01/25/2006 09:01 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB223 | |
| HB374 || HB375 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
January 25, 2006
9:01 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Harry Crawford
COMMITTEE CALENDAR
HOUSE BILL NO. 223
"An Act levying a tax on certain known resources of natural gas,
conditionally repealing the levy of that tax, and authorizing a
credit for payments of that tax against amounts due under the
oil and gas properties production (severance) tax if
requirements relating to the sale and delivery of the natural
gas are met; and providing for an effective date."
- HEARD AND HELD
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 223
SHORT TITLE: NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
SPONSOR(S): REPRESENTATIVE(s) CROFT
03/17/05 (H) READ THE FIRST TIME - REFERRALS
03/17/05 (H) W&M, O&G, RES
04/25/05 (H) W&M AT 8:30 AM CAPITOL 106
04/25/05 (H) Heard & Held
04/25/05 (H) MINUTE(W&M)
01/11/06 (H) W&M AT 9:00 AM CAPITOL 106
01/11/06 (H) Heard & Held
01/11/06 (H) MINUTE(W&M)
01/18/06 (H) W&M AT 9:00 AM CAPITOL 106
01/18/06 (H) Heard & Held
01/18/06 (H) MINUTE(W&M)
01/25/06 (H) W&M AT 9:00 AM CAPITOL 106
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
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
WITNESS REGISTER
JACK GRIFFIN, Vice President
External Affairs
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 223.
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 on Alaska's health care system.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:01:47 AM. Representatives
Weyhrauch, Moses, Samuels, and Seaton were present at the call
to order. Representatives Gruenberg, Rokeberg, and Wilson
arrived as the meeting was in progress. Representative Harry
Crawford was also in attendance.
HB 223-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
9:01:58 AM
CHAIR WEYHRAUCH announced that the first order of business would
be HOUSE BILL NO. 223, "An Act levying a tax on certain known
resources of natural gas, conditionally repealing the levy of
that tax, and authorizing a credit for payments of that tax
against amounts due under the oil and gas properties production
(severance) tax if requirements relating to the sale and
delivery of the natural gas are met; and providing for an
effective date."
9:03:08 AM
JACK GRIFFIN, Vice President, External Affairs, ConocoPhillips
Alaska, Inc., said HB 223 is described by its sponsors as
"creating an incentive for companies...to move forward on
developing a North Slope gas project," and ConocoPhillips
Alaska, Inc. (Conoco) has presented testimony in opposition
before, so he does not want to repeat it. He said Conoco
already possesses all the incentive necessary to move forward on
a North Slope gas project, and has "taken every reasonable step
within its power to do so." He added that the committee knows
well that Conoco has reached an agreement with the state on the
base fiscal and other terms necessary to move the project
forward. He said an agreement was reached in principle on
October 21, 2005, and Conoco has worked diligently to resolve
technical and drafting issues. He stated that Conoco now has a
deal with the state that it is willing to use as a basis to move
forward. Since reaching that deal, Conoco and the state have
been trying to negotiate a comprehensive agreement that includes
the other major North Slope producers.
MR. GRIFFIN said the agreement with the state is the culmination
of a multi-year effort following a $125 million cost study in
2001 to move the gas project to the next phase of development.
His company took a leadership role in seeking a reauthorization
of the Stranded Gas Development Act, which has led directly to
its contract with the state. Conoco took a leadership role, he
opined, in several pieces of federal legislation to streamline
the permitting process and lower the cost of debt on the
project. "Obviously we have taken a leadership role in crafting
and in finalizing an appropriate fiscal contract for development
of North Slope gas." He said the company is ready and willing
to move to the next phase.
MR. GRIFFIN stated that the next step requires economies of
scale that can't be met by his company alone. He told the
committee that the governor said that the best and most
efficient way to move forward is to conclude negotiations
between the state and the three major North Slope producers.
