HomeMy WebLinkAbout2005-03-23-HBRC-rpt Town Of Lexington
Report of the Health Benefits Review Committee
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DRAFT
March 23, 2005
1 Introduction
1 1 Structure and Formation of the Committee
The Health Benefits Review Committee is a Board of Selectmen subcommittee, with
appointments made at the Board s November October 20 2004 meeting (See Appendix A)
Members were suggested b\ individual Board members and invited b\ the Chair(for background,
see Appendix B) The Committee met 9 times on November 3 November 17 December 1
December 15 Januar\ 5 Januar\ 19 Januar\ 26 Februar\ 2 and March 2
The charge to the Committee was given with the following parameters
Description Thoroughl\ review and analyze current components of health
insurance being mindful of employee privac` rights Compare Lexington s
benefits with other communities and private sector operations Suggest possible
changes to operation which could reduce the cost and/or rate of increases to the
Town and subscribers Consider all options including benefit plan designing,
pooling with other Towns and/or local businesses, self-insurance, etc Report
back to a Joint meeting of the BOS School Committee and Appropriation
Committee findings and recommendations for additional work to be done in three
months
Membership criteria. Criteria for membership shall include Health Care
Consultants with experience in health insurance, one subscriber and citizens with
good analytical skills
Staff Support Municipal and School
Current Membership Bob Beckwitt, Richard Doughert\ (Co-Chair) Tom
Goodwin,Nano. Meadows, Tom Rand, Linda Roemer Claudia Sheffield,
Deborah Strod(Co-Chair) Maggie Oliva, a subscriber attended the first
meeting but was unable to continue, and Claudia Sheffield was asked to take her
place
Staff support: Rose Ducharme (municipal) Susan Bottan(School)
Liaison. Paul Hamburger and Rick Eurich(Appropriation Committee) Bill
Kenneth (Selectmen) Tom Griffiths (School Committee) Evelyn Silber
(Personnel Advisor\ Board)
Meetings Two meetings per month
Lexington Heath Benefits Review Committee Report DR4FT 2
1.2 Current Status, History and Trends of Health Benefits in Lexington, 2000- 2005
The nation has experienced double-digit increases in healthcare costs annuall` in recent years
(Globe,November 25 2004) Individuals have also seen their own cost to procure health
insurance and other health benefits rise— 60 to 75%dunng the period 1999-2004 1 Lexington is
projected to spend roughl` $15 million of the $125 million budget for FY 2005 on health benefits
for participants in its plans—in the Fall of 2004 that s 3616 total subscribers (employees,
retirees, famil` members, etc)2
The Health Benefits Review Committee was created to explore ways for Lexington to reduce an
anticipated 15%growth this year and in the future' One of our members pointed out that if the
health benefits costs continue to grow even at 10%, and assuming the Town s other costs increase
at 3%(a common assumption for inflation) within 10 years the portion of our budget which
health benefits takes will double At that point,the increase in future healthcare costs would use
up the entire 2 '/2%increase allowable under law This would mean all other program cost
increases would need overrides to fund them.
Adding to concern about this increase in costs for the Town is the growing sense in the nation that
costs of insurance can rise so much that individuals choose not to be covered b` an plan at all—
which drives the national costs even higher as those individuals receive care through emergenc`
rooms, and do not receive preventive care4
While created b` the Board of Selectmen,this Committee is not participating in an coalition
bargaining or union negotiations State law provides that the Town cannot unilaterall` change the
management of health benefits plans, but rather choices are subject to bargaining. The current
two-year agreement between the Town and the Coalition for health insurance expires June 30
2005
The committee found that health benefits have been quite well-managed b` the Town over the
years As the Committee raised potential solutions, we found that mans had been tried previousl`
often in partnership with labor Our claims costs are low relative to other groups insured b` Blue
Cross/Blue Shield according to their own calculations' Nevertheless, despite these positive
aspects,the Town still has a problem of costs growing beyond our capacrt` to pa`
1.3 Components of Health Benefits in Lexington
1.3 1 Overall Components
The town is self-insured and engages a consultant (Group Benefit Strategies—GBS)who helps
with financial reporting, bids, RFQs, administration and some minor legal issues Blue
Cross/Blue Shield and Harvard Pilgrim Healthcare handle the claims The Committee was
pleased with the overall value of the services provided b` GBS to the town.
The Town purchases re-insurance for costs incurred b` an individual during a plan year in
excess of$90 000 thereb` limiting the town s exposure to catastrophic claims Town officials
1 Minuteman,May 2, 2004
2 Enrollment Breakdown Ind/Fain/Total Subsc covered by plan
3 Source Group Benefits Strategies
4 See Employers Try Shifting Health Costs Boston Globe,November 25 2004 and Rising Cost of
Health Care Explained' Labor and Personnel News,MIAA.March 17 2004
email from Kevin Walsh November 30 2004
Lexington Heath Benefits Review Committee Report DRIFT 3
periodicall` review this level and price out the insurance costs at various levels to make sure the
cost is competitive and we are properl` protected against undue risk. In fact the reinsurance level
was recentl` increased from$75 000 to $90 000 in order to save on premiums
Lexington appropriatel` operates on the principal that insurance premiums (and re-insurance
premiums) are ultimatel` priced to include a profit (sometimes referred to as a risk premium)to
the compan` Insurance companies ma` lose mone` on an occasional basis because their pricing
is based upon statistical averages Over a period of several years, however insurance companies
will price their products so that the\ receive their desired risk premium and profit margin.
Historicall` Lexington has realized savings through self-insurance as compared to the full\
insured rates quoted b\ the insurance companies in the various Requests for Quotations
conducted b` the Town. These savings, as a result of other budget pressures, have been passed
directl` to the operating budget, instead of funding the health insurance trust fund and increasing
the reserves In fact over the last several years,the level of reserves in the Trust Fund has
declined.
