends. The difference between the House and Senate
versions was about $175 million per year. Adding another
$125 million to the capital budget equated to an additional
$400 million in expenditures. In order to afford that
additional $400 million in expenditures, additional revenue
was required. The solution needed to be additional taxes;
it was the House plan and it worked. The surpluses would
mean that by the end of the period the PFD kept pace with
inflation and there would be no unplanned draws. The
governor's plan also worked and used the OMB expenditure
plan including the capital budget and would fill the
missing $300 million with employment taxes. He concluded
that the problem was that there were multiple paths to
success.
2:01:58 PM
Representative Kawasaki stated his concern was the existing
deferred maintenance. There had been capital budgets that
had averaged $500 to $600 million General Fund and as much
as $2 billion to catch up with things that had been left to
deteriorate. He underlined that a capital budget of $220
million which encumbers the federal match was only "duct
tape repair". He expressed concern that the fiscal gap was
being greatly understated.
2:03:09 PM
KELLY CUNNINGHAM, ANALYST, LEGISLATIVE FINANCE DIVISION,
shared that LFD had been looking at the increase of
employer healthcare contributions for AlaskaCare and GGU
[General Government Unit]. She addressed graph 1 titled
"Annual Health Insurance Employer Contribution Rates per
Employee" dated November 9, 2017 (copy on file). She
outlined that four groups had been examined among active
employees: active employees whose health insurance is paid
for with UGF such as AlaskaCare, University of Alaska, GGU,
and the Hay Group study from FY 12 along with studies from
the healthcare authority were extrapolated out for school
districts.
Representative Guttenberg asked if the division had
compared the actual benefits in the programs to determine
how comparable the programs were.
Ms. Cunningham replied that they had only looked at what
the employer contributions were paying and not what the
employee premiums were and did not factor in the plans.
What was shown was strictly what was coming out of the
treasury.
Representative Guttenberg suggested that the growth rate of
all benefits was different. He wondered if an analysis had
been done on what the plans included and their respective
growth rates. He spoke about individual choices of where to
focus the money or benefit.
2:07:13 PM
Mr. Teal answered that an analysis had partially been done.
The healthcare study talked about whether the premium was
worth what participants received. The state healthcare
plans were what one would expect; higher premiums meant a
better plan. He added there were more than 100 healthcare
plans for state employees. The school districts' plans were
unrelated - some had low premiums and good benefits and
others had higher premiums without comparable benefits. He
believed the administration would come forward with
something in this area. He relayed that LFD had not been
looking at the premium versus benefit or at the employee
portion. He pointed to graph 1 and noted that the
University's growth rate was substantially lower because it
shared costs with employees, who paid 18 percent of their
premiums. It seemed to work out that when sharing costs
with employees, the employees spent less as they were
sharing the co-pay. Mr. Teal suggested that if the total
expenditure curve were to be made to bend downward,
healthcare was an area to do so in. He clarified that the
graph was not offering solutions, only demonstrating the
need to slow the expenditures.
2:11:01 PM
Representative Kawasaki mentioned having talked about
lowering healthcare costs for ten years and having a
wellness plan without much effect. He wondered about the
growth curve of private health insurance.
Ms. Cunningham responded that she believed the premiums had
gone up 7 percent since the previous year.
Mr. Teal interjected that it was a complicated
circumstance. There were federal subsidies of health
insurance. He furthered that LFD had not looked at the
growth in the private sector healthcare costs but at
Medicaid and had been surprised to discover that the growth
rate for healthcare costs for employees was 50 percent
higher than the growth rate for Medicaid. He concluded that
it was cheaper to have employees on Medicaid than on state
insurance.
Representative Kawasaki asked if state retirees were
included in the red line [on graph 1] showing AlaskaCare.
Ms. Cunningham responded in the negative. The graph only
reflected active employees.
Representative Kawasaki asked what private employers were
paying and whether their rates were also increasing.
Ms. Cunningham responded that she did not have the answer
but would provide the information later.
