JOINT HOUSE & SENATE HEALTH, EDUCATION AND SOCIAL SERVICES COMMITTEE March 7, 1996 3:13 p.m. SENATE MEMBERS PRESENT Senator Lyda Green, Chairman SENATE MEMBERS ABSENT Senator Loren Leman, Vice-Chairman Senator Johnny Ellis Senator Judy Salo Senator Mike Miller HOUSE MEMBERS PRESENT Representative Cynthia Toohey, Co-chair Representative Con Bunde, Co-chair Representative Gary Davis Representative Tom Brice Representative Caren Robinson Representative Norm Rokeberg HOUSE MEMBERS ABSENT Representative Al Vezey COMMITTEE CALENDAR COMPREHENSIVE HIGH RISK POOL PREVIOUS ACTION No previous action to record WITNESS REGISTER CECIL BYKERK, Chief Actuary Mutual of Omaha Insurance Company 9643 Oak Circle Omaha, Nebraska 68124 POSITION STATEMENT: Testifying in his capacity as Chairperson of the CHIA Board MARIANNE K. BURKE, Director Division of Insurance Department of Commerce & Economic Development State of Alaska P.O. Box 110805 Juneau, Alaska 99811-0805 Telephone: (907)465-2505 POSITION STATEMENT: Representing the Division of Insurance STEVE LEBRUN, Senior Account Manager Aetna Health Plan Aetna Life Insurance Company P.O. Box 91032 Seattle, Washington 98111-9132 POSITION STATEMENT: Testifying on behalf of Aetna, in its capacity as CHIA plan administrator ACTION NARRATIVE TAPE 96-22, SIDE A Number 020 SENATOR LYDA GREEN called the Joint House & Senate Health, Education and Social Services (HESS) Committee to order at 3:13 p.m. Members present were Senator Lyda Green, and Representatives Davis, Brice, Robinson, and Toohey. Representative Rokeberg arrived at 3:20. Co-Chair Green announced that the first speaker would be Cecil Bykerk, from Mutual of Omaha. Number 075 CECIL BYKERK, Chief Actuary, Mutual of Omaha Insurance Company, stated that he would testify in his capacity as Chairperson of the Comprehensive Health Insurance Association (CHIA) Board of Directors. Mr. Bykerk thanked the committee for inviting him to testify. He stated that he is Chief Actuary of Mutual of Omaha, one of the largest writers of individual major medical policies in the United States today. He further stated he is a former Professor of Actuarial Science, a past Vice President of the Society of Actuaries, and current Vice Chair of the Montana Comprehensive Health Association Board. Mr. Bykerk indicated that he has been heavily involved in health care reform issues, including testifying before Congress, as well as serving on industry and professional committees. Most recently, he served on the American Academy of Actuaries committee which analyzed the Kassebaum/Kennedy bill. MR. BYKERK expressed his gratitude to Director Burke, and Division of Insurance Actuary Katie Campbell, for their support of CHIA. He stated that the CHIA type approach is an extremely important element to the solution of health care access problems, and is a critical part of any solution which will maintain the viability of the individual major medical market. MR. BYKERK commended the Alaska Legislature for being interested in addressing an access problem that exists in health care financing. He noted that CHIA type approaches were never meant to be self- supporting. If they were, the individuals could not afford to purchase the coverage. He further noted that the original legislative history of CHIA in Alaska recognizes that fact. MR. BYKERK stated that CHIA type coverage is expressly directed at providing coverage to individuals who are uninsurable. He further stated that as an actuary, he translates uninsurable into being unable to calculate a premium that is actuarialy sound. One of the important elements of CHIA coverage is that participants are trying to provide for themselves, and even though they are subsidized, they are paying a significant portion of the cost. MR. BYKERK went on to discuss CHIA's history. He explained that he has been a CHIA board member since its inception in late 1992, and has been a Chairperson since June 1994, taking over from Ross Blaker. Mr. Blaker is now the Aetna representative on the board, and is located in Anchorage. MR. BYKERK further stated that CHIA started out slowly in 1993, but has shown steady growth, showing year-end enrollee numbers of 64, 128, and 184. Although year-end 1995 would seem to be tracking on a straight line, Mr. Bykerk suggested a closer look shows that the growth may be leveling off. He referred to Attachment 1 of Director Burke's letter of February 12, 1996, to the Joint House & Senate HESS Committees. This letter shows monthly participation to be essentially level since August, with monthly numbers of 183, 181, 185, 191, 184, 192, and 198. Mr. Bykerk indicated this leveling off was not taken into account in projections received by the committee several months ago. Those projections assumed straight-line growth, which is not taking place. MR. BYKERK commented that this is consistent with his experience on the Montana board. Although no state is quite like Alaska, Montana may come as close as any. Montana reached a plateau in its third year of operation, bounced a little bit higher in one year, and has fallen for the past three years. MR. BYKERK then indicated that he would review the activities of CHIA's board for the past three years. First, they have provided the necessary resources to get the pool in operation; recruited an administrator to perform the day-to-day work of enrolling new participants, collecting premiums, and paying claims; made assessments to cover losses as necessary; made sure that the program meets the requirements of Alaska law, and made reports back to the administration and the legislature. Initially it was difficult to know how many participants to expect. While the legislation allows CHIA to set premiums at twice