01/27/2006 09:08 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB374 || HB375 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
January 27, 2006
9:08 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
MEMBERS ABSENT
Representative Carl Moses
COMMITTEE CALENDAR
HOUSE BILL NO. 374
"An Act relating to establishment of a retirement benefit
liability account in the Department of Revenue and redirecting
deposit of annual dividends of the Alaska Housing Finance
Corporation to that account; and providing for an effective
date."
- HEARD AND HELD
HOUSE BILL NO. 375
"An Act relating to the retirement benefit liability account and
appropriations from that account; relating to deposits of
certain income earned on money received as a result of State v.
Amerada Hess, et al., 1JU-77-847 Civ. (Superior Court, First
Judicial District); and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 374
SHORT TITLE: RETIREMENT BENEFIT LIABILITY ACCT/AHFC
SPONSOR(S): WAYS & MEANS
01/17/06 (H) READ THE FIRST TIME - REFERRALS
01/17/06 (H) W&M, STA, FIN
01/20/06 (H) W&M AT 9:00 AM CAPITOL 106
01/20/06 (H) Heard & Held
01/20/06 (H) MINUTE(W&M)
01/25/06 (H) W&M AT 9:00 AM CAPITOL 106
01/25/06 (H) Heard & Held
01/25/06 (H) MINUTE(W&M)
01/27/06 (H) W&M AT 9:00 AM CAPITOL 106
BILL: HB 375
SHORT TITLE: RETIREMENT BENEFIT LIABILITY ACCT/PF
SPONSOR(S): WAYS & MEANS
01/17/06 (H) READ THE FIRST TIME - REFERRALS
01/17/06 (H) W&M, STA, FIN
01/20/06 (H) W&M AT 9:00 AM CAPITOL 106
01/20/06 (H) Heard & Held
01/20/06 (H) MINUTE(W&M)
01/25/06 (H) W&M AT 9:00 AM CAPITOL 106
01/25/06 (H) Heard & Held
01/25/06 (H) MINUTE(W&M)
01/27/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
MELANIE MILLHORN, Director
Health Benefits Section
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: During discussion of HB 374 and HB 375,
provided information and answered questions.
FREDA MILLER, Benefits Manager
Health Benefits Section
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: During discussion of HB 374 and HB 375,
answered a question.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:08:43 AM. Representatives
Weyhrauch, Gruenberg, and Samuels were present at the call to
order. Representatives Rokeberg, Seaton, and Wilson arrived as
the meeting was in progress.
HB 374-RETIREMENT BENEFIT LIABILITY ACCT/AHFC
HB 375-RETIREMENT BENEFIT LIABILITY ACCT/PF
9:08:55 AM
CHAIR WEYHRAUCH announced that the only order of business would
be HOUSE BILL NO. 374, "An Act relating to establishment of a
retirement benefit liability account in the Department of
Revenue and redirecting deposit of annual dividends of the
Alaska Housing Finance Corporation to that account; and
providing for an effective date." and HOUSE BILL NO. 375, "An
Act relating to the retirement benefit liability account and
appropriations from that account; relating to deposits of
certain income earned on money received as a result of State v.
Amerada Hess, et al., 1JU-77-847 Civ. (Superior Court, First
Judicial District); and providing for an effective date."
9:09:28 AM
MELANIE MILLHORN, Director, Health Benefits Section, Division of
Retirement & Benefits, Department of Administration (DOA),
continued her testimony from the previous meeting, and referred
to the DOA's report entitled, "AlaskaCare Health Plan Health
Cost Analysis". She recapped the three primary reasons for the
unfunded liability for the Public Employees' Retirement System
(PERS) and Teachers' Retirement System (TRS) which are: loss of
investment income, rising health care costs, and changes in
actuarial assumptions.
9:10:10 AM
REPRESENTATIVE GRUENBERG asked if Ms. Millhorn would prioritize
the "the problem each of those [reasons] causes."
MS. MILLHORN said the actuarial consultant prepared information
that applies percentages to these various areas, comparing data
from a 10-year and 3-year period. She said she could not, at
this time, provide the ranking information in which
Representative Gruenberg was interested but recalled that the
change in net assets during the 10-year period is smaller
compared to the change in liabilities; however, the results are
reversed during the 3-year period. She said she would provide
the committee with the actual percentages once determined.
MS. MILLHORN directed the committee's attention to page 5 of the
health cost analysis, which addresses "the various different
initiatives that the [Division of Retirement and Benefits] has
undertaken in order to manage the health care costs." She
pointed out that there are two vehicles available to manage
health care costs: plan design in which an individual can make
changes to manage and reduce costs to his/her plan, and
eligibility audits.