2:14:03 PM
Representative Wilson asked whether the green line
[University] in the graph was only lower because the
employer paid less than the employee.
Ms. Cunningham responded affirmatively but added that the
University had simply contained costs better in the
preceding ten years. She added that they had started higher
and had been covering 85 percent of healthcare costs and
were currently covering 82 percent. The University had a
tiered system so that employees could enroll or opt out,
and spouses and dependents were not necessarily included,
making the plan more complicated. Other state plans covered
entire families and were managed differently.
2:15:29 PM
Representative Wilson remarked that Medicaid capped what a
provider received but was fairly certain the state did not
do so with state insurance. She asked whether this was part
of the discrepancy.
Mr. Teal responded that it was certainly an issue. He
stated that the state coverage was not without restrictions
but applied what was "usual and customary." The employee
would be billed, and the state would not be paying more
than what was "usual and customary" rates, which were still
approximately three times the allowable amount with
Medicaid.
Representative Wilson asked whether the state could not
make the same type of agreement with providers since it was
self-insured.
Mr. Teal responded that Representative Wilson's statement
mirrored what the studies on healthcare had concluded. One
study found that about $60 million per year could be saved
in the retiree healthcare drug program alone. Under that
plan, retirees would receive the same benefits, the federal
receipts would cover the amount, and the state would not be
forced to use general funds. Another recommendation was to
form a healthcare authority. The plan involved a large
group instead of the more than 100 plans currently in
place, to allow for more negotiating power. His intent was
to say that healthcare costs were increasing beyond the
pace of inflation. He suggested finding out what the
University was doing would be helpful. He thought there
would be a tremendous administrative savings in the
multimillions.
2:20:20 PM
Representative Wilson hoped the University would assist.
She spoke of a time when people flew to Seattle, shopped,
stayed in a nice hotel, received treatment and still saved
money. She suggested that if someone could have surgery in
Seattle for $1,000 compared to $4,000 in Alaska, someone
would be paying for it. She thought it was time for the
legislature to take some sort of action. She surmised a
healthcare authority could aid in establishing a cap on
spending.
2:22:10 PM
Representative Guttenberg thought there were two ways to
reduce costs in the current system. The first was to reduce
benefits and the other was to transfer the cost to someone
else, such as the example of the university healthcare
system described previously. The state had an 80-percentile
rule, in which it paid 80 percent of what was "usual and
customary." He underlined that there was no accountability
as to how the full amount was billed, and each clinic could
charge what it wanted. He noted that the prescription drug
managers, which had started out as a good cause, was
turning into a profit center. It came down to who the
premium was paid to, and everyone along the billing path
was taking a cut. The state would become the processor of
the paperwork. It was much more complicated than in the
chart. He suggested getting control of medical costs. He
noted that fewer people had medical insurance and costs
were going up. He thought all the committee was talking
about was how much the state paid for rather than quality
of care.
2:26:21 PM
Representative Kawasaki referred to graph 1. He asked about
negotiations.
Ms. Cunningham stated that the University did not
negotiate.
Representative Kawasaki asked about the other groups and
whether they did negotiate.
Ms. Cunningham indicated that most of the groups, including
AlaskaCare, had said costs should remain flat but had not
received information from the GGU. She expected it to come
down a little bit.
2:27:59 PM
Ms. Cunningham moved to slide 2 of her handout. She thought
the slide was self-explanatory.
Mr. Teal noted that the state was now spending about $400
million per year on healthcare costs. The costs would go
from $400 million to $600 million over the subsequent six
years if current trends continued. He reiterated that LFD
was not proposing a solution. He noted that it was not a
special session topic; however, in the model, if the
expenditures could be reduced, the deficit would be
reduced, as did the need for taxes. If the deficit could be
reduced it would reduce the need for a tax.
2:30:20 PM
Co-Chair Seaton appreciated the discussion. He noted that
in one of the models showed a 2.25 percent inflation rate
and asked whether it was reasonable to provide the 2018
level of services. He thought it did not.