"We agree," he said. He added that HB 223 undermines the
efforts by penalizing Conoco. "There is nothing ConocoPhillips
can do to avoid imposition of HB 223's new tax, short of
surrendering the billions of dollars we have already invested in
the development at Prudhoe Bay." He said it has been suggested
that the company can avoid this new tax by selling its gas, but
he said that is not true. He said the tax is automatic and
unavoidable. Supporters of the tax say it will be refunded if
the North Slope producers move forward with the project, and he
said that is misleading. The tax for his company will likely
exceed $200 million per year over the next ten years, he stated.
That money will not be refunded for 10 to 25 years from now, he
said, with no allowance for the time value of money. That,
coupled with a limit on deductions, ensures that the refunds
will only be a fraction of the taxes that are actually paid, he
said. He concluded that the bill is bad public policy and
unfair, and there are a host of other issues that he has not
addressed, including constitutional ones.
9:09:52 AM
REPRESENTATIVE SAMUELS asked how the agreement works between the
three companies and if it was possible for Conoco to move
forward without its Prudhoe Bay partners. He noted that Mr.
Griffin said that Conoco can't ship or sell gas.
9:10:37 AM
MR. GRIFFIN said the unit agreement is a partnership for the
development of the resources to ensure there isn't physical or
economic waste of the resource within a given area. "Right now
there are no clear provisions for allowing ConocoPhillips to
move forward on its own. That is something that would have to
be addressed if we ever got to that point. But clearly, as the
governor stated, the best and most efficient way to move forward
is to do so with the agreement of all of the major North Slope
lease holders."
9:11:34 AM
REPRESENTATIVE SAMUELS said that when gas comes up, Conoco re-
injects it. He asked if one third [of the gas] belonged to
Conoco and was enough gas to pay the tariff to build a pipeline,
could the company take that gas and claim it to be theirs with
BP and Exxon's gas remaining in the ground.
9:12:07 AM
MR. GRIFFIN answered that it would be difficult but not
impossible. He added that it would not be ideal for Conoco.
9:12:36 AM
REPRESENTATIVE SEATON asked if Conoco was to sell its one-third
share of gas, if there would be a cause of action between the
other parties if doing so would reduce the flow of oil from
Prudhoe Bay. He asked if the production agreement requires the
production of gas, and if only one party is producing gas, which
then reduces the amount of oil, would that be a violation of the
agreement.
9:13:36 AM
MR. GRIFFIN said, "I can't say it would be a violation; I think
I could say that if one party to the North Slope unit agreement
- or the Prudhoe Bay unit agreement and the Prudhoe Bay
operating agreement - wanted to take its gas in kind without the
participation of the other unit owners, we would most likely see
the courts asked to resolve differences in interpretation of
those agreements."
9:14:14 AM
CHAIR WEYHRAUCH said he thinks that is a "yes."
MR. SEATON said that oil companies have indicated that to him.
He added, "Although it could legally be possible under gas, it
would be legally very involved when you got into one owner
taking part of the gas and that impact on the oil. And so I
think we need to consider that as well."
9:14:52 AM
REPRESENTATIVE SAMUELS said he believes the Alaska Oil and Gas
Conservation Commission and the court system would have "a lot
of issues with how much gas you can take off and how much goes
back in also, so it would be complicated even further."
9:15:12 AM
REPRESENTATIVE GRUENBERG asked, on the flip side, how Conoco
prevents itself from being held up by one of the other parties
who doesn't want to produce.
9:15:23 AM
MR. GRIFFIN said that is exactly how he would characterize the
negotiations under the Stranded Gas Development Act. "We're all
trying to come together on a set of commercial terms that works
for all of the major North Slope gas owners." He added that if
the state, Conoco, BP and ExxonMobil Corporation "are not all
holding hands," moving forward on a gas project will be
difficult.
9:15:59 AM
REPRESENTATIVE GRUENBERG said that is a new negotiation, but
what he would like to know is what the agreement allows on an
on-going basis. "Suppose one or more of you decides to cut down
on the production, how does the one-of-you that wants to produce
stop the others from just stopping that?" He said he knows they
are all smart enough to have figured that out, and he would like
to know how.
9:16:26 AM
MR. GRIFFIN said, "Generally speaking, the working interest
owners in a unit such as the Prudhoe Bay unit are going to be
aligned in trying to maximize the production that can be derived
economically from a unit like that." He added that there are
complex agreements to govern the relationship between them.