The Town operates a Flexible Spending Account allowing town employees to reduce pre-tax
income for eligible healthcare and other eligible expenses Finall` in 2004 the Town introduced
a pilot `Opt-Out program, in which one-time payments were made for employees who dropped
Town coverage and enrolled in a plan maintained b` their spouse or partner s employer
1.3.2 Legal Framework
• Chapter 32B of the Mass General Laws governs the provision of benefits
(http.//www.mass gov/legis/laws/mgl/gl-32b-toc.htm) People eligible to receive health
benefits include current employees, retirees, surviving spouses of retirees, people who
have left the emplo` of the town but continued benefits under COBRA, and members of
these groups families
• Health benefits are subject to negotiations, and the Town cannot change plans
unilaterall`
1.3.3 Fiscal Components
The town pays out the following items to cover health benefits
• Purchasing of stop-loss insurance (covering catastrophic claims which we couldn t pa`
out of our own self insurance funds)
• Town share of premiums for insured plans (including Dental)
• flu vaccine clinics
• administration of benefits
• self-insured claims up to the stop-loss limit
The town receives or sets aside mone` in the Health Insurance Trust Fund to pa` for health
benefits
• Participant contributions
• Reinsurance reimbursements
• Appropriating mone` from the town budget
Lexington Heath Benefits Review Committee Report DR4FT 4
1.3 4 Lexington's Participant Population
Of the 3616 individuals covered b` Town Plans, b` far the most (1994) are non-retirees covered
under the HMO Blue plan. Almost half that mans (982) are covered under retiree plans The
remaining are mostl` split between Harvard(301) and Blue Choice School/Town(285) with a
few in TEFRA and Managed Blue With approximatel` 29%of school employees 55 years old
or older we will continue to see the retiree population growing6 Furthermore, under state law
the Town is responsible for retiree benefits for an individual who retires from a Lexington
teaching position even if that person worked for another town for the majorrt` of his or her career
The Town s Earl` Retirement Initiative in fact added to our retiree population disproportionatel`
and a few years ago when Raytheon closed the local office and Polaroid ended retiree coverage
mans famil` members were added to that coverage When the employee retires, we reap a
savings in salar\ if we replace them with a less experienced, lower salaried employee However
we also retain the responsibilrt` for retiree health benefits and have likel` added the new
employee as well. In addition, earl` retirement (prior to Medicare ehgibilrt`) has a higher costs
to the town.
Part time employees who work 20 hours or more are eligible for health benefit coverage and pa`
the same portion of the premium as full time employees This is similar to coverage offered b`
other towns
1.3.5 History of changes'
• 1987— The town switched from premium-based healthcare to a self-insured plan
• 1993 —Lexington reduced the number of plans and replaced a costl` plan with more
aggressivel` managed plan— $1 3 million dollars saved (had been a projected increase of
15%or$800 000) A change in Massachusetts law allowed this step to take place
• 1993 —Dental benefit added with benefit cap
• 1995 —Access was limited to another plan to consolidate the risk pool.
• 1994-1999—Health insurance appropriation was level during a time when other towns
increased appropriations b` double-digit amounts
• 1997—third part` administration of Blue Cross/Blue Shield avoided$500 000 in plan
increases Dental cap eliminated
• 2003 —Co-payments increased, employee cost of plan increased, plan administration
changes, avoided$1 5 M anticipated cost increases
• 2004—One time opt-out pilot plan implemented, Express Scripts implemented
(prescription b` mail)
• 2004/5 — adjusted the town s stop-loss insurance levels increasing to $90 000
Lexington has participated twice in group-purchasing of health insurance once with the West
Suburban group and, once with the MIIA. In each case Lexington left the group after a
dissatisfactor\ experience In West Suburban, Lexington had the largest population but onl` one
non-weighted vote, and the others in the group chose plans too expensive for Lexington. In the
case of MIIA,the group failed to provide promised re-insurance, which was onl` recovered after
a great deal of time passed.
6 Email from Susan Bottan November 19 2004
7 See Lexington Minuteman,May 2004 and Bargaining History
Lexington Heath Benefits Review Committee Report DR ET 5
2. Summary of Recommendations (see related Table for details)
Based upon our review the Committee offers the following recommendations for
changes in health benefits structure and financing b\ the Town. Some changes will need
to collectivel` bargained. Our goal however is to present a comprehensive list of options
which should be considered over the short and long term.
2.1 Short term
2 1 1 Implement a Carve-Out Pharmac` Benefit Program(and strengthen recent
pharmac` changes)
2 1.2 Institute claims and enrollment audits
2 1 3 Review premium structure and plan design changes
2 1 4 Consider separate plan for out-of state enrollees (see 2 1 3)
2 1 5 Expand health promotion locall`
2 1 6 Develop a clear strategto expand case management
2 1 7 Continue to consider alternative providers, stop-loss levels and insurance vs self-
insurance as a part of rebidding process
2 1 8 Review implementation of this report on an ongoing, perhaps quarterl` basis
2.2 Long term (2 to 5 years)
2.2 1 Explore implementation of consumer driven health plans
2.2.2 Implement strateg` for expanded case management and health promotion
2.2 3 Explore group purchasing in tandem with review of premium structure and plan
design
Lexington Heath Benefits Review Committee Report DR4FT 6
2.1 1 Implement a Carve-Out Pharmacy Benefit Program (and strengthen recent pharmacy changes)
Option Comments Advantages Disadvantages
Carve out Pharmac` • Recommended b` GBS • Unifies administration and • Ma` impact local pharmac`
■ Would establish a separate benefits across all plans business, depending on how
administrator and plan for all • Estimates of 30%to 50% mans employees use the
pharmac` benefits reduced claims costs (b` GBS) pharmacies to get prescriptions
• Abilrt` to increase generic • Ma` increase admin. costs
usage • More use of mail-order requires
• Significant improvement in changes in patient and
data and reporting. physician behavior
• Increasestransparenc` of
pricing and uses of rebates
Increase incentives for generics • More information is needed on • Decrease pharmac` costs • Ma` impact local pharmac`
and mail order through changes in current utilization to evaluate business
pharmac` co-pays ■
Purchase drugs from Canada or • Not a long-term solution, but • Short term savings ■ Legal issues if not approved b`
the European Union ma` have short term savings FDA.
• Ma` have higher administrative
costs, particularl` for
switching.
• Ma` impact local pharmac`
business
Lexington Heath Benefits Review Committee Report DR4FT 7
2.1.2 Institute claims and enrollment audits
Option Comments Advantages Disadvantages
Claims Audits • Use outside firm to review • Uncovers billing errors • Ma` increase administrative
sample of claims cost.
• Unknown amount of savings
Enrollment Audits • Review participant and • Uncovers errors • Ma` increase administrative
dependent listings on a regular ■ Eliminates cost for ineligible cost.
basis and promptl` remove participants
those who are no longer
eligible This should be done
on an ongoing basis
Provide Explanation of Benefits • Blue Cross does not currentl` • Increases awareness of the cost • Ma` increase administrative
for all services provide these for town of services and could therefore costs
enrollees impact long term behavior
■ Enables participants to identif\
errors in claims
Develop incentives for • Develop incentives to • Uncovers billing errors ■
participants to review bills encourage participants to
review bills and EOB s to
ensure that billed services were
provided. Could be %of$
recovered.
Lexington Heath Benefits Review Committee Report DR4FT 8
2.1.3 Review premium structure and plan design changes (includes 2.1.4 on out-of-state plan considerations)
Premium Structure
Option Comments Advantages Disadvantages
Change ratio of premium • Lexington is near the low end of the middle- • Saves the town$ Ma` • Forces participants to bear higher
contributions range for the employee share of premium for encourage those with alternative costs Subject to union
comparable towns Lexington maintains health plans to opt out of the negotiations
different employee shares for different plans (e g. Lexington plan.