Mr. Teal thought the Co-Chair's remark was a good
transition to Co-Chair Seaton's presentation.
2:32:25 PM
AT EASE
2:39:27 PM
RECONVENED
^PRESENTATION: POTENTIAL SAVING FROM REDUCING HEALTHCARE
INFLATION BY REPRESENTATIVE PAUL SEATON
2:39:39 PM
REPRESENTATIVE PAUL SEATON, PRESENTER, introduced the
PowerPoint Presentation: "Potential Savings from Reducing
Healthcare Inflation" (copy on file). He explained that the
presentation was looking at avoidable future costs the
state would incur if it did not take certain preventative
measures. He reminded the committee of SB 74 [29th
Legislative Session] calling for a healthcare authority
study. In August 2017, Foster and Associates [Mark A.
Foster & Associates (MAFA)] included the following in the
study:
"Alaska public employee health plan annual inflation 8
percent to 12 percent 2014 - 2016 continues to exceed
U.S. growth rate of 5 percent to 6 percent 2014-2016."
Co-Chair Seaton continued that the healthcare inflation
would absorb all the money from a 2.25 inflation adjustment
to the state's future budgets. He reported that the Alaska
Retirement Management Board (ARMB) 8.8 percent was applied
to the FY 17 pre-Medicare [medical claims cost to get the
FY 17 medical claims cost] (source: PERS Actuarial
Valuation as of June 30, 2016, excerpt on file). He noted
that the number was slightly different from the LFD figure
because it had focused on the portion paid by the State of
Alaska. He remarked that the projection included deflation
(e.g. FY 51 showed the number at 4.4 percent). He explained
that a similar situation had occurred in FY 04 pertaining
to the state retirement system. The actuary had projected
growth of 5.25 percent, with a decline to 2 percent after
FY 06 going forward. He detailed that the growth of 5
percent had not been sustainable because at a certain point
it would consume the entire budget. In recent years there
had been growth of approximately 8 percent, which was
consuming the budget; the state had not been able to
control the growth. The goal of the current presentation
was to consider ways to avoid some of the costs by changing
the inflation.
Co-Chair Seaton referenced slide 1 of the presentation
showing an epidemiology bulletin from November 2016 related
to rickets and healthcare in Alaska.
[BW5]2:44:18 PM
Representative Wilson noted that the Healthcare Authority
spoke about more power with larger groups. She asked
whether creating that group, such a school districts, would
involve writing statute.
Co-Chair Seaton responded that the Healthcare Authority
made a lot of sense. However, combining the entities would
need to involve leaving Medicaid out of it. He did not
recommend combining Medicaid. He thought there would be a
significant amount of benefits, but it would have to become
part of the statute. He thought offering incentives to
school districts and other entities was a better approach.
If they did not choose a uniformed plan, the entities could
pay more. He was concerned that the legislature may not
have a mandate to require adherence to a plan.
2:47:07 PM
Representative Wilson asked if there was a formula where
the state contributed a given amount per person for school
districts or unions. She wondered if it was a contractual
arrangement. She wondered if the costs dramatically
exceeded those paid by other states.
Co-Chair Seaton replied that the individual school
districts and the other entities made those arrangements,
whether through negotiations or other systems. He was not
aware of any formula. He indicated that within a school
district there was something like a silver, gold, and
platinum plan. The legislature would have to look at
something that would gain the required efficiencies.
Representative Wilson noted that she hoped the state could
afford future costs. She pointed to school districts which
were given a grant. She thought most grant money went to
teachers and supplies.
2:49:46 PM
Co-Chair Seaton turned to slide 2: "Blood Levels of Marine
Foods Marker and Vitamin D in Prenatal Alaska Native
Women." He pointed to the top of the slide that showed the
high markers for traditional foods such as marine mammals
and fish. The chart below in the 1960s and 1970s the
vitamin D blood levels were between 40 and 65 in the Native
population pre-childbirth. By the 1980s, changing the diet
lead to vitamin D levels becoming very depressed. Rickets
rates appeared at 4 to 5 times the national average. He
spoke of the skin exposure to the sun and 90 percent of
vitamin D being absorbed. He brought the issue up to show
that it was a problem in Alaska, the only Arctic state.
