Can an Employee Health Insurance Cooperative Benefit Your Organization?

1. Can an Employee Health Insurance Cooperative Benefit Your Organization? Presentation of a Feasibility Study: A Self-Funded Health Insurance Cooperative February 28, 2007

2. Presentation Overview • Why This Study? The Current Situation: Ever Increasing Small Group Health Insurance Premiums and Pricing Volatility Threaten the Sustainability of Health Benefit Programs • An Alternative: Spreading Risk and Maximizing Economies of Scale Through a Self-Funded Health Insurance Cooperative • Benefits of a Cooperative • Estimated Costs • Potential Obstacles • Next Steps

3. The Study • Initiated at the Request of McHenry County Municipalities to Research Joint Purchasing Programs for Health Insurance Benefits • Set Out to Answer the Question: Would a Cooperative Health Plan Provide Better Value and Stabilized Pricing for Municipalities Versus Their Current Individual Health Plans? • Conducted by MCCG Ad Hoc Committee on Health Insurance from September 2005 to October 2006 • Art Osten, Village of Fox River Grove • Dorothy Pfeuffer, Village of Lakewood • Claudett Peters, Village of Johnsburg • Janelle Crowley, City of Woodstock • Robert Ivetic, McHenry County • Roberta Rogers, Village of Lake in the Hills • Anna Bicanic Moeller, MCCG

4. The Study • Consultants Assisting with the Study and Providing Cost Estimates for a Self-Funded Health Insurance Cooperative: • Mike Wojcik, Dennis Bautista and Bonnie Cochrane from the Horton Group • Catherine Loney from GCG Financial • These Consultants Were Asked to Assist With the Process Because of Their Experience with Public Health Insurance Cooperatives • Utilized demographic and health plan information from 13 municipalities and McHenry County (1,700 Employee Lives in Study and Cost Estimates) • Village of Cary Village of Barrington Hills Village of Fox River Grove Village of Johnsburg City of Harvard Village of Huntley Village of Lakewood Village of Lake in the Hills City of Marengo City of McHenry Village of Prairie Grove Village of Spring Grove City of Woodstock

5. The Study • Final report for McHenry County and the thirteen McHenry County municipalities was distributed in November 2006, presented to the study group January 17, 2007 and presented to approximately 40 municipalities outside of McHenry County on February 26, 2007 • Process opened to municipalities outside of McHenry County to increase economies of scale and maximize purchasing power

6. The Situation: Ever Increasing Small Group Premiums and Pricing Volatility • Many organizations face double-digit increases for premiums and fluctuating costs from year to year making budgeting for health insurance difficult • Costs are increasingly shifted to employees or benefits are reduced to cut costs • According the Kaiser Foundation: Healthcare premiums for family coverage rose 87% in last 6 years • Average premium increase was 7.7% in 2006* • 8.8% for small firms • 7% for large firms • 8.7% for fully-insured • 6.8% for self-funded • 2006 average cost (PEPY) per employee per year = $8,447** • MCCG Study average cost PEPY= $11,288 • 5 year forecast (2012) assuming trend of 11.9%*** average cost PEPY = $19,805 * Kaiser Foundation ** Milliman Study *** PricewaterhouseCoopers

7. Spreading Risk and Maximizing Economies of Scale Through a Self-Funded Health Insurance Cooperative • Cooperatives Have Been Used by Local Governments for Years • Several local government health insurance cooperatives have been in existence for over a decade in N. Illinois • Other cooperative arrangements such as IRMA and McMRMA have been effective in spreading risk and containing costs for members • Premiums pooled to cover claims up to a specific amount example: pool covers all claims up to $100,000 per individual and $1,000,000 aggregate. Any claims above these amounts are covered by stop loss reinsurance • Premiums are determined by the participating municipalities each year and are based on three factors: • Community rate • Individual organization’s risk level • Types of plans offered to employees • All participants share in fixed costs such as administrative fees, network access fees and stop loss insurance

8. Spreading Risk and Maximizing Economies of Scale Through a Self-Funded Health Insurance Cooperative • The cooperative is formalized through bylaws, which are created and approved by the participating municipalities • The tighter the rules and the group, the better the rates (ie a 3-year minimum for participation). • Stability is important for long-term success • 20% to 25% reserve policy recommended

9. Expected Benefits of a Self-Insured Health Insurance Cooperative • It’s Better to be Bigger • Larger groups have a larger population to spread risk • Larger groups have greater leverage in negotiating fixed costs such as administration and reinsurance expenses • Larger employers historically have lower increases when compared to small group plans • According to American College of Physicians- Small employers pay the highest premiums for health care coverage and experience the largest annual premium increases and their employees pay higher deductibles than large employers

10. Expected Benefits of a Self-Insured Health Insurance Cooperative • Municipalities share administrative expenses that minimize these costs to individual organizations • In an individual fully-insured plan, 22% to 32% of premiums are embedded administrative fees and fixed costs- source Congressional Budget Office and the Horton Group • Brokers charge at least 3% of premiums in fees- source-Blue-Cross / Blue Shield Group Markets Producer Agreement Compensation Schedule- January 1, 2003 • Large employers pay closer to 12% in fixed costs and administrative fees- source American College of Physicians- “Small Business Pooling Arrangements and Association Health Plans 2003”

11. Expected Benefits of a Self-Insured Health Insurance Cooperative • Smaller communities have access to services and plans otherwise not available to them • Greater reporting • Bigger discounts • Incentives to use wellness and preventative care programs to keep claims down, thus keeping employees healthier • Greater control, oversight and transparency in how premium dollars are allocated. Less guessing when budgeting for health insurance costs.

12. Estimated Costs for a Health Insurance Cooperative for McHenry County and Municipalities • 2007 Cost estimates provided by the Horton Group • Cost Estimates Based on 1700 Employee Lives • Rates determined by the three factors of community rate, risk level of the individual organization and type of plan (HMO, rich PPO or moderate PPO) • Premium Allocation: • 74% for Expected Claims • 15% for Reserves • 11% for Fixed Costs and Administrative Fees

13. Allocation of Premium

14. Estimated Costs for a Health Insurance Cooperative for McHenry County and Municipalities • Cost Estimates Show a 7.81% Decrease in Overall Premiums from 2005 to 2007 • $16,887,259.21 for 2007 versus $18,317,104.92 in 2005 ($1,429,845.71 less than organizations paid as a whole in 2005) • Savings achieved through maximizing economies of scale and shared administrative expenses among a large group • Long-term savings can be achieved by focusing on disease prevention and wellness programs

15. Potential Obstacles • Blue Cross / Blue Shield will not lease access to their network to cooperatives with organizations that have fewer than 151 employees • Fear of Change- Employees Resistant to Change • How to Deal with Union Contracts • Concept may be viewed as a vehicle to permanent decreases or zero increases in premium costs, which may or may not be true

16. Next Steps • March 21, 2007 at 10 am at the Village of Fox River Grove • Develop Strategy for Creating the Cooperative • Determine Timeline and Steps for Cooperative • Gather Demographics • Draft Intergovernmental Agreements • Create By-Laws • Select Providers • Launch Program

17. Thank You