|Budget Issue:||Proposed high deductible health plan reasonable, but may not reduce #cabudget costs.|
|Program:||State Employee Health Benefits|
|Finding or Recommendation:||Reasonable to include High Deductible Health Plan on menu of health plan options available to state employees; however, the fiscal effect of creating such an option is not certain.|
Under the Public Employees’ Medical and Hospital Care Act (PEMHCA), the Legislature establishes health insurance for active and retired employees of the state and participating local governments (about 1,100 public agencies). About three-fourths of the active state workforce receive health benefits established under PEMHCA (state employees who work for the University of California receive benefits established by the university’s governing board). The California Public Employees’ Retirement System (CalPERS) administers the health benefits established under PEMHCA. Each year, CalPERS negotiates with health care providers to establish the policies and premiums of the health plans available to state employees.
Annual Reports of Health Plans. The PEMHCA requires that CalPERS annually report to the Legislature regarding the plans offered under the law. Specifically, CalPERS is required to report information regarding the costs expected in the coming policy year, the quality of care provided to plan participants, and the level of accessibility to preferred providers for individuals who live in rural areas with limited or no access to health maintenance organizations.
The state pays a significant share of the premium cost for active and retired employee health benefits. The amount of money the state contributes towards employee health benefits varies by employee group. The state’s contribution is established in statute and in collective bargaining agreements, referred to as memoranda of understanding (MOUs). The state’s contribution typically is based on the weighted average premium of the four health plans with the highest enrollment (for the remainder of this report, we refer to this as the “average premium”). The two most common state contributions are:
Formula-Driven State Contributions. In most cases, the state pays a specified percentage of the average premium. This allows the state’s contribution to change as health premiums change. The most common formula among active employees is the “80/80” formula where the state pays 80 percent of the average premium to cover the employee and 80 percent of the average additional premiums to cover the employees’ family members. For retired state employees and employees who work for the California State University, the state’s contribution typically is based on the “100/90” formula where the state pays 100 percent of the average premium to cover the retiree or employee and 90 percent of the average additional premium costs to cover family members.
Flat-Dollar State Contributions. In some cases—for example, for correctional officers—an MOU specifies that the state will pay a specified dollar amount towards health coverage for active employees and their families. Often, the state’s contribution is equivalent to the 80/80 formula—or another formula—for the term of the MOU but this dollar amount does not increase automatically after an MOU expires.
Growing Health Costs. As has been the case for most health insurance purchasers across the nation, the state’s health costs have grown significantly over the past couple decades. In addition to trends in health care costs, the state’s costs are partly attributable to the fact that (1) health plans offered under PEMHCA provide relatively high levels of coverage—typically paying for at least 80 percent of covered health care expenses, (2) the state workforce tends to be older and have higher incidence of chronic conditions than the general working age population, and (3) in the case of retiree health costs, the number of retired employees receiving the benefit has grown as more state employees retire and people live longer. The Governor’s 2015-16 budget assumes that the state will spend about $4.8 billion to pay for active and retired state employees’ health benefits.
Health Plan Requirements. Under the Patient Protection and Affordable Care Act (ACA), federal law requires the state to (1) offer comprehensive health benefits to employees and their dependents (but not their spouses) and (2) pay, on average, at least 60 percent of the costs of these health care expenses. The benefits the state offers state employees provides somewhat more generous coverage than is required by the ACA. Specifically, The typical plan offered by the state pays for over 80 percent of covered health care expenses. (Employees pay the remaining costs in the form of deductibles, coinsurance, and copayments.)
“Metal Tiers.” The ACA requires all health plans to provide coverage for specified services, including: preventative and wellness services; pregnancy, maternity, and newborn care; laboratory services; and mental health and substance use disorder services. Under the ACA, health plans available to individuals and small groups in the insurance marketplaces are organized into four metal tiers to distinguish the level of coverage provided by a plan: bronze, silver, gold, and platinum. Generally, plan participants are expected to pay some share of cost for most benefits through cost sharing mechanisms such as deductibles and copayments. As we describe below, the share of annual health care costs participants are expected to pay—versus what is covered by the insurance plan—determines a plan’s metal tier. The typical plan offered to state employees likely would be considered a “gold” plan if it were offered through the marketplace.
Bronze. Bronze plans provide the lowest level of coverage across the four metal tiers. On average, these plans are designed so that the insurance is expected to pay 60 percent of a participant’s annual health care expenses. People enrolled in a bronze plan are expected to pay a larger share of health care costs. Accordingly, relative to other metal tiers, these health plans typically have the lowest monthly premiums but highest deductibles and copays. Bronze plans likely are most attractive to younger and healthier individuals who do not expect to use a significant level of health care services in a given year.
Silver. Health plans in the silver tier are designed to pay, on average, 70 percent of participants’ annual health care expenses.
