CHAPTER 6 ________________________________
Managing a Governmental Health Plan

In 1975, the Texas Legislature adopted recommendations from an interim study commission that I staffed, creating a uniform group insurance program. This program offered the customary benefits provided by an employer, the largest and most expensive being health insurance. Up until then, state agencies and institutions of higher education offered health insurance plans individually. These plans varied greatly based on the demographics of each agency’s workforce and the level of appropriations made to each agency. As you can imagine, there was much inequity.

The statute passed by the legislature required that all executive, legislative, and judicial agencies participate in the new group insurance program. It allowed institutions of higher education to elect to participate in the new program or to continue offering separate health coverage. All of the state’s institutions of higher education elected to participate, except the University of Texas system and the Texas A&M University system. Since the statute was passed, participation in the group insurance program has remained largely unchanged, except that certain county employees are now eligible.

The program is governed by the six-member Employees Retirement System (ERS) Board of Trustees. This board is made up of three active state employees elected from the system membership. The governor, the speaker of the state house of representatives, and the chief justice of the state supreme court each make an appointment to the board. The board appoints an executive director, who serves at the pleasure of the board. The executive director is responsible for the day-to-day operations of the group benefits program (GBP).

The Group Benefits Program

As executive director of the Employees Retirement System of Texas from 1996 to 2004, I managed the state employees’ and retirees’ GBP, which provided health and dental coverage, life insurance, and short- and long-term disability insurance. The GBP provides health care coverage to over 500,000 Texas state employees, retirees, and family members. It is a pay-as-you-go system financed primarily by state appropriations, but also employee contributions for family member coverage and out-of-pocket payments for usage of health benefits. On average, this program spends over $2 billion annually, and the average annual increase in cost has been 10 percent.

In Texas, the GBP is statutorily designated as a trust. As such, the duty of care guiding principle is fiduciary duty. Common law defines a fiduciary as acting solely in the interest of beneficiaries, with the exclusive purpose of providing benefits that are earned or promised. Fiduciaries must carry out their duties in a prudent manner and transparently implement the program according to plan documents. Fiduciaries are charged with prudent management of program resources; therefore, they must be mindful of keeping administrative expenses at reasonable levels.

It’s very important to develop consensus GBP policies to provide a guiding structure for decision-making. These policies must address the cost drivers of the GBP. Defining who may participate in the GBP is a fundamental policy that affects cost. A large, diverse pool of participants helps make health coverage more affordable. However, the policy-maker will want to maximize these outcomes by encouraging as close to 100 percent participation as possible and discouraging participants from making selections or choices that have negative financial consequences.

The policy must determine how risk is going to be managed and shared. Benefit coverage must be defined based on what is reasonable and affordable but should try to assure fairness to all participants when addressing the level and availability of health services. Finally, decision-makers should determine the total cost per individual that the system can afford. This could be done as a maximum average cost per person or as a percentage of the GBP budget or state budget.

It is the responsibility of the ERS executive director to guide the policy process and to achieve consensus on the policies affecting the GBP. The ERS executive director should develop policy options and recommended actions, then present the policy options and proposed actions to the governing board for consideration. A variety of briefing sessions should be scheduled to inform stakeholders about policies and options for changes. Stakeholders include leadership offices and key legislators, representatives of state agencies and higher education institutions, employees, and employee organizations.

Four Guiding Policies

Over the more than 30-year life of the Texas GBP, the health policies have evolved and strengthened. There are four primary guiding policies.

1. Obtain 100 percent participation by all employees, retirees, and families, with the employer accepting most of the financial risk. This is supported by state appropriations that provide full contribution for full-time employees and retirees and 50 percent contribution for family members. Part-time employees’ premiums are partially covered by the state.

2. Share the cost of using the health care benefit with the user. A system of copays was developed for health care services and prescription drugs. Along with this cost-sharing scheme, maximum annual out-of-pocket costs were established.

3. Ensure access to quality health care providers. This was accomplished by requiring that health plans develop a broad network of doctors and hospitals and seek to maintain the network.

4. Maintain a contingency reserve fund not exceeding 10 percent of expenditures. This policy was authorized by statute but was difficult to implement due to the state’s resource constraints. Although not fully understood or appreciated by budget writers, the reserve fund provides flexibility to manage the financial peaks and valleys of the program and is required by law for private insurance companies. Governments inherently have limited resources to allocate, and state government programs cannot run budget deficits or shortfalls. Therefore, careful budget estimates are prepared to ensure that expenditures do not exceed revenues plus balances and reserves.