MS. MILLHORN said Aetna [Inc], the third party administrator for
the State of Alaska's health plans, has negotiated discounts
with [health] facilities and physician providers which, when
frequented by members for health care services, has resulted in
substantial network savings. She clarified that the $35.2
million savings for fiscal year 2005 (FY 05) shown near the top
of page 5 of the report includes the savings of the active plan
employees; the amount of savings for just the retiree plan would
be $31.2 million. Additionally, she explained, the total
estimated retiree savings for calendar year 2006 (CY 06) is
$65.2 million, not the $69.2 million shown in the report, which
again includes the amount for the active plan at $4 million.
MS. MILLHORN then directed the committee's attention to the
graph at the bottom of page 5. She explained that the
percentages in the top line are determined annually by the
[division's] benefits consultant, Deloitte Consulting, which
compares claims costs, population, next-year premium projections
from Aetna, and the actuarial trend to determine what the
premium amount increase needs to be in order to pay for
administrative costs and health care costs.
MS. MILLHORN highlighted the importance of reviewing the reserve
balance when establishing the premium. The Deloitte Consulting
projections for the last two years, she explained, have
favorably differed from what was actually experienced, with
claims costs that were well below the national trend. She cited
figures from the financial statements showing that as of June
30, 2005, the reserve amount in the retiree health plan
increased from $173 million to $236 million. "What Deloitte
[Consulting] has recommended as a reserve parameter is between
15 and 25 percent when you have a health care plan the size of
our health care plan for our retirees." She opined that the
margin of the reserve amount for the retiree [plan], between 41
and 44 percent, is favorable, although two years of favorable
increases does not remedy the unfunded liability. Therefore,
the plan should continue to be managed in a way that "allows us
to have that favorable experience," she said.
9:18:29 AM
REPRESENTATIVE WILSON related her belief that it's wise to
proceed as [Ms. Millhorn] suggested.
9:18:52 AM
REPRESENTATIVE GRUENBERG asked if Ms. Millhorn had observed that
a provider, who is the only local provider of a particular
service in a particular location is less likely to participate
at the preferred rate than in locations where there are several
providers of the same service.
MS. MILLHORN agreed that this is the experience in Alaska.
Using Juneau as an example, she said, "We may not have the
number of physicians or surgeons in any one particular area to
actually create or incentivize that provider to enter into a
negotiated agreement with Aetna in order to reduce those costs
because the competition level does not necessitate that movement
for that physician." In further response to Representative
Gruenberg's question regarding providing incentives to
physicians, Ms. Millhorn said that each of the two Aetna offices
in Juneau and Anchorage, Alaska, have one staff member assigned
to engage providers in discussion on this topic.
9:21:34 AM
REPRESENTATIVE GRUENBERG asked if there was "any methodology the
[DOA] uses to audit Aetna's overhead itself."
MS. MILLHORN explained that every year Aetna provides a contract
amount for the following fiscal year, then the DOA and Aetna
engage in negotiations such that they review ways to reduce
administrative fees. Ultimately, the contract agreement
provision is sent to Deloitte Consulting for review and advice
on any proposed changes.
9:23:01 AM
REPRESENTATIVE GRUENBERG compared the 15-25 percent reserve
level that Deloitte Consulting recommended to the actual 41-44
percent level the state currently has in reserve, and asked
whether this amount is "excessive in this time of crisis."
MS. MILLHORN explained that in FY 04, $20 million of the reserve
amount was transferred from a shorter term investment account,
with a rate of return of 4.4 percent, to pay medical claims each
month and then transferred back into the respective retirement
systems from which the funds originated, approximately $16
million went back into PERS. She said there have been
discussions with the DOA commissioner and Deloitte Consulting
involving recommendations "to transfer from the retiree health
reserve amount back to the plans as we did in 2004." In further
response to Representative Gruenberg, she said the amount
[transferred], would be between $20 and $25 million.
9:25:13 AM
MS. MILLHORN said what is notable in CY 06 - in the grid at the
bottom of page 5 of the report - is that the medical costs for
the AlaskaCare Plan retirees is lower; however, prescription
drug costs have risen at a trend of 20 to 22 percent. Deloitte
Consulting, she explained, arrives at that premium trend by
reviewing the experience of retirees using prescription drugs,
which amounts to $96 million out of a total $256 million for the
claims costs in 2005. Therefore, that's an area deserving
attention, and at this point, there is discussion regarding a
closed formulary in which the retiree receives prescriptions
he/she needs while reducing cost to the plan because not all
drugs are made available. She confirmed Chair Weyhrauch's
observation, in the chart at the top of page 6, that whereas the
number of member retirees has increased 8 percent in 4 years,
the health care costs increased 120 percent in that same time.