12%for HMO Blue, 20%for Blue Choice and
15%for HPHC) These could be equalized, or
each adjusted toward enrollee paying more
Create a standard dollar • Same town contribution for individual or famil` • Can be structured to have no cost • Forces participants to bear higher
contribution b\ town coverage regardless of plan chosen. Same increase for HMO Blue costs
contribution for famil` coverage regardless of enrollees Provides • Ma` result in adverse selection,
plan chosen. predictabilth for town share of with those in poorer health paving
costs less for a less expensive plan while
using more services
■ Subject to union negotiations
Van required ■ We reviewed this alternative and concluded that
contributions based on it is not viable because there is not a large enough
salan (see Globe article) number of highl`-paid employees
Increase contributions for • Significant potential savings -Bill Kenneth • Increases employee ■ Ma` make it harder to recruit for
part-time employees estimates as high as $1M. Part-time employees contributions Encourages those part-time positions some of which
are paid significantl` greater in benefits per hour with alternate plans to opt out of ma` be essential for schools in
worked than their Full-Time co-workers the Lexington Plan. At least one particular Subject to union
example of industn using this negotiations
kind of program.
Limit entre to Blue • It is necessan to maintain a Plan which can • Ma` decrease use of out of • Man\ who elect Blue Choice do
Choice Plan or increase cover out of state employees and retirees network providers not actuall` go out-of-network.
the premium to encourage Their premium contributions will
lower in-state enrollment decrease if the\ go to HMO Blue
(town would pa` more)
Lexington Heath Benefits Review Committee Report DR4FT 9
Plan Design
Option Comments Advantages Disadvantages
Create separate plan for out of state • The majorrt` of the participants are • Ma\ achieve lower total • Possible higher administrative
participants located within MA. It ma` be more administrative costs Town would costs for out-of-state group
efficient to split out those who are have more options for the in-state • Ma\ not be able to exactl`
out of state and use a separate third- plans because it would not have to duplicate benefits for the smaller
part\ administrator or insurance provide Blue Choice The town group
compan` for that group and then should tr. to find a national
design the remaining programs to be compan` with a network that fits
most efficient within MA. for out-of-state participants
Increase non-pharmaceutical co- • Based on our surve` the $5 co-pa` is ■ Higher co-pays/deductibles might ■ Subject to union negotiations
pays and/or deductibles still common among cities and impact utilization and thus reduce • Ma\ make it harder to recruit.
towns Plans in industr\ often have costs, but the savings will not be • Lower paid participants ma` forgo
$10 or$15 co-pays Consider setting great. The 2003 RFQ showed a medical services the\ need.
the co-pa` at a%of the discounted slightl` greater than 1%change in Percent co-pays ma` increase
cost of the service funding rate b\ raising BCBS from provider administrative costs
■ The Town has reviewed the impact a$5 to a 10$office visit co-pa` • Forces participants to bear higher
of changing co-pays and deductibles ■ Setting the co-pa` as a percent of costs
on a regular basis and should the charge will make people more
continue to do so aware of the real cost of services
See 2.2 1 for discussion of ver
high deductible plans
Modify/Expand Opt-out Program Lexington is the onl` town that reported Ma\ decrease health plan ■ Ma` increase total costs, if those
an opt-out program. This is uncommon participation and thus lower costs who opt out would have moved to
m industr\ This program and the Ma\ save $ if the payment is less than alternate plans without an`
amounts paid need to be explored the approximatel` $10 000 cost of incentive payment.
further each new enrollee • Added administrative costs
Subject to union negotiations
■ The PAB originall` voted against
this program.
Review the new law re Medicare
Coverage for prescription drugs to
determine whether an changes
should be made to retiree coverage
Lexington Heath Benefits Review Committee Report DR4FT 10
2.1.5 Expand health promotion locally
Option Comments Advantages Disadvantages
Increase health promotion and • Information is needed on the major • Reducing risk factors would ■ Cooperation is needed from
disease prevention activities health risks of the Lexington mean a reduction or dela` in insurers, providers, and enrollees
enrollees in order to institute the onset of illnesses such as • There would be some additional
activities to reduce these risks diabetes, heart disease, or costs for savings that would occur
Among the most likel` risks are stroke, resulting in healthier later and be hard to measure
smoking, high blood pressure, high enrollees and reduced costs ■
cholesterol, and being overweight. ■ A healthier work force would
mean more productive
employees with reduced
absenteeism.
2.1 6 Develop a clear strategy to expand case management
and
2.2.2 Implement strategy for expanded case management and health promotion
Option Comments Advantages Disadvantages
Ensure that there are effective case • More data is required about the • Effective case management and ■ Dependent on cooperation of
management and disease extent to which case and disease disease management will result providers, insurers and enrollees
management programs management are being applied to in more effective treatment and • Data is hard to obtain.
Lexington enrollees, particularl` on reduced costs • Hard to monitor particularl` for
an ambulator basis conditions for which there is no
hospitalization.
• Not clear where mayor
responsibilit\ lies
Lexington Heath Benefits Review Committee Report DR4FT 11
2.1 7 Continue to consider alternative providers, stop-loss levels and insurance vs. self-insurance as a part of rebidding process
Option Comments Advantages Disadvantages
Consider alternative health • Lexington has requested competitive ■ Bidding keeps BC/BS • United and CIGNA networks are not as
plans and providers quotes at each renewal (two years) administrative pricing strong in MA. Some participants ma`
We recommend continuing that competitive Account ma` have to change providers
practice Consider Tufts, United get more attention from • Increases the administrative workload.
Healthcare, & CIGNA. In the past, BCBS HPHC and more
Tufts has been more expensive and active management from
United and CIGNA networks have GBS
not been as good as BC/BS Harvard
Pilgrim, &Tufts
Review Reinsurance/Stoploss • The reinsurance and stop loss levels • Reduced premiums • Increased risk—a report the committee
(Increase retention levels, e g. the are reviewed on a regular basis and reviewed showed 25 people
portion of risk retained b\ the we recommend that this practice be responsible for$2M in claims, so a few
town.) continued. Currentl` individual stop extra people having adverse health
loss is set at $90 000 Last year 6 experiences can increase claims costs
cases exceeded the stop-loss level significantl` in an one year
which was set at$75 000
• Compare premium savings from
increased levels to expected value of
claims being assumed b\ the town.
Review self-insured versus fully • This has been done at each renewal, • Self-insurance costs less in ■ Insured quotes ma` be low at first to
insured plans and this practice should be continued. the long run and gives the gain the business, but is more
Currentl` Blue Choice,Network Town more control over expensive in the long run.
a) medical Blue, HPHC &Medex are self- benefit design. Estimates • Need to pa` runout claims after switch
insured and the dental and retiree were that risk premiums ma` to insurance
programs (other than Medex) are ultimatel\ cost an additional • Must keep appropriate reserves—from
insured. Less savings to self-insure 3%-5%. Self insured plans 2 to 4 months Current reserves are
dental due to smaller average claims do not have to offer some below two months The optimal level is
size and high claims volume mandated benefits for 4 months
insured plans and avoids
premium taxes
b) dental • Dental insurance is not self-insured
anymore because self-insurance cost
more
• Continue to review this on a annual
basis
Lexington Heath Benefits Review Committee Report DR4FT 12
2.2.1 Explore implementation of consumer driven health plans
Explore Consumer Driven • This is a long-term project, • Plan design ma` encourage • Requires additional administrative
Health Plans requiring additional stud\ and participants to compare prices and use resources to implement and
extensive participant education. health care more wisely thus administer the program. Requires
■ This type of health plan is only decreasing costs extensive participant education.
now emerging and have little • May increase consumer choice • For HSAs,plan design may
public sector acceptance • Potential long-term change in behavior encourage lower paid participants to
b\ patients and providers pay penalties and use funds for non-
• Increased focus on patient education medical purposes and leave them
through web based and other content. without the resources to pay for
• High visibility of products health care when the\ need it.