Understanding Cost Drivers

Managing the GBP requires that the executive director understand the dynamics of the program and is knowledgeable about the cost drivers. Cost drivers are identifiable factors causing changes in expenditure patterns. Two factors explain most of the cost impact on an insurance program: participant demographics and the health condition of the participants. For example, if your participant pool is predominantly made up of women of childbearing age or people over age 50, the cost will be higher due to these demographics. If your participant pool includes a disproportionate number of people with diabetes or heart conditions, again, your cost will be higher.

The executive director of the ERS must know the participant demographics: age, sex, geographic location, and related trends and growth rates, and must track information regarding the health condition of participants, the most common and costly medical services, and prescription drugs.

He or she must develop, prescribe the format of, and collect, monitor, and analyze financial data, which should enable cost forecasting. ERS summarizes cost trends in three categories: medical care providers, hospital care at inpatient and outpatient facilities, and prescription drugs. Much has been written about the rising cost of medical services and prescription drugs. Like demographics and health status, these play an important role in the cost of a program and need to be monitored. Improvements in medical technology and prescription drugs are introduced continuously and play a significant role in improving health outcomes but also affect the cost of an insurance program. Finally, rates of consumption of medical services and prescription drugs must also be tracked.

Keys to Success

The GBP is one of the most successful programs in Texas state government. It is the health plan that others attempt to emulate or other groups of public-sector employees would like to join. There are several reasons that ERS has been able to sustain this reputation: balance, global coverage, communication, a good contracting process, transparency, and management of the appeals process.

Balance

We managed the program with an emphasis on the customer; this was balanced with being fiscally responsible. It is a challenge to achieve such balance because maintaining fiscal health is frequently incompatible with being customer-oriented. Over time, policymakers had emphasized benefits in lieu of salary increases. Employees saw this as one of the primary perks of state employment. We also understood the value of the large and diverse pool of participants; it allowed us to leverage a large pool of quality providers and obtain discounts for services. The pool was diverse in age, gender, ethnicity, and health condition. Adverse selection was moderated because the state paid the entire contribution cost for employees and retirees and half of the cost of dependent coverage—the only exposure to adverse selection.

ERS had a core group of talented, dedicated staff who possessed institutional knowledge essential to managing this complex program. Very importantly, ERS had expert assistance from a consulting actuarial firm that had worked with the program since 1974. There simply is no substitute for the experience, care, and perspective these advisors provided to the GBP. The GBP health plans included a point of service (POS), self-insured plan financed through state appropriations and contributions from members for family coverage. This plan had a private-sector partner to administer the network of medical providers and to process the claims. We separated the prescription drug program (PDP) from the health plan and hired a separate benefit manager to develop the retail pharmacy network and mail pharmacy and to pay the claims for members. During the time that I managed the program, there were also health maintenance organization (HMO) choices. For a time, the GBP had a self-insured HMO. However, it was discontinued because the cost of benefits exceeded the cost of the POS plan. The other HMO options were commercial insurance products and were included in the portfolio of health plans if the cost of inclusion was equal to or less than the cost of the self-insured plan. It was very difficult for most HMOs to compete against the relatively low cost of the self-insured plan.

Providing Global Coverage

Providing global coverage was challenging. While most of the participants live in Texas, some employees have working assignments in other states. Retirees and family members live all over the world, so benefits must be portable. Participants living in Texas are spread throughout the large state, and there are few options for medical services in the more rural areas. We took care to provide these services globally.

A team of staff and consulting actuaries worked with an advisory board made up of health plan participants, industry experts, and the governing board to review the vision and direction for the global coverage health plan. The plan of benefits and incremental costs were evaluated on an annual basis, and rates were set by the ERS board of trustees annually. Most years, the plan of benefits did not need much revision, but the HMO plans were competitively bid each year. Because of the requirement that HMOs cost less than the self-insured plan, there was significant volatility in the HMO choices, making this a very difficult communication problem.