9:28:31 AM
REPRESENTATIVE GRUENBERG recalled reading "how other states have
reduced the cost of pharmaceuticals by drug-pooling purchasing
agreements," and asked if this option has been examined.
MS. MILLHORN said she has not been involved in discussions with
other states regarding pooling options but affirmed that all
avenues in managing health care costs would be considered.
REPRESENTATIVE ROKEBERG, returning to Ms. Millhorn's comment on
transitioning to a closed formulary for retirees, asked how this
would work given the "case law shift of benefits."
MS. MILLHORN said that any plan changes to retirees are
considered carefully and in concert with the Department of Law
(DOL). As to discretion, she explained, it doesn't create a
diminishment of benefits, but "if the member can still receive
the service and/or the drug prescription that they need, it
doesn't distill itself down into a diminishment of benefits when
it's about choice or discretion."
9:31:34 AM
MS. MILLHORN agreed with Representative Rokeberg regarding being
able to maintain ordinary and customary [health care] services
when specifying, in the closed formulary, what brands of drugs
are available or when members can choose generic [drugs]. Ms.
Millhorn commented that it is very helpful to look at what other
state systems are doing in regard to retiree health care. She
said a report compiled by Workplace Economics, Inc.,
commissioned by AARP, determined that 24 percent of the states
do not provide retiree health benefits to their members unless
that member pays the entire premium, 44 percent of states are
engaged in a cost share system with their members, and 22
percent have what [Alaska] has which is a system-paid medical
benefit.
MS. MILLHORN said that SB 141 addresses rising health care
costs, of which 75 percent accrue to those members who are
between retirement age and age 65, when a person's health care
is coordinated with Medicare. She opined that "SB 141 really
does inject cost savings to the plan and it also cost shares
with the member." Returning to an earlier question, Ms.
Millhorn expressed her opinion that employers have insulated
members from the true cost of health care and that members
should be educated in being good health care consumers as well
as engaged and incentivized with these costs just as they might,
in the example she gave, in purchasing a new car.
9:36:12 AM
REPRESENTATIVE GRUENBERG asked if there were other plans in
existence that devised incentives to members for holding costs
down.
MS. MILLHORN replied yes, and informed the committee of the High
Deductible Health Plan (HDHP) with attached Health Savings
Accounts in which members can build wellness and disease
management into their plans and pay 100 percent of preventative
care. Recent research has shown these kinds of plan features to
be very beneficial, she said, and this avenue is currently being
explored as a health care opportunity for [Alaska PERS/TRS]
members along with several others listed on page 7 of the
report.
MS. MILLHORN said the state is, at present, working with Aetna
on a preferred provider opportunity in Anchorage for retired
state employees. There currently is a preferred provider
arrangement with Providence Hospital in Anchorage for active
employees, and therefore when active employees go to other
hospitals in [the Anchorage] area, members pay an extra 20
percent, she explained.
9:39:07 AM
REPRESENTATIVE ROKEBERG asked how the state could legally
require retired employees to seek services with a preferred
provider.
MS. MILLHORN explained that in discussions with the DOL,
steering retired employees to preferred providers is allowable
as long as there is no diminishment of benefits. In further
response to Representative Rokeberg, Ms. Millhorn said there has
been research on disease management as it relates to the state's
retiree population but this initiative was put on hold for
several reasons, including the voluntary nature of the program,
the cost to the plan at approximately $300,000 per year combined
with the fact that any savings to members 65 or older would
accrue to Medicare or the federal government and not to the
state plan, and the fact that Aetna has never before offered a
disease management plan for retirees. She said the state will
consider the results of the three-year pilot program Medicare is
currently performing on disease management for retirees, and in
which Aetna is participating, before going further. In response
to Chair Weyhrauch, Ms. Millhorn clarified that "PPO" is the
acronym for preferred provider organization.
9:43:16 AM
FREDA MILLER, Benefits Manager, Health Benefits Section,
Division of Retirement & Benefits, Department of Administration,
in responding to a question by Representative Wilson, explained
that there are several ways to express dispense as written
(DAW). However, unless the doctor has indicated on the DAW
prescription that a generic drug is acceptable as well, then the
[pharmacy] has to dispense the brand the doctor has written.
