Editor’s Note: A guest post by Louisiana Commissioner of Administration Kristy Nichols.
The Office of Group Benefits (OGB) is making changes that allow it to provide better service and care to its members in the changing health care environment. With the impact of the Affordable Care Act, the cost of health care rising by six percent every year, and more than 10,000 baby boomers turning 65 every day, the industry is shifting rapidly. That shift requires employers to balance the needs of their members with financially responsible practices that ensure they can continue to provide comprehensive benefits for years to come.
OGB provides health insurance to more than 230,000 state employees, retirees and their dependents. Most of OGB’s plans are self-funded, meaning that OGB pays claims with the money it takes in from premiums.
Because it’s self-funded, OGB’s finances are immediately impacted by the health care its members receive each month. Each child that’s born, each prescription filled, and each infection treated is paid for with the premiums paid by OGB members and the taxpayers who fund the state’s portion of premiums through state dollars. If the cost of caring for members is more than the premiums it receives, OGB has to make adjustments to ensure it is operating responsibly.
OGB and its actuary carefully balance historical claims trends with premium rates each year to ensure that premiums cover expenses. The agency also maintains a reserve fund, often called the fund balance, that acts as a safety net if expenses exceed premium revenue. Over the years, OGB’s fund balance has fluctuated greatly, even spending some time in a negative balance. In 2011, however, the fund balance reached $540 million. At first glance it may seem like having a fund that large is a great thing. But in reality, keeping hundreds of millions unnecessarily locked up in a reserve fund was not the best use of taxpayer money.
Think about it this way: a reserve fund is similar to a bank account set aside for a rainy day. If the fund is too low, you run the risk of not being able to cover unexpected expenses. If the fund is too high, your money sits idly and doesn’t work for you. Considering that the state funds 75 percent of member premiums through taxpayer dollars, letting that large of a balance sit unused meant that those funds weren’t being used for other important projects.
When discussing the reserve balance it’s important to understand some basics. First, the fund balance is not all the cash in OGB’s bank account. The fund balance refers to cash on hand without including money set aside for incurred but not reported expenses. So, OGB not only has the fund balance, but an additional $125 million on hand to pay for claims that have not yet been reported. It’s important to note that those claims are theoretical. Because OGB operates on a cash basis, incurred but not reported claims would only be relevant if the plan were eliminated, which is not an option that has ever been considered by this administration.
If $540 million is too much, then how much money should OGB keep in its reserve fund? OGB and its actuary have developed a formula for calculating an appropriate target. A variety of factors were used in the calculation and the recommendation was based on best practices of funds maintained by other insurance entities and the National Association of Insurance Commissioner’s risk based capital standards for health insurance companies. Using those standards, an appropriate balance falls between the highest monthly disbursement during the past six months and two times OGB’s average monthly disbursements during the same period. That puts a target balance currently at somewhere between $113 million and $226 million.
Like all responsible employers who provide comprehensive benefits to employees, each year OGB evaluates program design and costs compared to benchmarks. In past years, when the fund balance was unnecessarily high, OGB decreased premiums to return some of the inflated reserves to its members. However, now that OGB has reached its target fund balance, it must make changes that keep the organization operating responsibly. Those changes include offering new, lower cost plans as well as helping its members focus on wellness and preventive care. Plan changes for fiscal year 2015 are estimated to lower expected claims costs by $131.8 million even with the additional $24 million in expenses from the Affordable Care Act. That puts the fund balance at $118.8 million at the end of FY 15.
Overall, OGB is expanding choices, promoting wellness, and ensuring a continued fiscal foundation of state benefit plans despite the challenges that come with the Affordable Care Act. Change may be constant in health care, but OGB is well-prepared to navigate the new world.