• HRAs are more limited in use of the
funds
• All require high deductible levels
• May encourage people to forgo
needed care
• Lexington would be one of the first
municipalities to adopt such a plan.
Lexington Heath Benefits Review Committee Report DR4FT 13
2.2.3 Explore group purchasing (in tandem with review of premium structure and plan design)
Option Comments Advantages Disadvantages
Re-explore group purchasing This has been tried in the past,with Possible savings because of larger Less control over benefits offered.
negative results group size and more negotiating Other towns ma` have worse
power experience than Lexington.
Each town ma` onl` have one vote,
regardless of size
Minuteman Nashoba This is a new group
Health Group
MITA Tried in the past. Did not obtain stop Lexington ma` not be allowed to re-
loss coverage enter the group
West Suburban Tried in the past. One vote per town HPHC rate is lower than the Lexington ma` not be allowed to re-
was a problem for Lexington as a Lexington rate More choice of enter the group
larger town plans available Lexington rate is currentl` lower for
HMO Blue (our highest enrolled plan)
Other Form a new group') Added advantage in the abilit\ to Long term option onl` Will take an
select members and rules investment of time and resources to
organize
Lexington Heath Benefits Review Committee Report DR4ET 14
Appendix A
Discussion of Options
In this section, we detail more of the Committee s discussions, both about the Options we
recommend the town investigate further and other ideas we rejected after an initial look. For
ease of reference, we use the same number as in the initial summary page and tables
2.1 1 Implement a Carve-Out Pharmacy Benefit Program (and strengthen recent
pharmacy changes)
a) Pharmac` Benefit Management Carve-out
Pharmac` Benefit Management (PBM) companies have grown considerabl` in recent years b`
offering strategies for clients to lower pharmaceutical costs These services include drug
formular\ management programs, retail drug card programs, and other clinical management
programs Prescription drugs are dispensed to beneficiaries primaril` through non-exclusive
networks of retail pharmacies and through mail pharmac` service centers
As a part of its Blue Cross Plans, Express Scripts currentl` provides certain pharmac` benefit
management services for Lexington employees The consensus of the Committee and GBS
consultants was that significantl` more savings could be realized through more aggressive benefit
management procedures For a number of it municipal clients, GBS intends to develop a
pharmac` carve-out plan, where pharmac` benefits are separatel` administered from the health
benefits, providing a higher level of attention to benefit management, improved reporting and
increased transparenc` of costs Group Benefit Strategies estimates that the\ can cut
pharmaceutical costs b` up to 33%if the most aggressive plans are implemented.
b) Canadian or European Drug Reimportation
The town staff had been poised to tr. importing drugs from Canada two years ago but it did not
move forward based on concerns from Selectmen. At this point,the consensus of the committee
is that the possible short-term benefits which might have been(or might even still be) realized are
not worth the effort now Whatever benefits might accrue in the short term will decrease over the
long term.
There has been considerable stud` concerning the potential to reimport drugs from Canada into
the US to save mono. Currentl` it is estimated that the reimportation business from Canada is
over$1 billion because mans drugs can be as much as 50%cheaper than in the US There are
mans who claim that this will grow considerabl` in the next few years While the FDA has not
approved the abilrt` to reimport drugs from Canada,mans states, such as Louisiana,North
Dakota, Minnesota,Wisconsin, California, Massachusetts,New Hampshire, Maine, Illinois and
Maryland are attempting to structure and implement Canadian drug reimportation. Some political
leaders have stated publicl` their intention to def` the FDA if necessary
To date the FDA has not approved reimportation primaril` due to safet` concerns In several
recent testimonies, officials of the Food and Drug Administration, as well as representatives of
other government agencies, have noted the potential dangers associated with reimportation,
including individual importation,the purchase of drugs from foreign sources over the Internet,
and counterfeit drugs entering the United States In testimon` on this subject,William Hubbard,
Senior Associate Commissioner for Polio. Planning, and Legislation at the U S Food and Drug
Lexington Heath Benefits Review Committee Report DR4FT 15
Administration, stated. `Currentl` new drugs marketed in the United States must be approved b\
FDA based on demonstrated safet\ and efficac\ This closed' regulator\ system has been
yen successful in preventing unapproved, adulterated or misbranded drug products from entering
the U S stream of commerce Legislation that would establish other distribution routes for drug
products, particularl` where those routes routinel` transverse a U S border creates a wide inlet
for counterfeit drugs and other dangerous products that can be injurious to the public health and a
threat to the securrt` of our nation s drug suppl\ Similar concerns have been echoed b\ former
Bush administration Health and Human Services (HHS) Secretarn Tomm\ Thompson and former
Clinton Administration HHS Secretarn Donna Shalala. Even the representatives of the Canadian
government have recentl` clarified their position b\ stating that the\ could not guarantee the
safet\ and effectiveness of drugs exported from their countrn. This is especiall\ troublesome as
counterfeit drugs entering the U S pose genuine risks Lexington would need to investigate the
liabilit\ risk should it offer drugs reimported from Canada to its employees
There are man` who also claim that the safet\ issue is just a wa` to politicall\ protect
pharmaceutical profits Eventuall\ mechanisms are likel\ to be in place to protect US consumers
from the risks stated above At that point,the remaining question will be whether discounts will
remain in Canada should the amount of drugs reimported become much larger
Canada,b\ population, is one-tenth the sizes of the US Its market for drugs is substantiall\
smaller than the $200 billion worth consumed here Drugs are made less expensive for the
consumer in Canada because the state imposes substantial price controls When government is
the single or mayor purchaser of pharmaceuticals and other health care services, as it is in Canada,
prices are fundamentall\ distorted. The government leverages its bulk purchasing power to
negotiate prices with pharmaceutical manufacturers However since there is onl\ one mayor
purchaser of these goods and services and no real consumer-based market for these products,the
government retains the abilit\ to dictate a fixed price with little or no regard for real market
prices
At some point, it is likel\ that the discounts available to US consumers will disappear mostl`
likel\ from a combination of efforts from pharmaceutical companies and the Canadian
government itself.