Twice during the time I was managing the plan, significant revisions to the benefit plan were required to cut the cost of the plan and balance the budget. Unfortunately, the changes usually resulted in more costs shifted to the participants. However, significant cost savings were also realized by renegotiating or rebidding the PDP and by renegotiating provider contracts. The POS plan administrator contract was competitively bid every three to six years. These changes were thoroughly vetted with the advisory committee, governing board, legislative staff and members, and other government leadership. In addition, forums were held to brief the participants and agency benefit coordinators.

Communication

Communication is key to managing any large public program, but it is even more essential for a health plan, which impacts people in the most personal and direct manner. Careful planning went into frequent communication with the financial partners—government leadership staff and other legislative leaders and staff. It was very important to identify and focus on key members of the governor’s, lieutenant governor’s, and speaker’s offices, as well as the state senate and house of representatives. We made an effort to educate these government leaders more extensively so that they could act as advocates for the plan. We held regular meetings, delivered reports on the fiscal status of the health plan, and developed standardized report formats to promote consistency in the material we shared. Over time, this significantly helped our education effort. We also made sure to keep the employee and retiree association and groups informed. Keeping these groups as allies was paramount.

A Good Contracting Process

Develop a good contracting process for retaining your private-sector partners. This can be done by developing good contracts with performance standards and consequences and monitoring them closely. On a monthly basis, ERS senior staff met with the self-insured POS administrator and the PDP vendor. Program staff met with their working counterparts at least monthly. Operationally, we had daily contact with all the vendors as we actively managed the complex plans.

Each year, have the contracts audited by an outside, independent firm. Hold the vendors accountable. Don’t be afraid to rebid or renegotiate the contracts. The health care market is very dynamic, and going out for bids allows you to take advantage of improvements. Often, you can lower your costs without too much difficulty.

Transparency

Managing a government health plan is more complex than managing one in the private sector. There’s more transparency in a government plan: All documents, except for private health information, are subject to disclosure. We regularly disclosed information to government and legislative leaders, employee and retiree groups, and the press. The pool of participants is more complex; it includes all elected officials, legislators, judges, and their family members. The participants tend to have a more sophisticated understanding of their benefits—especially employees and retirees of the higher education system. Because Texas has tended to use benefits as a significant form of compensation, often in lieu of salary increases, employees and retirees pay close attention to any changes that they think dilute the benefit.

Policy decisions affecting a government health plan, including benefit changes, selection of health and prescription drug plan vendors, and rates paid for each category of coverage, require governing board approval. Board members are trained to understand the laws and budget of the health plan. These briefings cover the components of the health plan’s cost and the benefit structure. Board members meet at an annual workshop to receive in-depth information in an informal setting. This allows free and wide-ranging discussion among board members, senior staff, and invited experts and advisors. Board members are given one-on-one briefings as appropriate or requested. Also, during the regularly scheduled formal meetings of the board, additional information about the health plan is conveyed, often through the deliberation of appeals by participants regarding denial of benefits.

Managing the Appeals Process

ERS has a formal appeals process for the denial of health benefits. If the appeal is upheld at any point in the process, the claim is paid. The first appeal is a request that the health plan reconsider its decision. If that is unsuccessful, the participant may file an appeal to ERS. Staff will consider the denial and make a decision. If approved, the claim will be paid. If not, the staff will refer the appeal to the ERS Medical Board. The medical board may recommend that the claim be paid or denied. If the staff and medical board recommend denial, the executive director may override the decision and pay the claim.

If the executive director agrees with the recommendation to deny, a letter is sent to the participant informing him or her that the denial stands but that he or she has the right to an administrative appeal conducted by the state office of administrative hearings. Then, at a formal hearing of the board, the examiner presents the case, allowing for testimony by the participant and ERS staff and/or health plan vendor representatives. The board makes a final decision about whether benefits will be awarded, which can be appealed to the state district court. The court system process makes the final decision in these cases. Fortunately, very few cases have administrative appeals, and even fewer are appealed through the court system.

Reflection

Successfully managing the Texas GBP was the most challenging and rewarding experience in my career. The importance of this program in the everyday lives of state employees, retirees, and their families was a constant reminder of my fiduciary duty. And with the current national debate over health care reform, the GDP case illustration underscores the importance of good policy models.

I have two disappointments looking back over my years of managing the Texas GDP. First, we were unsuccessful in gaining support from budget writers for a healthcare spending target. And second, we were not able to convince budget writers of the necessity to fully comply with the statutory requirement of a contingency reserve fund. Without these tools to assist us in managing the program, our flexibility and efficiency was reduced.