the going rate for similar major medical policies in the marketplace, the board chose to set them at 175 percent of standard premium levels. Premium levels have not changed since inception, but such an update is in the works. Increases will generally range from 25 to 40 percent. MR. BYKERK stated that he wanted to clarify any misconceptions about premium levels charged by CHIA. He referred to page 6 of CHIA's 1994 report. He explained that the CHIA program bases rates on age, as well as plan design. Thus, a $500 deductible plan will cost a 60-year old $694 per month, based on the old premium schedule. He further stated that care must be taken when this amount is compared to group premiums, which are subsidized by the employer, and which don't take age into account. It is important to note that CHIA participants are paying premiums which are significantly more than standard, and that CHIA is not competing with the commercial market. At least some portion of the premium is being paid by the individuals covered. Eliminating CHIA would most likely shift most of the cost to the state, through Medicaid. MR. BYKERK noted that the CHIA 1993 report made suggestions for legislative changes to facilitate easier administration. These changes were accepted and enacted in 1994 and implemented in 1995. As the board tracked the emerging experience during 1995, they saw a marked increase in claims. This was a significant concern, and the board entered into discussions with the division and the administrator about where the pool was going. About the only responses that the board could make were to raise premiums, institute a case manager, negotiate reduced administrative fees for the new contract, and suggest further legislative changes. MR. BYKERK commented that he wished to clarify the role of the CHIA administrator, which at this time happens to be Aetna. CHIA bears the risk and the liability, although it has the advantage of being able to make assessments on its member companies for any shortfall. Aetna was selected as the administrator, and acts as CHIA's employee. Aetna receives a fee for its services, and bears no more risk than any other association member company. Mr. Bykerk further noted that he wished to thank Aetna for agreeing to be the administrator, when no one else would come forward. The board was approached by third party administrators, but the law did not allow them to be considered. MR. BYKERK further stated that the Request For Proposal (RFP) sent out in the fall of 1995 only resulted in one company which was qualified under statute coming forward with a proposal--Aetna. Instead of reduced fees, the proposal included fees that were around 25 percent higher, and did not include the cost of a dedicated case manager, which was essential. Since then, Aetna has agreed to add the case manager, for an additional 10 percent increase in fees. Contract language is still being pursued. However, the necessary fee levels will put CHIA's administrative fees at the highest level of any state risk pool. MR. BYKERK emphasized that he supports proposed changes to the law, which would give the board greater flexibility in its selection of administrators. Attachment 6 to the Director's letter provides a comparison of the assessment levels of the various states that make assessments based on health premium written. CHIA's level is not out of line, being around one half of one percent of the collected premium. While the signs indicating some leveling off in enrollment are hopeful, CHIA clearly needs to find ways to reduce claim costs in the pool and to reduce the gap between CHIA premiums and actual costs. MR. BYKERK stated the CHIA board supports the suggestions in the director's letter, regarding administrator selection, as well as flexibility in setting deductibles, out-of-pocket limits, and co- insurance percentages. However, the board cautions that lengthening the pre-existing condition period and reducing the lifetime maximum will have little long term effect, and could result in increased Medicaid costs for the state. The Board is actively working with the division in reviewing possible changes which will maximize the management of CHIA. Mr. Bykerk then invited questions from the committee. REPRESENTATIVE CYNTHIA TOOHEY asked if Montana's leveling off was achieved without making any changes in rates and benefits. MR. BYKERK replied that Montana did not make major changes at that time. Premium levels are somewhat higher than Alaska's, targeting about 250 percent. Over the past five years, Montana's participant base has been reduced, and the premiums have remained constant. Other states have seen similar rates of growth and leveling off. REPRESENTATIVE TOM BRICE asked that written copies of Mr. Bykerk's testimony be distributed to the committee. Number 298 CHAIR GREEN called on the next witness, Marianne Burke, Director of the Division of Insurance. MARIANNE BURKE, Director, Division of Insurance, Department of Commerce & Economic Development (State of Alaska), stated that the division does support the efforts of the CHIA board, and recognizes the time and effort expended by insurance companies. Ms. Burke referred to her letter of February 12, addressed to the joint House and Senate HESS Committee. As the letter states, the division has collected a large amount of data concerning CHIA plans throughout the United States. The CHIA plans vary from state to state, but all have one common characteristic--they are set up to provide an option for a particular group of people. These people are not covered by group plans, individual health insurance, or Medicare. The CHIA plan gives them a way to participate in the cost of providing for their own