Pharmaceutical manufacturers sometimes choose to sell their products at less than market value
because their loss ratio is minimal in smaller markets, like Canada. However under
reimportation, if the U S begins to import more drugs from Canada,the existing loss ratio in
Canada would increase and earnings in the U S market would decrease To protect against this
increased loss, pharmaceutical manufacturers would have a direct economic incentive either to
limit an surplus sold to Canada or to stop selling their products to Canada altogether Man\
pharmaceutical manufacturers ma` be more likel\ to forgo the smaller Canadian market for the
larger market in the U S We've alread` seen several steps in this direction, as Pfizer cut off
supplies to several Canadian wholesalers
In addition, if reimportation was expanded and pharmaceutical manufacturers continued to sell
their products to Canada,the Canadian government might choose to stop allowing U S citizens to
free ride off their health care system, especiall\ if supplies were limited b\ the manufacturers
If fewer drugs were available to Canadians,the effect of reimportation in all probabilit\ would be
the opposite of that intended b\ its proponents Prices would be more likel\ to increase in Canada
than the\ would be to decrease in the United States
Lexington Heath Benefits Review Committee Report DR4FT 16
The probability of sustaining discounts might increase should Congress look beyond Canada by
providing the ability to reimport drugs from larger European nations It would be much harder
for pharmaceutical companies to forgo the much larger European markets However this type of
reimportation would vastly complicate safety problems and expand the political stakes
Financially strapped European health care systems, fully understanding that what happens to
Canadian prices could also happen in Europe, would likely making drug reimportation a matter of
diplomatic negotiations, stalling its implementation for many years
In conclusion, while there may be some short term savings available from Canadian drug
reimportation, it is likely that reimportation will not lead to intermediate or long term discounts
unless dramatically expanded to Europe
c) Mail-in prescription. Lexington s Express Scripts program, implemented in 2004
Significant savings can result from two aspects of filling prescriptions by mail— savings on the
drug purchase itself, and changing filling behavior from brand name to generic where possible
The latter saves the most money Reports provided to the committee ( Drug Payment Drilldown
from BCBS) indicate that for Network Blue subscribers, about 10%of the prescriptions are being
filled by mail, but there is an almost even split between those which are filled by generic versus
by brand name drugs There is room to grow the use of mail and the use of generics,through
incentive or other programs New reports which provide easier comparison of price per dose
would be helpful. Express Scripts also has features which would support exploration of Case
Management. Further description of Express Scripts follows
Express Scripts has over 50 million lives under coverage, representing $24 billion in
pharmaceutical spending each year In 2003 the company managed 379 million retail
prescriptions and 32 million mail prescriptions The company offers PBM services to help
manage outpatient prescription drug usage to foster high quality cost-effective pharmaceutical
care Its range of services includes retail pharmacy network administration, electronic point-of-
sale claims processing, mail order pharmacy services, benefit plan design, formulary
administration and compliance, drug utilization review therapy management services such as
prior authorization,therapy guidelines, step therapy protocols, and formulary management
interventions, information reporting and analysis outcomes assessments and drug information for
consumers via its Web sites
There has been controversy in the field about the transparency of drug pricing and perceptions of
conflicts of interest in the use of rebates and other manufacturer incentives Prior to 2003
Express Scripts received targeted funding from pharmaceutical manufacturers in support of
certain formulary support programs including its drug choice management program and its
therapy adherence program. Aside from rebates, Express Scripts identified about $30 million in
other fees that it was paid by manufacturers This amount was less than 1%of revenues at the
time, and appeared to be less than the payments some competitors received from manufacturers
Starting in January 2003 Express Scripts began eliminating manufacturer funding for these
programs and as of October 2003 such funding was completely phased out. Express Scripts
continues to provide formulary support programs for its clients without this manufacturer
funding. The company has also committed to reducing the amount of non-rebate fees that it
receives from manufacturers, which is encouraging given the scrutiny in this area.
Express Scripts helps its clients select plan design features that balance the need for cost control
with member convenience and satisfaction. The most common benefit design options offered to
its clients are financial incentives and reimbursement limitations including formularies,tiered
Lexington Heath Benefits Review Committee Report DR4FT 17
co-payments, deductibles, or annual maximums, incentives for generic drug utilization, incentives
or requirements to use onl\ network pharmacies or mandator\ mail for maintenance drugs, and
reimbursement limitations on the amount of a therapy that can be obtained within a specific
period.
Express Scripts administers a wide range of different formular\ options for its clients, with
various benefit design features that encourage the use of preferred drugs, including restricting
the formular\ through plan design features such as tiered co-payments, programs in which
Express Scripts or the client activel\ seek to educate individuals about formular\ drugs, programs
that activel\ promote lower-cost therapeutic and generic interchanges Whereas clients tvpicall\
have selected a plan design with an open formular\ today an increasing number of clients are
selecting formularies that offer financial or other incentives (such as three-tier co-payments)to
encourage the selection of preferred drugs (While Lexington offers a tiered co-payment scheme,
it is questionable whether the difference in prices is large enough to save the town money) These
approaches help contain the rate of cost increases for clients and encourage greater involvement
b\ beneficiaries in the decision making process Some clients opt for even more restrictive closed
formularies, in which benefits are available for onl\ those drugs included on the formular\ In
2003 some 54%of all claims fell into three-tier or closed categories, compared to 42%for 2001
To support evidence-based pharmac\ benefit management,the company s Office of Research and
Planning evaluates the cost-effectiveness of drug therapies, pharmac\ benefit designs and clinical
offerings, and conducts various other studies related to clinical and financial aspects of the
pharmac\ benefit.
After selecting a formular\ clients can choose to participate in one of several rebate
arrangements that Express Scripts offers. Express Scripts has two different types of rebate
contracts with pharmaceutical manufacturers The rebates paid b\ pharmaceutical manufacturers
under both types of contract are a function of the brand drugs dispensed to members, with the
manner in which the rebates are calculated serving as the primary differentiator
One type of rebate contract is called the market share program Under the market share
program,the company negotiates with manufacturers for rebates based upon the market share of
the brand drugs sold b\ those manufacturers in its clients plans, as compared with the national
market share of the drugs This approach sets a percentage of the rebate that Express Scripts will
retain for each prescription. This route is tvpicall\ selected b\ customers that are less interested in
spending the time to customize their formularies These contracts generate about one-third of the
rebates that are paid b\ manufacturers
Another type of rebate contract is called the preferred savings grid(PSG)program Rebates
under the PSG program are based on the characteristics of the formular\ design selected b\ the
client. This system allows plan sponsors still in the contracting stages to see how different levels
of product selection would affect pricing. Scenario analyses can be run to view the impact on
pricing of making a given product more or less available to members Manufacturers provide bids
for each drug the\ wish to see included on a formular\ Prices are then arranged according to a
matrix of offerings, with rebates tied to the way positioning of the product b\ the client. That is, if
a drug is included as the sole choice in a therapeutic class, it carries a higher rebate than if it is
included in a broader group of drugs Rebates also are influenced b\ the client s co-payment
structure, such that the more a contract favors use of a drug,the higher the rebate In both cases,
manufacturers pay Express Scripts administrative fees for certain services it performs in
administering the formular\ program. In situations where Express Scripts is required to pay all or
a portion of rebates to the client,the client has a contractual right to audit the calculation of their
rebate payment.
