On Monday, April 16, 2001, a subcommittee of the Employee Benefits Committee (EBC) was appointed to make recommendations regarding the University of Kentucky health insurance program. The following are the recommendations, drafted by that subcommittee and finalized in collaboration with the full Employee Benefits Committee. While not every committee member agrees with every individual recommendation in this report, they all support the overall document.

Preamble: From the perspective of many employees, the cost of health insurance is a growing problem. The employee share for the UK HMO family plan has increased by 70% over the past three years. The announcement of the rates for fiscal year ‘01-02 with monthly employee costs for the dependent plans up from 34% to 44%, is a catalyst for a problem which had been brewing for the past several years. The cost of the plans put the family health insurance out of reach for many of UK’s lowest paid employees.

Because of the crisis situation, the committee divided their work into two parts. The first was a focus on the immediate situation. A set of recommendations was developed to minimize the current problems. However, serious long- term problems exist. If employee health insurance costs continue to escalate at rates far exceeding inflation or pay raises, it will exacerbate the problems of adverse selection¹ and the inability of lower paid employees to afford the health insurance for their dependents. The Committee will continue their work over the next six months to develop a set of recommendations to address the longer run situation.

The Committee cannot emphasize strongly enough that an actuarially sound and affordable package of health care benefits is critical to the future of the University and the welfare of the UK Community. Quality employees, whether at the entry staff level or at the advanced professorial level, cannot be recruited and retained without a major restructuring from the published rates. The published rate structure is perceived as symbolic that university priories are weighted against employees, especially those in the lower income levels.

Recommendations to be Implemented Immediately:
#1
Problem: The published rates proposed for fiscal year ‘01-02 put the entire program at risk due to adverse selection. As proposed, rates will increase to the extent that many young, healthy employees will find non-UK health plans, even without the UK contribution, to be lower cost. The loss of these participants would put the integrity of the program at risk and create the potential for what is known in the insurance industry as the “death spiral”. Many employees have already signed up for alternative insurance plans.

Recommendation: Premiums paid by employees (the insurance rate less the UK contribution) must be set at levels at which most employees will find the UK programs the most attractive choice.

#2
Problem: The proposed rate increases were much greater for dependent plans than for the individual plan. This created the impression that income generated by the employee share of the dependent plan was used to allow the individual plan to be provided at no out-of-pocket cost to the employee.

Recommendation: Adjust the increases in insurance premiums among individual and dependent plans so that all the premiums increase by about the same percentages (i.e. are maintained near the same ratios as in 2000 - 2001).

#3
Problem: Some UK employees outside of the Lexington area do not have access to the PPO Network. These employees should be reassured that their situations will be given appropriate assessment. The Committee recognizes that the cost to the University’s plan is higher for the indemnity plan than the PPO plan.

Recommendation: For those who do not have access to the PPO network, the indemnity plan should be made available.

#4
Problem: The concerns about the health insurance program have created a public relations problem for the Medical Center, which is counter-productive to their mission as well as to the UK health program.

Recommendation: The Medical Center Administration, Central Administration and the UK Community should collaborate to find ways to resolve this problem.

#5
Problem: To accomplish the goals of making the combined health insurance programs actuarially sound and as affordable as possible, rates must be restructured from the initial published proposal.

Recommendation: The table in this document reflects the recommendations of the full Employee Benefits Committee, along with the cost impacts. The highlights of the proposal include payments of $14/mo. by employees for the single plan and an increase of 5% in the employee cost for dependent plans (compared to the 34% to 44% increases initially published). This structure does not resolve the adverse selection problem, but is the best compromise between adverse selection and cost to the University. The proposed rate structure costs the University $3.4 million, probably $1.7 million (about half) of which would come from the general fund. This is a “share the burden” recommendation. The increases in contributions from single plan participants reduce the budget impact by about $1.5 million.

#6
Problem: The revised rate structure increases the expense borne by the UK budget. Budgets are tight, however the Committee recognizes that these costs cannot be absorbed without some reallocation.

Recommendation: The sources of funds, must be determined by the Central Administration, but the Committee strongly recommends that they not come from pending salary adjustments.

Details of the Proposed Rate Structure -

Key Features: Single employees pay $14 and dependent rates are raised five percent from the fiscal year ‘00 - ‘01 levels.

Employee Costs:
FY 2001-2002 EBC Proposal			FY 2001-2002 Orig. Admin Prop.	FY 2000-2001
UK-HMO	Single Parent +Ch Couple Family	$14 $181 $239 $382	$0 $246 $329 $486	$0 $172 $228 $364
Medicare Carve-out		$14
PPO/ Indemnity	Single Parent +Ch Couple Family	$36 $225 $289 $449	$55 $291 $382 $555	n.a. n.a. n.a. n.a.

Rates, UK Credit and Employee Cost:
Projected Enrollment			'01-‘02 Rates	UK Credit	Empl. Cost.
UK-HMO	Single Parent +Ch Couple Family	7311 1154 743 1383	$220 $436 $504 $670	$206 $255 $265 $288	$14 $181 $239 $382
Medicare Carve-out		1957	$220	$206	$14
PPO/ Indemnity	Single Parent +Ch Couple Family	2017 242 360 468	$242 $480 $554 $737	$206 $255 $265 $288	$36 $225 $289 $449
Budget Exposure: $3.423 million (General Fund exposure $1.712 million)

These rates are based on the approximate historical and actuarially based relationships between the single plan and the dependent plans, which are: parent +children = 1.98; couple = 2.29; family = 3.04.

Submitted by the Health Insurance Subcommittee of the UK Employee Benefits Committee (Lee Meyer (Chair), Mary Bolin-Reece, Julia Costich, Bill Reesor, Jack Supplee, Cliff Swauger, Spence Turner)

The Employee Benefits Committee thanks the staff members who provided supporting data and analysis.

--submitted on 25 April 2001

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¹ Adverse Selection is a term used in the insurance industry to describe a situation in which the design of the policy encourages participation by high risk individuals and discourages participation by low risk individuals. As a result, the costs of providing coverage are increased.