REPRESENTATIVE WILSON opined that the definition for DAW,
provided at the bottom of page 7 of the report, is misleading in
that it says the pharmacy may substitute a less expensive drug
even with DAW written on the script.
MS. MILLER said because of the different types of DAW, she would
need to do research before clarifying further.
9:44:26 AM
MS. MILLHORN referred to the last page of the report which
summarizes the current PERS and TRS members by category: active
employees, deferred vested, deferred, and retired. Of note, she
said, is the fact that the retiree population is growing, a
factor that can't be controlled, and costs are going to rise as
the population increases. She directed the committee's
attention to the Tier 1 column which will "continue to be costly
to the retirement plans."
MS. MILLHORN then directed the committee's attention to her
January 26, 2006, letter which answered questions brought up at
the previous meeting. She informed the committee that 37
percent of active members who participate in the Select Benefits
Health Plan have enrolled in the economy plan. Furthermore, she
explained, the state employee enrolled in this plan has cost
share associated with it which goes away to a large degree when
that employee retires.
9:47:10 AM
REPRESENTATIVE ROKEBERG asked if he were correct in
understanding that regardless of which plan [the employee]
enrolls - economy or premium - when that employee retires
his/her [coverage] defaults to whatever the retiree plan is.
MS. MILLHORN confirmed that to be correct and indicated that the
only substantive change is under SB 141 which has cost share
injected into that health care plan. She pointed out that as
soon as the employee is eligible for Medicare, he/she still has
the premium [to pay], 30 percent down to 10 percent. Under SB
141, she explained, new members enrolled in the economy plan
will, to a large degree, be in the same plan they have when they
retire because of the cost share factor. She confirmed that
Representative Wilson was correct in her understanding that
under SB 141, whatever plan an active employee has selected, is
the plan he/she will have upon retirement. Ms. Millhorn
emphasized that under SB 141, the focus is not so much under
which plan an employee retires as to the fact that there are
some mechanisms in the plan design itself by which the member
shares in costs, and so is more likely to be engaged in the
process - doing research and comparing costs of available
service providers, physicians and prescription drugs - in order
to select the best option.
9:50:52 AM
REPRESENTATIVE WILSON asked if she was correct in understanding
that under SB 141, "they pay a part of the premium and when they
retire, they still pay part of that premium?"
MS. MILLHORN replied yes. She added that the way SB 141 is
designed in relation to the medical component, a Medicare-
eligible individual pays a percentage of that premium based on
the years of service: between 10 and 14 years, the member would
pay 30 percent and after 30 years, the member would pay 10
percent. Additionally, the member will have a health
reimbursement account, which is designed to pay medical
expenditures for the premium and which, Ms. Millhorn opined,
will have members "wisely spend out of that account."
9:52:02 AM
REPRESENTATIVE WILSON queried, "When they retire, they pay a
portion of the premium, yes or no?"
MS. MILLHORN reiterated that is correct, [the retiree would pay
a portion of the premium].
9:52:29 AM
MS. MILLHORN directed the committee's attention to the chart
[Medicare Reform Assumption Changes] showing the actuarial
analysis done to redesign the medical plan under SB 141. The
chart shows the claims costs for [fiscal year] 2004 at $225
million of which 74 percent of these medical costs are incurred
by retirees under age 65, and 26 percent for retirees age 65 and
older.
9:54:11 AM
REPRESENTATIVE SEATON highlighted that the chart does not
directly reflect the difference in costs for those [retirees]
under age 65 and those over age 65. He opined that this
difference would more accurately show possible savings to the
state should the state find ways to dissuade members from early
retirement.
9:55:53 AM
MS. MILLHORN, addressing an interest previously expressed by the
committee, presented a one-page summary on the estimated
contribution shortfall to PERS and TRS funds in FY 06 and FY 07.
She said that the $385 million in Column D is the contribution
amount based on the calculated rate for the categories listed in
Column B: political subdivisions, school districts, state of
Alaska, university, and other public organizations. In order to
prevent adding additional liability to the system, she said, the
actuary has calculated that "the contribution amount needs to be
$631 million for a shortfall in that contribution of $245
million."