9:17:03 AM
REPRESENTATIVE GRUENBERG said, "So you have already pre-agreed
to agree."
9:17:12 AM
MR. GRIFFIN said, "Obviously we have agreements at Prudhoe Bay
governing our relationship with the other working interest
owners there, and we have come together for the purpose of
maximizing the production and maximizing the value of the
Prudhoe Bay oil and gas resource."
CHAIR WEYHRAUCH asked, "And not in restraint of trade?"
REPRESENTATIVE GRUENBERG asked if that agreement was in writing
or just an oral understanding.
9:17:59 AM
MR. GRIFFIN said it is written in the Prudhoe Bay Unit
Agreement.
9:18:26 AM
CHAIR WEYHRAUCH said the purpose of this bill is to develop
Alaska's gas "to get those who are sitting on the gas to move
forward on a gas pipeline. If we don't do that we're going to
tax you. Once you develop it we will refund the tax." It is an
incentive to move the gas to market to benefit Alaskans, so he
asked why it is bad public policy.
9:19:07 AM
MR. GRIFFIN said it is bad public policy because Conoco has all
of the incentives necessary. "This bill reaches too broadly,"
he opined. The state has provided the right incentive by
authorizing the administration to enter negotiations with the
other major North Slope gas owners on a set of fiscal terms that
will increase investor confidence and allow this project to move
forward. Using a tax "as a weapon to force private parties to
expend billions of dollars on the state's behalf without regard
to whether the investment makes sense, and there is nothing in
the bill that requires that the investment actually makes sense,
is a novel and unprecedented use of a state taxing authority,"
he stated.
9:20:37 AM
CHAIR WEYHRAUCH said, "The gas is used as part of the
corporation's portfolio to show stockholders that the price of
the stock is adequately valued because you are sitting on this
large resource, and it is unfair to serve as a reserve for the
benefit of the corporation just to show that on the bottom
line." He added that it does Alaskans more good to have it
developed. He said perhaps Conoco wouldn't be taxed because it
is poised to go forward, but others should be taxed.
9:21:21 AM
MR. GRIFFIN said there is no benefit to a corporation to sit on
Prudhoe Bay gas. "You cannot count that gas as part of your
reserves base for purposes of reporting to the Securities and
Exchange Commission and to your shareholders and potential
shareholders until you've authorized the development of the
project necessary to move that gas to market." He said even if
the bill is constitutional, it is unfair because it reaches
those who are in agreement with the state and are motivated to
move forward.
9:22:41 AM
REPRESENTATIVE SEATON inferred that ExxonMobil Corporation,
ConocoPhillips Alaska, Inc., and other owners of leases on the
North Slope do not have any gas reserves listed in any of their
holdings.
9:23:11 AM
MR. GRIFFIN said he can't speak for any other company, but "our
understanding" is that "until you authorize the expenditures
necessary to make those reserves marketable, they don't become
reserves for reporting purposes. They're known resources, but
they're not reserves ... and that is what shareholders look at."
9:23:57 AM
REPRESENTATIVE ROKEBERG asked Mr. Griffin to provide information
on the constitutional issues he spoke of. He noted that former
Governor Hickel said this tax was a form of punishment, and
Representative Rokeberg finds it "grossly unfair," because it
points a gun at the company when in fact it is doing everything
to move forward to market.
9:25:18 AM
MR. GRIFFIN said he agrees, and Conoco has done its utmost to
work with the state, so it would be punishing a company for
doing exactly what the state has requested.
9:26:16 AM
REPRESENTATIVE ROKEBERG said that Mr. Griffin testified that
this legislation would require Conoco to pay $2 million a year
for 10 years. He asked if the company would stay in Alaska
under those terms.
9:26:46 AM
MR. GRIFFIN said that he doesn't see Conoco leaving the state as
a consequence of this bill. "The state is too important," he
said, and it would be disappointing and have an effect on how
the company looks at future investments in the state. He said
he considers the state a partner of Conoco.