Lexington Heath Benefits Review Committee Report DR4FT 18
Express Scripts uses its electronic claims processing system to appl\ the client s benefit plan
design parameters to submitted claims and to enable monitoring of the financial performance of
the plan.
At the end of 2003 Express Scripts operated seven mail pharmacies, located in Missouri,New
Mexico Pennsylvania,New York and Arizona. These pharmacies provide members with
convenient access to maintenance and specialt\ medications, while helping the compan` manage
drug costs through operating efficiencies and economies of scale Since mail order pharmacies are
directl` involved with the patient and member the\ are generall\ able to achieve a higher level of
generic substitutions and therapeutic interventions than is tvpicall\ achieved at retail. Within its
mail pharmacies, Express Scripts maintains a large inventor\ of brand name and generic drugs,
which it purchases either directl` from manufacturers or through wholesalers
Reporting & Analysis/Disease Management Programs
Express Scripts offers disease management and education programs to plan beneficiaries in an
effort to help manage clinical outcomes and the total healthcare costs associated with certain
chronic conditions such as asthma, diabetes, and cardiovascular disease These programs are
based on the premise that better-informed patient and physician behavior can positivel\ influence
medical outcomes and reduce overall medical costs Express Scripts identifies patients who ma`
benefit from these programs through analysis of claims data or through self-enrollment. Express
Scripts offers a tiered approach to member education and wellness, ranging from information
provided through its Internet site,to educational mailings,to its intensive one-on-one registered
nurse or pharmacist counseling. The programs include providing patient profiles directl` to their
physicians, as well as measurements of the clinical, personal and economic outcomes of the
programs
Network Administration and Claims Processing
Express Scripts contracts with retail pharmacies to provide prescription drugs to beneficiaries of
the plans Express Scripts manages In the United States,the compan` negotiates for discounted
prices at the pharmacies which will provide drugs to plan members More than 57 000 retail
pharmacies, representing more than 99%of all US retail pharmacies, participate in one or more of
its networks Express Scripts also manages pharmac\ networks that are customized for or under
direct contract with specific clients These networks can alert pharmacists to opportunities for
generic substitution and therapeutic intervention as well as formular\ compliance issues
In conclusion, Express Scripts provides a faith comprehensive set of strategies to control the cost
of prescription drugs It ma` be in the best interest for Lexington to evaluate each option so it can
determine whether it has reached the optimal balance between cost containment, member
convenience and satisfaction.
2.1.2 Institute claims and enrollment audits
A significant cost containment opportunit\ lies in making sure that the Town onl\ pays for
eligible claims and for covered persons
First and foremost,the Town must be extremel\ timel\ in reporting changes in status This
includes monitoring dependent coverage,tracking dates of birth and requesting substantiation for
Lexington Heath Benefits Review Committee Report DR4FT 19
students who otherwise fail age requirements, as well as terminating former employees and their
dependents
It is also important that the covered services be full` understood and monitored carefull`
In addition to the internal monitoring,the Town should consider engaging an independent firm to
review the claims on a periodic basis, probabl` quarterl` The\ would review the data base of
employee and dependent information and carefull` monitor cut off information to make sure that
an claims paid subsequent to a termination are the result of services performed prior to the end
of the coverage period. The\ would also review all large claims paid to make sure that the
services were appropriate,there were no overcharges and that the services were appropriatel`
covered(i.e not excluded services)
The auditor would also review significant claims for a dependent spouse to make sure that no
other coverage was available from another source to pa` for these services
Note that Express Scripts has support for this kind of work for the pharmaceutical costs
2.1.3 Review premium structure and Plan Design
a) Increase non-pharmaceutical co-pays
There ma` be an opportunik to significantl` change behavior b\ changing plan design. Under
the current structure, with$5 copays for most services,there is limited consumerism. Participants
do not have the information to make choices based on cost because the amounts the\ are paying
do not relate to the true cost of the services The cost to the participant of using a high cost or
inefficient provider is the same as the cost of using a more efficient provider There is no
incentive, for example to avoid high cost teaching hospitals for routine tests and services which
could be performed more efficientl` and with equal quaht` in a communrt` setting. The optimum
plan structure would include rewards for wise behavior as a health care consumer
b) Institute Explanation of Benefits forms—
Participants generall` do not receive explanation of benefits forms from Blue Cross Blue Shield
when claims are paid, so the\ are totall` isolated from the real cost of medical care
c)A structure with participants paying a percentage of the discounted cost per visit might
encourage more consumerism.
d) The $5/ $10/$25 copay structure for prescription drugs is also somewhat low Once again,
there is no incentive to compare prices charged b\ participating pharmacies or to compare the
costs of different generics
We need to understand how much flexibiht` there is in determining plan design. For example, if
Lexington requests a different benefit structure than the standard programs offered b\ Blue Cross
or Harvard Pilgrim in order to influence participant behavior will Blue Cross or Harvard Pilgrim
be able to administer that program. Some design decisions are tied to each other. for example,
some vendors ma` refuse to offer high deductible programs with Health Reimbursement
Accounts or Health Savings Accounts if the Blue Choice program is also a plan option.
Lexington Heath Benefits Review Committee Report DR4FT 20
e) Change the ratio of Premium Contributions
The Town currentl` pays 80%of the total cost for Blue Choice, Medex, and HPHC First
Semorrt` 85%for HPHC 88%for Network Blue, 80%for Managed Blue Seniors, and 50%for
all dental plans
There is a three-tier structure for dental coverage (individual, individual plus one, and famil`) and
a two-tier structure for medical coverage (individual and famil`) We understand that a three-tier
structure was considered and rejected because the famil` premium would be too high. This
should be reviewed each year The committee was not provided with information as to how the
current premium structure was developed. For the medical programs,the ratio of the famil`
premium to the individual premium varies b` plan between 2 40—2 59 This weighting should
be reviewed to determine if it is appropriate It ma` be more appropriate to use the same ratio for
all three plans
The current structure, with two Blue Cross alternatives and one Harvard Pilgrim alternative, was
established in 1994 and participants selected plans at that time There has not been significant
movement between plans since that date because at the time of the changes, enrollment was
frozen for 3-4 years and people were required to move off of the HPHC plan into the BCBS plan
to pool risk; enrollment changes have been due to new employees selecting plans It is possible
that a different premium or benefit structure would result in significant changes in the distribution
between plans
After reviewing long term cost projections for each Plan,the Town should determine whether
there is an reason to mcent employees to select one plan over another and develop a premium
structure which encourages movement towards one plan, if appropriate
One option is to reduce benefit levels or increase employee premiums enough so that those with
working spouses will elect to participate in those plans instead of the plans offered b` the town.
It should be noted that this action could detract from the town s abilit` to attract new employees,
unless wage structures were revised upwards to compensate
Another alternative to consider is to have the Town contribute the same dollar amount (one dollar
amount for individual coverage and one for famil` coverage) whichever Plan the employee elects
and have the employees pa` the remaining premium.