care. Waiting periods vary from 90 days to 12 months. Alaska has a six month waiting period. Some states have deductibles as low as $300. Alaska has deductibles ranging from $500 to ten thousand, with the difference being reflected in the premium. Lifetime benefits also vary from state to state. Alaska's lifetime benefit is currently set at $1 million. MS. BURKE noted that the division's research has shown that changing the variables has very little impact on the overall cost of the plan. What does happen is that costs are shifted. Often, they are shifted to the state. The February 12th letter also outlines some legislative fixes, which could give the CHIA board greater flexibility in managing costs. For example, the current legislation does not contain any incentive to use a Preferred Provider Option (PPO) structure. If such a structure was included, under the present law, it could actually result in a lowering of premiums collected. Other practices include incentives, pre- certification, and using centers which provide the highest quality care for the lowest price. MS. BURKE concurred with Mr. Bykerk's assessment that the board needs to be given greater flexibility in the selection of a plan administrator. Current costs are the second highest in the nation. She further emphasized that she did not wish to hold out false hope. Even if all suggested changes were put in place, the plan would not be self-supporting. There will always need to be a mechanism for funding the short-fall. The current mechanism is the combination of the individual participating in the cost of care, and a subsidy. The subsidy is provided by assessing all insured plans in the state of Alaska. All insurers who write health care coverage in the state of Alaska are assessed, based on their premium base. What is commonly referred to as self-insurance escapes this. A self-insured plan is where the employer elects to pay the cost of the health care directly. The division has no regulatory authority over these plans, because they are exempt by federal statute. Other states fund the subsidy in different ways. California, for example, has a cigarette and tobacco tax. Colorado has an income tax surcharge. Another state charges one dollar per month per policy, which would make the administrative costs high. Utah uses a state appropriation. Louisiana funds the cost through its general fund. Some states use a premium tax off-set. In the state of Alaska, 100 percent of the premium tax goes directly into the general fund. MS. BURKE noted that there are other options with respect to the CHIA program. A moratorium on new participants has been suggested, although under current statute the division lacks the authority to impose such a moratorium. However, as Mr. Bykerk noted, the publicity surrounding such a moratorium would certainly result in a glut of new applicants during the waiting period. The option that is currently in place does permit individuals to participate in paying for their own care. She emphasized the division's position that, however the CHIA plan is funded, it must be run with sound business principles. She reiterated this requires giving the board greater flexibility. Ms. Burke then invited questions from the committee. Number 425 REPRESENTATIVE TOOHEY asked about voluntary PPO. She stated her opinion that until the medical community becomes competitive, like any other business, there will be no lowering of costs. She emphasized that in offering a benefit package, the best possible price should be obtained. Number 468 REPRESENTATIVE CON BUNDE referred to the division's letter of February 12. He asked if it was correct that a voluntary PPO would result in a 6 percent reduction in claims. MS. BURKE responded that those were the plan administrator's projections. REPRESENTATIVE BUNDE then asked at what level a premium increase would drive consumers out of the market. MS. BURKE replied that as the premiums go up, those people that may be marginally high risk will leave the plan, while the sicker, higher cost people will stay in. REPRESENTATIVE BUNDE responded that what was actually being discussed was medical welfare. He then asked if raising premiums would result in more companies going to self-insured plans. MS. BURKE stated that was correct. REPRESENTATIVE BUNDE stated that a policy decision may require finding a way for everyone to contribute. He then referred to the discussion on page 5 of the division's February 12th letter, which refers to Alaska's administrative costs being the highest in the nation. MS. BURKE stated that this was based on actual data, and referred to Attachment 5 to the letter. REPRESENTATIVE BUNDE wondered why the costs were so high. MS. BURKE responded that the cost is what is charged by the plan administrator to administer the plan. It is a fee for services. The division has been negotiating to try to lower the cost. REPRESENTATIVE BUNDE responded that the cost was three times the national average, and asked if Alaska had three times the claims of the national average. MS. BURKE replied that the cost was per participant. REPRESENTATIVE BUNDE then asked if the cost of doing business in Alaska was three times what it was elsewhere, or was the problem due to lack of competition. MS. BURKE responded that the plan administration fee has nothing to do with the premium, or the cost of providing care. It is simply the cost of processing the necessary paperwork. REPRESENTATIVE BUNDE repeated his question, as to why the cost was three times the national average. MS. BURKE replied that was why she was asking the legislature to give the board more flexibility. She stated that it gets back to competition. If the statute is written so that only one or