Gold. Health plans in the gold tier are designed to pay, on average, 80 percent of participants’ annual health care expenses.
Platinum. Platinum plans provide the greatest level of coverage across the four metal tiers. On average, these plans are designed so that insurance is expected to pay 90 percent of participants’ annual health care expenses. Consequently, platinum plans typically have the most expensive monthly premiums but the lowest deductibles and copays. Platinum plans likely are most attractive to older individuals and people who are more likely to require higher levels of health care services in a given year.
“High Deductible Health Plans (HDHP).” Federal tax law defines an HDHP as a health plan that includes (1) an annual deductible that is more than $1,300 for self-only coverage or $2,600 for family coverage and (2) provisions limiting annual out-of-pocket expenses (deductibles, co-payments, and other amounts excluding premiums) to $6,450 for self-only coverage or $12,900 for family coverage. Health plans with high deductibles typically have lower premium costs because participants are expected to pay a greater share of their health care bills. These plans typically are in the bronze or silver tier. The state currently does not offer an HDHP on its menu of health plan options.
“Health Savings Accounts (HSA).” Under federal tax law, individuals who are enrolled in an HDHP (and their employers) may make contributions towards an HSA. These contributions are deductible for purposes of federal income tax. An HSA allows individuals to save money exclusively for the purpose of paying qualified medical expenses as they occur. Federal law limits the amount of money that individuals and employers may contribute towards an HSA. In 2015, this limit is $3,350 for an individual with self-only coverage under an HDHP and $6,650 for an individual with family coverage under an HDHP.
As part of his 2015-16 budget, the Governor proposes that the state offer (1) an HDHP under PEMHCA and (2) an HSA for state employees enrolled in that plan. The stated purpose of this proposal is to reduce state health costs and to encourage employees to put money aside to pay for future health care expenses.
Offer One or More Silver Tier HDHP. The Governor proposes directing CalPERS to add at least one HDHP to the menu of health plan options available under PEMHCA. The new HDHP would need to offer coverage equivalent to the silver metal tier. Under the proposal, CalPERS would be required to establish these plans so that employees may enroll in the new plans beginning in the fall of 2015.
Establish HSA. The Department of Human Resources (CalHR) would establish an HSA that would be available to employees who enroll in an HDHP. The proposal authorizes CalHR to structure the account to allow employer as well as employee contributions to the account. The proposal does not specify how much money the state would contribute towards its employer contribution or how the amount would be determined.
Require CalPERS to Report New Information. The Governor proposes amending the annual CalPERS reporting requirements established under PEMHCA. The proposed changes require CalPERS to report on a number of specific trends that affect the cost of the health plans offered under PEMHCA.
The fiscal effect of the administration’s proposal is not certain and would depend on the net interaction of four factors: (1) the premium savings associated with the new HDHPs, (2) how many employees enroll in an HDHP, (3) the extent to which migration of employees to the HDHPs affects the premiums of other health plans, and (4) the amount of money the state contributes towards HSAs. As we describe below, it is possible that the Governor’s proposal could produce net state savings or net state costs.
State Could Realize Net Savings. Offering HDHPs under PEMHCA would reduce the state’s contribution towards active and retiree health benefits if the new plans (1) had lower premiums than the state’s existing plans, (2) attracted sufficient state employees so that one or more of these plans was included in the state’s calculation of its average premium costs, and (3) did not result in other plans increasing their premium rates. Under this scenario, unless the state spent all of its premium savings making contributions to participating employees’ health savings accounts, the state would experience aggregate net savings under the Governor’s proposal.
State Could Have Increased Net Costs. Plans with high deductibles tend to be more appealing to younger and healthier employees. Given that the typical state worker is somewhat older and has more chronic health problems than the average Californian, it is possible that the HDHPs would not attract enough employees to affect the state’s calculation of its average premium cost. It is also possible that the current health plans might increase their premium costs if younger, healthier, and less expensive to insure employees migrated to a new HDHP. To the extent this occurred, the state’s net health care costs could increase.
Reasonable to Provide Employees More Health Plan Options. The decision to enroll in a particular health plan is personal and depends on an individual’s age, lifestyle, personal and family medical history, risk aversion, and needs. Providing state employees a variety of health plans that provide varying levels of coverage allows employees to select a comprehensive plan that best fits their personal circumstances. Accordingly, we think the Governor’s proposal to offer employees HDHPs that provide coverage equivalent to the silver metal tier is reasonable.
More Information Needed. Given the significant uncertainty regarding the fiscal effect of establishing HDHPs under PEMHCA, the administration’s proposal to require CalPERS to report information regarding the state’s health plans is appropriate. The administration and Legislature will want to monitor the fiscal effect of offering an HDHP, including its effects on other state health plans and state and local governments costs.