Employee contributions could also van based on pa` with those over a certain salan
contributing more to their own health care Again,this ma` make the Town less competitive as
an employer
The committee discussed the possibilit` of recommending that part time employees pa` a higher
pro rata share of the premium, in order to encourage those with working spouses to get their
medical coverage from the spouse s plan. This could save the town as much as $IM annuall`
according to one estimate The current benefit structure results in as much as $7 per hour in
additional compensation for part-time employees compared to their full-time colleagues
However this increase in premium could make it vers. difficult to fill part time positions since
access to health care is a major hiring incentive In addition, mans part time jobs within the
schools don t work well as full time positions There has been some effort to keep as mans part
time jobs as possible below the 20 hours that qualifies the individuals for benefits, but that is
often not feasible For mans the availabilit` of the town s health care program is the reason the\
are willing to take the jobs at relativel` low wage levels
Lexington Heath Benefits Review Committee Report DR4FT 21
The Committee also discussed whether or not it would be possible to charge higher premiums to
smokers or other high-risk groups, as is done with life insurance The consensus was that this
would be too difficult to administer How would the town treat a famil` where the employee did
not smoke, but the spouse or dependent child did9
2.1 7 Continue to consider alternative insurance providers, stop-loss levels and insurance vs.
self-insurance as part of rebidding process
a)Alternative Health Plans
Blue Cross/Blue Shield, Harvard Pilgrim, and Tufts Health Plans have the most extensive
networks in Massachusetts Rose Ducharme has indicated that the Town has requested
competitive quotes from Tufts Health Plan in the past and it was more expensive than the
programs currentl` offered. This cost comparison should probabl` be repeated ever` three to five
years Periodicall` it ma` be worthwhile to compare the networks offered b` United Health Care
and CIGNA to the list of providers used b` Plan participants, since neither network is currentl` as
extensive in Massachusetts as Blue Cross, Harvard Pilgrim, or Tufts
b) Self-Insurance versus Full Insurance
Rose Ducharme has indicated that the Town requests quotes and compares self-insured and full`
insured programs on an annual basis This practice should continue Self-insured and insured
dental programs should also be evaluated.
In the long run,the cost of coverage for a large group is the total of claims paid, administrative
and claims processing costs,the cost of an risk transfer plus an allowance for profit for the
insurer or plan administrator Insurance ma` save mone` over self-insurance in the short run, if
the insurer underestimates claims or provides an artificiall` low quote to `bu` the business, in
the assumption that it will recoup its first-year losses in future years In the long run, self-
insurance (perhaps combined with reinsurance or stop loss coverage) is likel` to be less costl`
because the profit margins assumed b\ administrators are lower than those assumed b\ insurers
In addition, state laws mandate certain benefits for insured plans self-insured plans are not
required to offer most state-mandated benefits
c) Limit Entry or Reduce Employer Contribution for Blue Choice Plan
The out-of-state Blue Choice Plan does not require participants to have a primary care physician.
Man\ believe that having a gate-keeper can help to keep medical costs down. The in-state Blue
Choice Plan requires a primary care physician, but does allow participants to go out of network if
the\ choose that is when the\ utilize their out of pocket deductible If this is true,the premium
structure used for the Blue Choice Plan should include an employee contribution reflecting the
additional cost of the program. The Town could also consider not allowing new employees to
select the Blue Choice Plan.
However we cannot determine from the information available whether there is adverse selection
or whether or not it is costing the town more when employees elect the Blue Choice Plan. It
would be interesting to review the demographics of the employee selecting Blue Choice with
those selecting HMO Blue Rose Ducharme has indicated in the past that in-state employees who
selected Blue Choice do not often go out of the HMO network for care However the\ are
willing to pa` a higher premium to reserve the right to go out of network. If mcenting them to
move to the HMO plan does not change their utilization of health care,the cost to the Town
might actuall` increase, since claims would remain the same and employee contributions would
decrease The Town should review the rate structure each year to be sure that relative employee
Lexington Heath Benefits Review Committee Report DR4FT 22
contributions for the Blue Choice and HMO programs reflect the perceived value of the
availability of out of network care
Since the Blue Choice Plan is the only one allowing participants to go out of the network for
services, it ma` be the only one appropriate for retirees not eligible for Medicare who live outside
Massachusetts (42 individuals and 18 families) and families with dependents in college out of
state Therefore,the Plan cannot be eliminated unless another plan appropriate for this population
is added.
Since the cost of coverage for out-of-state retirees is higher a higher retiree share ma` be
appropriate
2.2.1 Consumer-Directed Healthcare; Health Savings Accounts, Flexible Spending
Accounts, Medical Savings Accounts, Health Reimbursement Arrangements
The town should consider various options in the implementation of consumer directed health care
strategies, similar to the current trend in mans businesses Please see Appendix for a more
detailed discussion of these options
2.2.2 Implement strategy for expanded case management and health promotion
a) Case Management
There is little data available to the Committee that would enable it to draw an conclusions about
savings that more aggressive case management might provide to the town. Case management
activities are currently focused on two sets of individuals
The first group includes those who are in acute episodes For these, case management
concentrates on getting an individual out of expensive care such as hospitals into less expensive
services such as rehabilitation facilities or home care Although Blue Cross and HPHC have little
financial incentive to provide these services to town employees and dependents who are not
insured b` them, it is likely that the\ do because the\ provide such services for those the\ insure
It seems unlikely although possible,that the\ would separate out those who are self-insured in
order not to provide case management. The town should ascertain whether these services are in
fact being provided to its msurees There is considerable evidence, however that town staff
provide consumer education and certain case management services when the\ can.
The number of cases in which the reinsurance floor is reached indicates that there are several
cases within the Lexington insured group for whom acute episodes are costly Aggressive case
management might lower costs for these individuals Generally however the most substantial
savings are realized for cases where the annual claims level is in the $10 000 to $50 000 range
Case management can also be focused on those with chronic conditions who are not in a health
facility and ma` still be working. Although these individuals ma` have acute episodes,their care
is generally on an outpatient or ambulatory basis and drugs are usually the most expensive part of
such treatment. Conditions included in this group include asthma, diabetes, coronary artery
disease, heart failure, hypertension, and high cholesterol. It is likely that some forms of case
management for these individuals is done bs the practitioners who treat them, however there are
no incentives for this
Lexington Heath Benefits Review Committee Report DR4FT 23
The evidence on savings from case management for chronic conditions is not encouraging,
although it is clear that case management can result in better quality services and improved
patient satisfaction. Few entities providing case management report significant savings One
positive example is Asheville,NC which has a program for cit` employees that concentrates on
diabetes, asthma, hypertension, and high cholesterol. This program, which is currently being
tried in a few other places, uses specially trained pharmacists to monitor participants It was
reported that the city has saved four dollars for every one dollar it invested in the program, mostly
in reduced hospital costs
There is, unfortunately little data to estimate how much case management is being done for those
with chronic conditions or whether savings can be attained. What is clear is that the incentives
are probably not aligned in ways that encourage aggressive management of the chronic conditions
of those Lexington covers
The town would benefit from improved reporting on claims made for particular health conditions
for our population(diabetes, smoking-related or obesity-related illnesses in particular) in order to
gauge how effective increased health-promotion efforts could be at decreasing claims However
as noted elsewhere in this report, our claims are actually lower than the rest of Blue Cross/Blue
Shield s book of business
Note that Express Scripts has features which support this work.
b) Health Promotion and Disease Prevention
There is little systematic attention currently being paid to health promotion and disease
prevention activities within the Lexington employee and dependents population.