two companies can provide the service, then there is no room to negotiate. If greater latitude was given to seek the services from qualified, licensed entities, there would be more competition. Number 493 CHAIR GREEN asked how we would get to that point. MS. BURKE responded that legislation would be required. The statute presently requires that it be one of the companies that is in the top group, in terms of volume of business. If Aetna hadn't stepped forward, there would have been no option. CHAIR GREEN asked if the price was negotiated, or actual. MS. BURKE replied that was what was actually charged, for 1994. REPRESENTATIVE BUNDE stated that he did not intend his comments to be critical of Aetna. He then asked if the $100 thousand cost savings that would result from increasing out-of-pocket costs would be an annual savings. MS. BURKE responded that the amount represented the savings that would have occurred from inception of the plan. REPRESENTATIVE BUNDE asked if it was possible to guess how a 6 percent reduction in claims would translate into dollars. MS. BURKE stated that the cost of the plan has been projected, using available data. Based on Aetna's experience with using PPO's, they have projected a 6 percent decrease. She reiterated that the $100 thousand figure represents savings that could have been achieved from inception. There is no reason to believe that an enormous savings would result from going to a PPO plan. REPRESENTATIVE BUNDE stated that he believed statutory changes could be made to encourage competition, and to require increased contributions from those using the system. He asked if it was fair to say that the division would encourage such changes. MS. BURKE responded that was correct. The board does need greater latitude to make changes, while still keeping in mind the needs of the participants. If the participant incurs $100 thousand in claims, and there is a 20 percent co-pay provision, then the participant will pay that amount. This is something the board needs to look at. REPRESENTATIVE BUNDE asked if it would also be fair to say that we all share a risk of needing to use this system. Those with average risk levels make a contribution. Would it be fair to say that those who have a higher than average risk, such as people with congenital or long-term illnesses, should pay more than the person of average risk? MS. BURKE responded that is in fact what is happening. Participants in this pool already pay 175 percent of what the average person pays. If you are high risk, you pay high premiums. Number 563 REPRESENTATIVE CAREN ROBINSON asked what would happen if no legislation was passed this year to fix the system. MS. BURKE replied that the board would be very limited as far as lowering the administrative costs. A PPO could be inserted, but it wouldn't work, because of the statutory requirement that an 80/20 option must be available. For instance, the PPO option might offer 90 percent reimbursement when using a preferred provider, but only 60 percent if not using a preferred provider. However, the statute requires payment of at least 80 percent. Therefore, there would be no incentive for taking the PPO option. Latitude does exist to put in a case manager, and to increase premiums, which the board is now in the process of doing. So there will be some increase of revenue. REPRESENTATIVE ROBINSON then asked if the best thing the committee could do would be to try to get legislation passed this year. MS. BURKE responded that would be her recommendation. Number 580 CHAIR GREEN asked if administrative actions could be taken through the division to reduce any of the costs. MS. BURKE stated that the division has been working with the Office of the Attorney General, and has already done everything that can be done in accordance with statute to reduce costs. TAPE 96-22, SIDE B Number 020 CHAIR GREEN asked if legislation had been drafted. MS. BURKE stated that it had. CHAIR GREEN then called on Steve LeBrun, Aetna Account Manager. STEVE LEBRUN, Senior Account Manager, Aetna Health Plans, Aetna Life Insurance Company, stated that he would comment in his capacity as plan administrator for CHIA. He reiterated that Aetna supports the idea of a high risk pool. Mr. LeBrun stated that Aetna supports the division's recommendations, but emphasized that this still leaves a funding issue. Because of the assessment structure, the state of Alaska plan pays one dollar out of every three dollars assessed. Over the next several years, the state plan faces potential assessments of a million dollars per year. To date, Aetna has absorbed those costs. But this is becoming more difficult for them to do. He therefore urged the committee to consider funding alternatives, including the possibility of broadening the funding base to cover self-insured employers. Number 064 REPRESENTATIVE TOOHEY asked if Aetna did this type of management in other states. MR. LEBRUN stated that they did not. REPRESENTATIVE TOOHEY asked how the figure of $85 per participant was determined. MR. LEBRUN responded that it was a complex calculation. The Alaska plan is the smallest of the plans nationally, with only 167 enrollees. Most plans have two or three thousand. This results in a small base over which to spread fixed costs. Because of the nature of the assessment process, which is a deficit assessment, significant interest charges are incurred. REPRESENTATIVE TOOHEY again urged the use of competitive bidding in choosing providers. CHAIR GREEN announced that a follow-up meeting would be scheduled. ADJOURNMENT There being no further business to come before the Joint House & Senate Health, Education and Social Services Committee, the meeting was adjourned at 4:03 p.m.