Health Care Cost and the City of Arlington Health Benefit

1. Health Care Costand the City of Arlington Health Benefit Employee / Retiree Discussion April 2004

2. Overview • Budget Overview • Global Health Care Condition • City of Arlington • Health Plan • Workforce Demographics • Long Term Liability • Provision of Health Benefit, 2005 & Beyond • Discussion

3. Budget Overview

4. Positive Developments • Sales tax allocations for three of the last four months are up • Amount budgeted for sales tax can be achieved with flat receipts for the remainder of the fiscal year • Positive end-of-year fund balance projected

5. Caution Required • Recent sales tax increases have been less than the prior year decreases for the same period • A persistent structural problem remains

8. Fiscal Year 2005 • Avoid further program cuts, service level reductions and layoffs • Restore training and professional development • Minimize further erosion of our competitive pay position

9. Health Care

10. Global Health Care • Cost of health care • Frequently in the news • Driven recent changes in legislation • Organizations are aggressively pursuing solutions • Market Perspective • National League of Cities - “Health care is the top financial pressure facing cities nationwide” • USA Today – “The rising cost of medical inflation isn’t just a temporary blip but the beginning of a new era that will force employers and employees to make some tough choices.”

11. Drivers of Health Care Cost • Traditional low or no premium HMOS • Result - reduced consumer incentives to consider alternative lower-priced doctors and/or services • Market Consolidation • Malpractice Law Suits • Skilled Health Care Worker Shortage • “Wellness” is losing ground to medication as the solution Source: Health Futures Inc.

12. Prescription Drugs • Kaiser Family Foundation - Three factors drive the increases in prescription drug spending • Increased number of prescriptions • 74% increase over last 10 years • Changes in types of drugs used • New drugs replacing old and R&D spending increased from $10 to $32 Billion in last 10 years • Manufacturer price increases for existing drugs • 7.3% average annual increase over past 10 years

13. City of Arlington

14. City FY 2004 Operating Budget

15. Health Benefit % Payroll In 2003, double digit average increases in trend continued. At the current rate of increase, it is projected that the cost of health care coverage will average 25% of wages or more in less than five years for many plan sponsors. The Segal Group, Segal Health Plan Cost Trend Survey For the city this would be $29.3M if this projection is applied to present payroll.

16. COA Health Care Increases • Premium rates are set prior to the plan year. Total actual contributions may vary based on actual enrollment. • These numbers have been changed since the presentation to employees and retirees. The original numbers were projections. These modified numbers are actuals.

17. Recent Adjustments

18. 2003 Strategies • Adjustments • Self Funded • New Claims Administrator • United HealthCare • Open Access Model • No primary care physician • No referral required to a specialist • Fewer restrictions on prescription formulary • Expanded Network

19. 2003 Results • $1 million annual cost avoided Health Fund Activity • $3.06 million deficit • City contributed $1.58 million over & above premium amount • $1.48 million was pushed into FY 2004

20. 2004 Strategies • Plan Design Changes • Increased • Physician, prescription, and ambulance co-pays • Added • Co-insurance on hospital, out-patient, emergency room and other related services • Introduced • Maximum out-of-pocket expense on the HMO plans • Subsidized • The PPO plan at the same level as the HMO plan • Eliminated • One HMO and one PPO plan

21. 2004 Results • Cost Sharing Changes: • City Contribution : 83% to 78% • Employee / Retiree: 17% to 22% • 6 Largest Metroplex City Comparison • Average 2003 City Contribution: 62% • $198M = total health care costs • $123M = total employer share

22. 2004 Results • 2004 rates appear to be adequate to Fund • Claims and expenses • Required reserve amount, and • The remaining $1.48 million 2003 deficit • Adjustments in 2003 and 2004 • Strengthened the health fund • Increased access to quality health care • Assisted in managing long term liability • Maintained a competitive plan design in an evolving market

23. Comparative Market Value • Value Components • Employee monthly premium • Co-pays • Deductibles • Out-of-pocket maximums • Employer contributions Hay comparison data • Among Public & Private Employers, Arlington’s plan is above the 75th percentile in value.

24. Comparative Market Value • Scenario – Hospital Stay = $10,000 +1 year worth of premiums – EE Only

25. Comparative Market Value • Scenario – Hospital Stay = $10,000 +1 year worth of premiums – EE + 1

26. Comparative Market Value • Scenario – Hospital Stay = $10,000 +1 year worth of premiums – EE + F

27. Retiree Health Benefit

28. COA Retiree Demographics • Retiree Breakdown (3/1/04) • 467 current retirees & surviving spouses • 437 currently eligible for retirement as of 3/1/04 • 285 additional employees eligible for retirement in the next 5 years • 1,189 potential retirees in the next 5 years

29. Retiree Health Benefits • Minimum of 10 years of service with City for employer paid health benefit subsidy • 10-14 – 60% 25-29 – 90% • 15-19 – 70% 30+ - 100% • 20-24 – 80% • Dependent subsidy currently = 70%

30. Comparative Market Value • Scenario – Hospital Stay = $10,000 +1 year worth of premiums – Retiree + 1

31. Metroplex Cities Subsidies

32. Projected Retiree Benefit Cost • Current Pay-as-you-go funding:

33. Governmental Accounting Standards Board (GASB) • Accounting Standards effective 2007 • No more pay-as-you-go funding • Required to account for long term liability on an annual basis • Cities’ long term liability includes: • Current employees’ future retirement benefit • Current retirees’ remaining retirement benefit • Standard requires cities to account for / fund the long term liability now

34. Governmental Accounting Standards Board (GASB) • Actuarially projected additional impact on the retirement portion of the health fund as a result of GASB beginning in 2007, based on current benefit design and subsidization = $20M / yr (Total accrued liability = $196M)

35. 2005 and Beyond • Partnership with qualified technical expert – The Hay Group • Study design and cost sharing approaches • Propose strategy in May/June • Communication • HR Update • Employee / Retiree Meetings

36. Consumer Awareness • “Employer’s can’t continue to absorb double-digit health care premium increases year after year and remain competitive in the global marketplace… Public payers into the healthcare system must hold up their end of the bargain, and health plan enrollees need to become more active consumers with a better understanding of the true costs of care… Otherwise more working Americans won’t be able to afford their health plans and will join the ranks of the uninsured.” Kate Sullivan, U.S. Chamber of Commerce Director of health policy. June 2002

37. Considerations • Medicare Changes • GASB requirements • Retirement Health Savings Plan • Technology • Shared Services Project • New Technology = Increased ability to pursue creative solutions

38. Priorities • Increase • Options • Consumer Awareness • Reduce • Long-term Healthcare Liability • Proactively pursue • Competitive Cost Containment Measures

39. Next Steps • HR / Consultant proposal of options in May/June • Review with City Council • Follow-up Employee/Retiree meetings June/July

40. Discussion