University of Kentucky
Health Insurance Task Force Meeting
August 15, 2001
Agenda

Year-by-year financial results under self-insurance
 Rationale going in
 Key Mercer recommendations
 Results
 Explanation

Why did UK-HMO rates increase more than the 11%
capitation rate increase?
Health Insurance Task Force Meeting
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Financial Summary of the University of Kentucky
Self-Funded Medical Benefits Plan
For Plan Years 1997-1998 through 2000-2001
CASH FLOW results per UK internal reporting
Year
Revenue
Expenses*
Net
Surplus/Deficit
Average Per
Employee/Month
1997-1998 $ 38,003,454
$ 39,098,255
$(1,094,801) $
(1,094,801) $
(6)
1998-1999 $ 41,064,528
$ 42,547,916
$(1,483,388) $
(1,483,388) $
(8)
1999-2000 $ 44,750,182
$ 49,354,993
$(4,604,811) $
(4,604,811) $
(24)
2000-2001 $ 51,205,112
$ 51,883,670
$ (678,558) $
(678,558) $
(4)
Total
$
(7,861,558)
Notes
* Expenses include: claims; capitation; administrative fees, stop/loss insurance and adjustments to incurred but not
reported (IBNR) claim reserve estimates.
Health Insurance Task Force Meeting
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Breakdown Of Expenses for
2000-2001
Claims
$22,500,000
Capitation
$27,600,000
Administrative Fees
$2,500,000
Stop/Loss Insurance
$250,000
Reserve Adjustment
($950,000)
Total
Health Insurance Task Force Meeting
$51,900,000
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1997-1998 Plan Year

Rationale going in:
 unknown; Mercer not involved until February 1998
 likely used insured carrier rates that had already been quoted

Key Mercer recommendations:
 none

June 30, 1998 result: $1.1 million deficit

Explanation of results
 unknown (to Mercer)
 medical inflation still very low during this period
Health Insurance Task Force Meeting
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1998-1999 Plan Year


Rationale going in:

Mercer hired in mid-February (1998) to produce rates in two
weeks for July 1, 1998 effective date

No time for strategy discussions or changes
Key Mercer recommendations:

use of 4-tier structure for all plans

consistent tier factors across all plans

consider “single risk pool” rating
Health Insurance Task Force Meeting
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1998-1999 Plan Year (cont.)

summer planning meeting to address self-insurance “housekeeping” and strategy issues
 took place 6/12/98
 Mercer recommended simple enrollment tracking system
to accurately monitor eligibility (Excel? Access?)

June 30, 1999 result: $1.5 million deficit
Health Insurance Task Force Meeting
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1998-1999 Plan Year (cont.)

Explanation

Mercer financial analysis (earned premium vs. expenses)
produced a $150,000 GAIN for plan year

Difference was on the revenue side

Mercer analysis based on insurance carrier claims and
enrollment reports – carrier enrollment was overstated on
these reports

UK experienced revenue shortfall because there were actually
fewer enrollees than reported to Mercer. This enrollment
discrepancy was not discovered until well after 1999-2000
rates had been set.
Health Insurance Task Force Meeting
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1999-2000 Plan Year

Rationale going in:
 Rates for 1999-2000 based on experience through
December 1998
 At that time, no apparent major problems with UK strategy
to rate each plan based on its own experience
 Enrollment discrepancies were not known, so carrier reports
were used (standard practice)
Health Insurance Task Force Meeting
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1999-2000 Plan Year (cont.)

Key Mercer recommendations:
 consistent, 4-tier rate structure
 single risk pool
 in terms of what is covered, standardize some benefits
(transplant coverage, prescription drugs) across all plans

June 30, 2000 result: $4.6 million deficit
Health Insurance Task Force Meeting
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1999-2000 Plan Year (cont.)

Explanation:
 Return of medical inflation
 Rates inadequate by about $3 million; remainder due to other
“one-time” charges
 Inadequate rates – causes
 Understated historical enrollment (baseline per
capita experience too low because enrollment too high)
 Enrollment shift in UK-HMO population (enrollment older
than in previous year, so actual age/gender capitation
payments higher than UK-HMO rate increase)
 Poor transplant experience (very difficult to predict)
 Anthem BCBS experience very poor
 Humana began to assess previously uncollected
capitation payments (that had not been rated for)
Health Insurance Task Force Meeting
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1999-2000 Plan Year (cont.)

Explanation:
 “One time” charges
 Humana had failed to bill UK for certain capitation
charges since conversion to self-insurance (July 1997)
 Humana requested $900,000 reimbursement
 UK (with Mercer assistance) negotiated $400,000
settlement

Timing issue of cash claims
Health Insurance Task Force Meeting
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2000-2001 Plan Year

Rationale going in:
 Emerging poor experience for 1999-2000 known based on Mercer
financial modeling PRIOR to 2000-2001 rate setting
 Rates based on experience through November/December 1999
 August 1999 – Mercer warns of need for major corrective actions
(rate increases, plan design changes)

Key Mercer recommendations:
 No free coverage – everyone must pay
 Single risk pool – same rate increase for all plans (to manage
anti-selection)
 Add $1 to $1.5 million to UK-HMO rates to account for additional
age/gender enrollment shift risk ($400,000 added)
 Major plan design changes
Health Insurance Task Force Meeting
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2000-2001 Plan Year (cont.)

June 30, 2001 result: $700,000 deficit

Explanation:
 Claims projection right on target
 Humana withdrawal on June 1, 2000 forced unanticipated
enrollment shifts (obviously too late to change rates)
 Humana population was older – they shifted to lower cost plans
(less premium collected but claims remained the same)
Health Insurance Task Force Meeting
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2001-2002 Strategy

Rationale going in:
 Experience of 1999-2000 plan year convinced UK staff to
consider more major changes as recommended by
William M. Mercer, Incorporated
 Single risk pool
 Reduced number of vendors
 Prescription drug carve-out (and other specialty vendors)
 Totally new plan designs
 Planning began in June 2000
 Rate for anticipated UK-HMO enrollment shifts
 No free coverage (rating structure must recognize that
medical costs are increasing much faster than UK overall
budget allocation)
 Results to be determined
Health Insurance Task Force Meeting
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Why did UK-HMO rates increase more
than capitation increase?

Discussed in depth August 8 (and summarized clearly in minutes)

Age/gender capitation matrix shifts risk of enrollment changes
to UK health plan – result is shared risk between HMO and
health plan
 UK-HMO absorbs risk of adverse utilization and price
fluctuations within each age/gender “cell”
 UK health plan absorbs risk of transplants, durable medical
equipment, and out-of-area emergency services (capitation
rates do not cover these items)
 UK health plan absorbs risk of “older” enrollment than
anticipated

Example?
Health Insurance Task Force Meeting
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