2:53:05 PM
Co-Chair Seaton advanced to slide 3: "Potential Future Cost
Savings for Alaska"
Estimated Health Care Cost Savings for Canada of
Raising Vitamin D levels above 40 ng/ml:
$12.5 billion or $344 per person year
Alaska Population: 741,800
Alaska Potential Cost Savings $255,179,200
Data source: Estimated economic benefit of
increasing 25-hydroxyvitamin D concentrations of
Canadians to or above 100 nmol/L. Grant et al.
Journal of Dermato-Endocrinology. 2016
Representative Ortiz asked why the costs in Canada were
half those of Alaska.
Co-Chair Seaton responded that Canada had a national
healthcare system. He noted that primary care was much more
available than in Alaska. Canada focused on primary care.
Representative Ortiz asked if primary care was another term
for preventative care.
Co-Chair Seaton replied that with a national healthcare
system it was easier to get a standard of care.
2:56:21 PM
Co-Chair Seaton discussed slide 4: "Major Healthcare Cost
Drivers." He noted that there was a new study, not included
in member packets.
• 57 percent of total healthcare expenditures in North
America in 2010 was diabetes-related
• Diabetes cost estimated to grow 34 percent between
2010 and 2030
• A meta-analysis review of 24 randomized control
trials showed that vitamin D supplementation can
significantly improve glycemic control
• A minimum 4000 IU/daily dose to bring vitamin D
levels to >40 ng/ml was recommended to improve
glycemic measures in type 2 diabetic patients
[Source] The Effect of Improved Serum 25-
Hydroxyvitamin D Status on Glycemic Control in
Diabetic Patients: A Meta-Analysis. Mirhosseini et
al. Journal of Clinical Endocrinology & Metabolism.
September 2017
2:59:03 PM
Co-Chair Seaton scrolled to the next study which confirmed
the benefits of Vitamin D on slide 5: "Type 2 Diabetes
Incidence in GrassrootsHealth (N=4,933) and NHANES
(N=4,078) Cohorts." The study compared to National Health
and Nutrition Examination Survey (NHANES) studies conducted
every three years, which included about 4,000 people. The
NHANES study showed a vitamin D level of 22 ng/ml and that
approximately 9.3 out of 1,000 individuals got diabetes.
The GrassrootsHealth study aimed at increasing vitamin D
levels to 41 ng/ml. He pointed to a 2.0 unadjusted amount
on the left of the graph, which represented the actual
number of individuals who had been diagnosed with diabetes.
Studies adjusted for "cofounders" such as smoking or a
higher body mass index (associated with type 2 diabetes).
After adjusting for the cofounders there was a 60 percent
reduction in the new cases of type 2 diabetes due to
increasing the vitamin D level above 40 ng/ml. He reminded
the committee that 57 percent of the total healthcare
spending in North America was related to diabetes.
Co-Chair Seaton reviewed the study on slide 6: "Health Care
Cost Avoidance - Example: Reduction in Opioid Use." He
indicated that when people came in for palliative care they
had less than six months to live and were given whatever
they needed to relieve pain. He reported that a couple of
years back the study had considered a correlation with
opioid use. The study had found that people with higher
vitamin D levels used less opioids. He provided details on
the study. He discussed the negative repercussions of
opioid abuse on quality of life.
Co-Chair Seaton clarified he was bringing up the issue
because opioid abuse was driving much of the medical,
correctional, and other costs in Alaska. He referenced the
lack in ways to address opioid addiction. He shared that an
additional study would begin shortly and would take two
years to complete. He was supportive of educating the
public that there may be something they could do on their
own to combat opioid consumption. He referenced a handout
showing six recent studies [on vitamin D and pain relief]
(copy on file). He noted that the last study had to do with
chronic back pain. He gave additional detail on the study
showing that individuals with chronic back pain had
experienced significant decreases in pain when taking
vitamin D. He noted that low back pain was a primary
disability impacting the workforce.