9:27:41 AM
REPRESENTATIVE ROKEBERG asked for Mr. Griffin's thoughts on
former Governor Hickel's comment that the producers would not
sell the gas to Yukon Pacific, and what Mr. Griffin thinks would
have happened if the state had sold the gas to Yukon Pacific and
how much the state would have lost.
9:28:24 AM
REPRESENTATIVE GRUENBERG, regarding Mr. Griffin's comment that
his shareholders would be disappointed with HB 223, asked
whether the voters are shareholders too, "and don't you think
they are disappointed when you don't produce?"
9:28:51 AM
MR. GRIFFIN said his message is that Conoco wants to move
forward with North Slope gas development in partnership with the
state, which will be a decades-long partnership. He said there
are members of the Alaskan public who reflect some
disappointment, but his company is working very hard. He said
to keep in context "where we've been and where we are today."
When Prudhoe Bay was developed, natural gas prices did not
support transportation infrastructure. "The state would be in a
far, far poorer place today had we been foolish enough to build
a gas project back then ... We would have lost not only the
value of the gas for all Alaskans, we would have also lost the
value of approximately three billion barrels of oil at Prudhoe
Bay that we have been able to recover as a consequence of re-
injecting that gas."
9:31:00 AM
REPRESENTATIVE GRUENBERG said the legislature does not expect
people to be clairvoyant, "but there is a reasonable expectation
that if you enter into a lease, you will get a royalty as soon
as possible, and it will be continuing. That's what any lessor
requires." He wondered if it is fairly common to have a clause
in a lease to require production and asked, "Isn't that pretty
much of a standard elsewhere in the world?"
9:32:32 AM
MR. GRIFFIN said he is unfamiliar with a clause or law like HB
223 anywhere in the world. North Slope leases do have term
limits, which are extended if the leases are in a unit. "We are
in compliance with all of the requirements of those leases."
9:33:33 AM
REPRESENTATIVE WILSON said production of oil has been
decreasing, and she asked what will production do without the
gas being re-injected.
9:34:14 AM
MR. GRIFFIN said the company uses water for pressure maintenance
and enhanced oil recovery on the North Slope, but he said he
can't give an estimate.
9:35:05 AM
REPRESENTATIVE SEATON noted that Mr. Griffin said he is not
aware of terms similar to the bill before the committee, and he
asked if he was aware of any other contract provisions that seek
the same goal of stimulating and ensuring production.
9:36:12 AM
MR. GRIFFIN said every resource owner has an incentive to
encourage leaseholders to produce as soon as practical. He said
in other jurisdictions around the world there might be
production-sharing agreements, which are analogous to the
negotiation his company is involved with in the Stranded Gas
Development Act. Most lease provisions include lease term
limits in the event that they are not developed, he said. The
Alaska project is truly unique, at least in the United States,
he opined.
9:38:06 AM
CHAIR WEYHRAUCH announced that HB 223 would be held over.
HB 374-RETIREMENT BENEFIT LIABILITY ACCT/AHFC
HB 375-RETIREMENT BENEFIT LIABILITY ACCT/PF
9:39:29 AM
CHAIR WEYHRAUCH announced that the next 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."
CHAIR WEYHRAUCH said the committee received a letter and report
yesterday from the chair of the Alaska Retirement Management
Board (ARMB).
9:41:01 AM
MELANIE MILLHORN, Director, Health Benefits Section, Division of
Retirement and Benefits, Department of Administration, said
there are three primary drivers for the unfunded liability for
the Public Employees' Retirement System (PERS) and Teachers'
Retirement System (TRS), and those are: rising healthcare costs,
loss of investment income, and changes in assumptions. She said
that she has a nine-page summary to present to the committee
that speaks to the issue. The focus of her presentation, she
said, will focus on rising healthcare costs for PERS and TRS and
what the division is doing to manage these costs.
9:42:08 AM
CHAIR WEYHRAUCH asked that Ms. Millhorn highlight issues that
need addressing by the legislature.