MS. MILLHORN explained that each year [the state] is not at the
required contribution rate calculated by the actuary, a
shortfall results, such as on June 30, 2004, when the shortfall
for TRS was 1.24 percent for the employer contribution rate and
.89 percent for PERS. "That has been the additional
contribution amount and shortfall that is added to the system
when [the state is] not at the actuarial rate," she said. Once
the actuarial rate is reached, she explained, [the state] would
pay at an amortized rate on a 25-year cycle.
9:57:58 AM
REPRESENTATIVE GRUENBERG, referring to Ms. Millhorn's mention of
switching to an accrual method, inquired as to what effect this
had on the shortfall figures and if "it caused a significant
change and increase in the total deficit."
9:58:16 AM
MS. MILLHORN replied that in statute, there is a provision which
requires that health care benefits be actuarially determined.
She further explained that the State of Alaska, for PERS and
TRS, "has always accrued for their benefits on an actuarial,
accrued, liability basis and in fact they prefund." She said
there are 11 other pension systems that prefund for medical
costs, which she opined has been beneficial. In response to a
question by Chair Weyhrauch, Ms. Millhorn said the expected
contribution for FY 07 for the University of Alaska of $38
million is derived from its payroll base, not from its submitted
budget.
9:59:52 AM
CHAIR WEYHRAUCH asked if the actuarially required contribution
of $49 million for the university is the amount it would need to
pay "so there's no shortfall." Upon hearing Ms. Millhorn's
confirmation that this is accurate, he then asked, "What would
be the problem, in terms of the system, by saying the
university's contribution should be $49 million; that would be
good for the system, right?"
MS. MILLHORN said the only caveat she would add is not being
certain of the university's exact contribution because of 2 AAC
35.900 [from the Alaska State Administrative Code] which, until
it's repealed, may cap the university's rate.
10:00:57 AM
REPRESENTATIVE SEATON said the 5 percent cap is what's causing
the discrepancy.
CHAIR WEYHRAUCH expressed his belief that the [committee] needs
to know what the legally required amount of the contribution is
under the regulation and this component needs to be included.
He said, "There's an artificial number here."
MS. MILLHORN agreed there is an artificial number [on the chart]
for some employers but not all because PERS is based on the
[employer's] own individual rate.
CHAIR WEYHRAUCH said he didn't know how to analyze the
information on the chart in the context of the administrative
restraints on the system.
MS. MILLHORN said she would use the chart by reviewing the
employer's contribution amount for all categories, which in FY
07 is shown as a total of $503 million and includes the required
regulation rate for that employer.
10:02:13 AM
CHAIR WEYHRAUCH opined that this topic may "lead to the heart"
of future discussions on the budget, and that [the committee's]
efforts in making the system as whole as possible is subject to
administrative constraints. He also posed the question as to
what policy recommendations should be made "to the
administration, or vice versa, on changing the caps that are in
regulations so that the system can be made more whole."
10:02:35 AM
REPRESENTATIVE ROKEBERG stated his agreement with Chair
Weyhrauch's comments and noted that the expected contribution of
$503 million is one sixth of [the state's] budget.
CHAIR WEYHRAUCH said, "So there's an expected contribution, a
actuarially-required contribution, and then a legally-required
contribution."
MS. MILLHORN said Chair Weyhrauch was correct and again stated
that the expected contribution amounts shown in the chart
reflect the regulations in place for those employers.
CHAIR WEYHRAUCH sought confirmation that the expected
contribution amount assumes the legal requirement.
10:03:29 AM
MS. MILLHORN said this was correct with the exception of TRS,
which although it has an adopted rate, has no legal requirement
and no cap. She said 2 AAC 35.900 will be repealed going
forward.
REPRESENTATIVE ROKEBERG referred to a discussion [the committee]
had last fall as to whether the 5 percent cap was repealed by SB
141 and asked, "Then where are we?" He said, "Then it's a
matter of what we budget in the [general funds ("GF")], too;
it's a budgetary function additionally."
10:04:12 AM
REPRESENTATIVE SEATON expressed his opinion that the [committee]
should recognize that the legislative cap of 5 percent does not
really apply to TRS and has only been applied administratively.
He said that although a collar on TRS is not required by
statute, the underfunding of TRS by the recommended amounts is a
policy decision, not a statutory [one].
REPRESENTATIVE ROKEBERG asked if it was accurate to say, in
regard to the legal obligation, "that the budgetary
appropriation can be whatever it is...we're not constrained to
do something."
CHAIR WEYHRAUCH and MS. MILLHORN agreed that this was correct.
[HB 374 and HB 375 were held over.]
10:05:15 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:05 a.m.
| Document Name | Date/Time | Subjects |
|---|