Co-Chair Seaton moved to slide 7: "What do we know about
Vitamin D?":
· D3 is more effective than D2
· Daily is better than weekly or monthly
· Monthly, quarterly, or annually is generally
ineffective
· Studies suggest 40 - 60 ng/ml is where disease risk
reduction occurs
· Over-the-counter supplements available for less than
$16 per person a year
3:07:50 PM
Representative Guttenberg thought that after age 55 people
were advised to take low-dose aspirin which is covered
under healthcare insurance. He asked if vitamin D was
covered in a similar manner.
Co-Chair Seaton reported that the Native health system
covered vitamin D testing and that the state of Alaska has
agreed to pay the cost of testing for vitamin D.
Representative Guttenberg asked whether the vitamin D
itself was covered.
Co-Chair Seaton replied that he had just been at a box
store that sold vitamin D in 5000IU for a year's supply for
$16.49. He noted that health fairs offered the vitamin D
for free. Doctor offices did not supply the vitamin for
free.
3:10:09 PM
Representative Thompson had been talking with a state
employee and had found out that their vitamin D was
extremely low. They had been issued a prescription by their
physician and it had been covered through state insurance.
Representative Seaton posed the question of how to get
Alaska to work towards the goal of taking something that
would contribute to avoiding costs. He wanted to see
Alaskans return to getting vitamins through diet. He
recounted his upbringing in southern California when
children were sent outside to make sure to get in the sun
and play outside. He mentioned campaigns that had led to a
rise in consumption of folic acid in pregnant women.
3:15:15 PM
Representative Wilson asked if it was possible for a
representative of Medicaid to present a spreadsheet to have
a better understanding why things were so different from
the current state insurance system. She asked if anyone
knew whether the state received its Medicaid certification
of compliance with the federal government. She expressed
concern that the state may be in violation.
Co-Chair Seaton thought there had been testimony that the
report would be ready at the end of the year. He added that
once that was completed the 75 percent reimbursement rate
for administration would recommence once certification was
complete.
Representative Kawasaki confirmed that he had heard from
the Legislative Budget and Audit Committee and confirmed
that the report would be coming out in December. He asked
if there was a way to distribute vitamin D on a voluntary
basis to state-owned facilities such as pioneer homes and
jails.
3:20:17 PM
Co-Chair Seaton responded DOC was currently administering
vitamin D to seniors and inmates on a voluntary basis.
There was a study that showed that there was a drop in
frequency of bone breakage.
Representative Kawasaki thought the state could provide
vitamin D to inmates on a voluntary basis.
Co-Chair Seaton answered in the affirmative.
Co-Chair Foster reviewed the meeting calendar.
ADJOURNMENT
3:25:42 PM
The meeting was adjourned at 3:25 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD 11 9 17 HFC Model HFIN.pdf |
HFIN 11/9/2017 1:00:00 PM |
|
| Potential Savings from Reducing Healthcare Inflation_finance presentation_Seaton_11.9.17.pdf |
HFIN 11/9/2017 1:00:00 PM |
HFIN |
| Vitamin D Opioid Reduction Handout- with letter.pdf |
HFIN 11/9/2017 1:00:00 PM |
HFIN |
| The economics of prevention_State of Reform 2017 Rep Seaton.pdf |
HFIN 11/9/2017 1:00:00 PM |
HFIN |
| LFD _HFIN 11-9-17 Health Insurance Employer Contributions for State and School Districts.pdf |
HFIN 11/9/2017 1:00:00 PM |
|
| Response to Reducing Healthcare HFIN Seaton 110917.pdf |
HFIN 11/9/2017 1:00:00 PM |