9:42:39 AM
MS. MILLHORN referred to her report regarding demographics of
the retirees who have system-paid medical, where the member does
not pay the premium cost. Beginning in 2001 through 2005, she
explained, there was an increase in the population of those
available to receive these benefits, which have an out-of-pocket
maximum of $800. "That is a very rich plan," she said. Out of
$256 million of claims for 2005, $96 million is in the
prescription drug area, she noted. She said she will talk about
initiatives to deal with those costs.
9:44:34 AM
MS. MILLHORN said Commonwealth North reported that the costs in
Alaska are 40 percent higher than in Seattle, Washington, and
there are 110,000 uninsured parties in Alaska. She said that
creates a vicious cycle, because uninsured Alaskans impact the
insured. She said growth in enrollment is not going to change;
there are up to 2,000 members a year who retire, which is a
growth of 5.3 percent. "The benefit is richer for the retiree
population than the active plan. And what that's referring to
is the [deductibles] that I mentioned earlier...if that member
retires from select benefits, which is the active plan, and they
have the economy plan. The economy plan is a plan that we have
in place for active employees where they pay nothing out of
their pocket; that is a $500 deductible. That has a family
deductible of $1000. That has an out-of-pocket amount of $2000.
If an active employee chooses either the standard plan or the
premium plan, they pay all of the costs associated with having a
plan at 80 percent or 90 percent. The economy plan pays for 70
percent. So you would go from an active plan where you have
costs associated with your medical expenditures that when you
retire you don't experience that kind of cost share with the
plan. So it is a very rich benefit when you have a retiree
medical plan such as PERS and TRS."
9:47:13 AM
REPRESENTATIVE SEATON asked what percentage of active employees
has the economy program.
9:47:23 AM
MS. MILLHORN said there are about 5,300 who are in the select
benefits plan, and they cover about 8,900 dependents. She will
get the information for him, she said.
9:47:43 AM
REPRESENTATIVE WILSON sought confirmation of her understanding
that those still employed pay; however, when they retire, they
do not pay.
MS. MILLHORN said this was correct.
9:47:56 AM
CHAIR WEYHRAUCH asked if the benefits are constitutionally
guaranteed.
9:48:02 AM
MS. MILLHORN said a lawsuit in 2003 determined that medical
benefits for Alaska's retirees are protected under Alaska's
constitution, Article XII, Section 7.
9:48:24 AM
REPRESENTATIVE ROKEBERG said not to forget that all the
bargaining units have their own insurance. The state used to
have 25,000 employees plus dependents as active employees.
However, he said, everybody retires on the plan, even from the
bargaining units. "Big problem," he claimed.
CHAIR WEYHRAUCH asked the impact of that.
9:48:57 AM
MS. MILLHORN said it is "just a larger population that is
available to have retiree medical benefits; it's not just the
5,300 and the dependents. There's approximately 14,500 state
classified employees."
9:49:18 AM
REPRESENTATIVE SEATON asked if other bargaining units have the
same active plan, and "do they have that same differential that
we have?"
9:49:54 AM
MS. MILLHORN said she has not studied those health trusts, but
"if you use ours as a barometer, yes, you're paying more as an
active employee than you would be paying when you go to the
retiree plan."
9:50:13 AM
CHAIR WEYHRAUCH said that since the benefits are
constitutionally protected, would the only way to address
healthcare be by managing the costs on the receiving end.
9:50:33 AM
MS. MILLHORN said, "The way that you can manage those costs are
two ways: one is plan design and the second one is eligibility
audits."
CHAIR WEYHRAUCH asked if managed care comes into play.
9:51:09 AM
MS. MILLHORN said managed care is a concept where there is a
consortium of providers that have an agreement to have network
kinds of costs. "Unfortunately, in the state of Alaska, because
there are more patients than there are doctors who need to
compete for patients, we don't have the same structure that
other states enjoy when they have an HMO [Health Maintenance
Organization] and other managed care available." She said
Alaska's structure doesn't lend itself to managed care.
CHAIR WEYHRAUCH asked if there are structural impediments that
exist by statute or by regulation.
9:52:01 AM
MS. MILLHORN said it is neither; physicians in Alaska don't have
sufficient competition.
9:52:20 AM
REPRESENTATIVE ROKEBERG said he has been looking at that issue.
There are small statutory barriers to entry for HMOs in Alaska,
and those need to be reformed. He spoke with the commissioner
of Health and Social Services about putting out a [request for
proposal] for Medicaid management, which almost all other states
have, which might be an impetus for a HMO to come to Alaska. He
said the state has other types of managed care opportunities
under current underwriting insurance laws in the state.
9:53:22 AM
CHAIR WEYHRAUCH asked how to resolve the statutory barriers.
REPRESENTATIVE ROKEBERG said his staff is working on it.
9:54:48 AM
REPRESENTATIVE SEATON noticed that "75 percent of retiree
medical costs are incurred for pre-65 members." He asked about
incentives for those people to work longer.
9:55:52 AM
MS. MILLHORN said it is beneficial to the system for those
individuals to stay in the system longer, because when retirees
reach age 65, "we coordinate with Medicare, and the cost is
reduced." She said the system actually gives incentives for an
employee to retire at the age of 55 and then go do something
else. She added that SB 141 structurally redesigns the plan so
that the individual receives that benefit, that cost-share, at
the time that they are eligible for Medicare. That legislation
reduces 75 percent of the medical costs, she said.
CHAIR WEYHRAUCH said, "That doesn't deal with the existing
unfunded liability, nor the huge ballooning healthcare costs
associated with Tier 1."
9:57:33 AM
MS. MILLHORN said, "That is the 800-pound gorilla that is a
national issue, but I think there are some measures that are
available to us, and we have taken the initiative in certain
areas."
9:57:45 AM
REPRESENTATIVE WILSON asked Ms. Millhorn to put that on paper
and to explain the difference of someone retiring at age 63
instead of age 65.
9:58:36 AM
MS. MILLHORN said for Tier 1 employees, their normal retirement
age is 55, so as a Tier 1 employee, "if you chose to work
longer, there's no expenditure, there's no premium, there's no
claims cost to the retiree plan; however, if you retire at age
63, you, your spouse and your dependents (if eligible) would be
eligible for system-paid medical. So at that point in time, our
costs incur. However, when you turn 65, and you're Medicare-
eligible, Medicare becomes primary, so anything that's allowable
under Medicare for those expenditures first flows to Medicare,
then flows to our plan."
9:59:34 AM
REPRESENTATIVE SEATON said he would like an average cost for the
pre-65 members, "so we can figure out what benefit the system
would gain for each year those persons would stay within the
system."
10:00:29 AM
MS. MILLHORN said she can provide some projections on that.
10:00:41 AM
REPRESENTATIVE WILSON asked about working after the age of 55.
10:01:56 AM
MS. MILLHORN said that when someone is employed, "their active
plan pays for their medical coverage. It is at the time that
they decide that they are going to retire that the system pays
their premium and pays all of their claims expenses." So as
long as they're in the system there are no costs that accrue to
the retirement health plan.
REPRESENTATIVE WILSON asked about returning retirees.
10:02:46 AM
MS. MILLHORN said there was HB 161 when "the legislature made
changes to that bill in order to ensure that their active plan
was primary and that it suspended their retiree plan during
their period of reemployment."
10:03:17 AM
MS. MILLHORN said there was a seminal law case in 1999, Retired
Public Employees of Alaska (RPEA) v. Duncan, in which retirees
wanted to be able to update the plan, "and the division was not
reluctant to make those changes; however, they said that those
changes must be cost neutral to the system." She added that
those changes included increases and decreases. "When those
changes were put into effect, January 1, 1999, increases and
decreases...designed to be cost neutral, RPEA, NEA and ASEA
filed suit." She said that case has been ongoing and is being
litigated right now, and the legal costs to the system in this
fiscal year will be about $235,000.
10:05:13 AM
REPRESENTATIVE ROKEBERG said he doesn't care what the legal fees
are, he wants to know the cost to the system if the state
doesn't prevail. He questioned that the organizations requested
the changes and then sued.
10:05:55 AM
CHAIR WEYHRAUCH asked if Ms. Millhorn said that the parties to
the case signed off on the changes and then sued.
10:06:05 AM
MS. MILLHORN said it is her understanding that those retirees
were active in asking for some of these changes and that they
later brought suit.
REPRESENTATIVE GRUENBERG said that the committee should have the
parties themselves explain their actions.
10:06:30 AM
MS. MILLHORN said the cost containment initiatives deal with two
areas: plan-design changes and eligibility audits. "In 2004 we
discovered that our plan booklet for our retirees did not
comport with Alaska statute that individuals between age 19 and
23 had to be enrolled full time in college. That has been an
issue for about 20 years." So 1000 dependents were removed,
saving the system $3 million. She said the division is now
doing an eligibility audit to ensure benefits only go to those
entitled. Recipients get the benefits on a tax-preferred basis,
she said, and it jeopardizes the plan if the state is paying
benefits to un-entitled people. She said the audit will save
the system about $16 million annually.
10:08:17 AM
REPRESENTATIVE WILSON asked whether dependents weren't checked
on before.
10:08:35 AM
MS. MILLHORN said the division did not require documentation,
and she is talking about, for example, a divorce that has
occurred and the state still paid claims. "We have a
demarcation line in which we are telling all of the parties who
are receiving benefits that they must provide supporting
documentation in order to continue to receive those benefits."
She noted that national auditing firms have found that every
time an eligibility audit is done, it is discovered that about
15 percent of recipients are not eligible.
10:09:53 AM
REPRESENTATIVE SEATON said the legislators had to submit similar
documents when they started service.
10:10:11 AM
REPRESENTATIVE GRUENBERG asked if the level of auditing was the
same as it was three or four years ago.
10:10:46 AM
MS. MILLHORN said the state had a comprehensive audit in 2004
that looked at claims processing and errors, and the division
made changes in accordance with the audit.
10:11:19 AM
REPRESENTATIVE GRUENBERG asked for a copy of the audit and a
list of changes that were made in response to it.
10:11:26 AM
MS. MILLHORN said another initiative is generic drugs. The cost
savings is approximately $4 million per year. She noted that
there is an educational effort to get retirees to go from a
brand name drug to a generic drug. "For every 1 percent
movement, it's a million dollar savings to the plan," she said.
MS. MILLHORN stated that network savings is a very large cost
saver for the plan. It is when the third party administrator
goes out and negotiates with facilities and providers in order
to arrive at a discounted rate, she said. In the last two
years, the state has had a performance guarantee with Aetna in
the contract where they must hit that network guaranteed amount.
It is a direct savings to the plan, so if members go to those
facilities that have a network-negotiated rate with Aetna, "our
plan saves." The member saves too because there are less out-
of-pocket costs, she noted. It represents a savings of about
$25.8 million for 2004. Aetna has to hit that negotiated rate
each year, otherwise they lose revenue objectives, she stated.
She said there was also a pharmacy rebate through Aetna for
negotiated rates that comes to $4 million each year.
MS. MILLHORN said, "We also successfully applied for, and will
be receiving, Medicare part D," which is a 28 percent subsidy,
representing $7 million annually. The total savings of the
initiatives are about $59.8 million for calendar year 2006, she
concluded.
10:14:22 AM
REPRESENTATIVE SEATON spoke of the escalation in medical costs
in Ms. Millhorn's report, and he said it is different from the
assumed rates.
10:14:59 AM
REPRESENTATIVE ROKEBERG asked if the managed-care principles
that were negotiated are part of the litigation that was
mentioned. He asked if that has been tested in the courts to
know if the state can do that.
10:15:24 AM
MS. MILLHORN said the network savings are passive in the sense
that "when our member goes to that facility or goes to that
provider, we reap the benefits, but it is not punitive to them
if they don't go."
10:15:57 AM
MS. MILLHORN said the members cannot be monetarily penalized
now.
REPRESENTATIVE ROKEBERG asked if it was different for the active
plans.
MS. MILLHORN said there is a [preferred provider] in Anchorage,
and if members don't go, they are penalized.
[HB 374 and HB 375 were held over.]
10:16:18 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:16 a.m.
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