Health promotion encourages the adoption of healthy practices in areas such as diet, exercise, and
stress reduction. Disease prevention involves the identification of specific risks and the taking of
steps to reduce those risks Treatment of individuals shown to be at risk for osteoporosis aimed at
preventing future fractures is an example of disease prevention. Early detection, while often
included in disease prevention is not prevention but is important for the future health of the
individual and the cost of health care Mammograms and PSA testing for prostate cancer are
examples of early detection. Early detection and disease prevention, because they more clearly
fall within the scope of practice of medical practitioners, are more likely to be done than is health
promotion.
Health Promotion and Disease Prevention in Lexington s Plans
While there are minor differences, both the HPHC and Blue Cross plans seem to offer a quite
similar variety of services Both offer discounts for fitness centers,Weight Watchers and bicycle
helmets However Town employees are not entitled to the fitness center or Weight Watchers
discounts because we are self-insured and these were deemed expenses not worth incurring. Both
offer discounts on various exercise and safety options Blue Cross seems to have somewhat more
emphasis on baby care and has a program to increase physical activity in children. Blue Cross
offers smoking cessation by telephone and prescription discounts Harvard Pilgrim appears not to
provide smoking cessation assistance, but provides information on various non-HPHC programs
Both have extensive health information on their web sites, although it is not clear that these are
any more helpful than independent web searches Both provide early detection services, e g.
mammograms, PSA testing.
Lexington Heath Benefits Review Committee Report DR4FT 24
However both seem to lack an integrated approach toward health promotion and the offerings
appear to be a smorgasbord from which a subscriber chooses The subscriber pays for most of
these services, although at a reduced rate We have no data on how mans Lexington enrollees
use these services
Are Savings Possible?
While it is tempting to hope that health promotion activities can provide immediate savings in
health costs for the town,this is unlikel` for a number of reasons
• The town does not have information about various risks that exist within the covered
group
• Obtaining data about risks that could or should be addressed will be costl` and require
the cooperation of town employees This is beyond the current scope and capacrt` of
town government.
• Within the employee population,there are likel` to be individuals at high risk and broad-
based programs aimed at the general population ma` not reach them. High-risk
individuals pose a particular threat to health care expenses because of their effect on the
communrt` experience and future costs Methods b` which an employer ma` identify
and reach these individuals so as to reduce risk are onl` dust being developed and ma` be
difficult to implement, particularl` with HIPAA in place
• Effective health promotion and disease prevention activities will entail costs now for
savings that might be realized in the future Savings would come in the medium-and
long-term and almost certaml` would not be identifiable as deriving from such efforts
Simpl` talking about health promotion and making it available to employees at reduced rates is
not sufficient to change much behavior More aggressive action would be required.
One example will suffice It can be assumed that some town employees and dependents smoke
Smoking affects not onl` the health of the individual but of his or her famil` as well. The effects
of second hand smoke on household incidence of lung cancer upper respirators infections and
asthma, for example, have been documented. However we do not know how mans town
employees smoke We also do not know whether those who smoke are interested in stopping.
The Blue Cross and Harvard Pilgrim offerings described above are likely to be less effective
interventions than more intensive programs
Were it determined that there are a number of town employees or retirees (or their dependents)
who smoke and want to stop it might be appropriate for the town to establish a smoking cessation
program that goes beyond what our insurers offer The design of such a program would best be
left to experts, but probably should provide some cost to the individual with a reward for
successful cessation. For town employees such an intervention might be done during work hours
or at the least, at convenient times and places
Similar arguments can be made for weight control, blood pressure control, and stress
management,to name only the most obvious
Because the data and participation needed for an health promotion and disease prevention
programs can only come from the employees themselves, gains can only be made b` a combined
effort of the town and its employees A health risk assessment of town employees (and possibly
of dependents as well) would provide much needed data and might help to build support within
town government and the employee population for needed programs in these areas This would
require funding from the town.
Lexington Heath Benefits Review Committee Report DR4FT 25
2.2.3 Explore group purchasing in tandem with review of premium structure and plan
design
There are currentl` two major purchasing groups in Massachusetts—MetroWest and MIIA.
Lexington has participated in both groups in the past. At the time we were part of the MetroWest
Group we were one of the largest towns in the group and each entit` had one vote Lexington
dropped out because the group elected to offer benefits that were more generous than the town
felt it could afford. With MIIA,the purchasing group did not purchase the stop-loss insurance
expected and the purchasing group was required to fund several claims for Lexington employees
which it had not anticipated. It ma` be worthwhile to review the two groups again to see if the
operating rules or the composition of the groups have changed.
Lexington Heath Benefits Review Committee Report DR4FT 26
Appendix B: Plan Descriptions
The current census and medical premium structures are summarized in Table I. Benefits covered
under the various plans are summarized in Table II.
Currentl` the Blue Choice,Network Blue, HPHC and Medex programs are self-insured and the
HPHC First Seniorrt` the Managed Blue Senior Plan, and all the dental programs are insured.
The Town purchases stop-loss insurance for protection against claims in excess of$90 000 for the
self-insured programs
We note that the cost of providing medical benefits to retirees is likel` to continue to increase
dramaticall` Nearl` a third of the school employees are expected to retire within the next five
years, and most of these positions will have to be replaced. As teachers move between school
districts during their careers,the last town the\ work for before the\ retire is the town which must
fund their retiree health care
In the corporate environment,the cost of providing retiree health care is reduced somewhat when
the employee reaches age 65 and qualifies for Medicare Some town employees ma` never
qualif` for Medicare unless the\ or their spouses have had Jobs outside of state or local
government. Currentl` the Committee understands that this involves onl` one or two retirees
Earl` retirement programs have a double impact on health care costs In addition to paying for
the retiree medical costs of the new earl` retiree,the town has to pa` for the health care costs of
the retiree s replacement in the active work force New hires often have lower wages than those
the\ replace, but the full costs of the earl` retirement incentive program ma` not have been
anticipated b` the town. It was noted that there are a large number of retirements anticipated in
the schools over the next five years, and the town needs to plan for the added expense
The growing retiree medical habilrt` has an impact on the bond rating of the town. Wellesle` has
started to pre-fund its retiree medical obligation in order to ensure that it can maintain its
favorable bond rating.
Currentl` the perception is that the benefits offered to town employees are better than those
offered b` local industr\ Employee contributions are often lower than provided b` the private
sector Some towns and mans private employers are providing plans with co-pays in the $10 to
$15 range, but Lexington is still offering $5 co-pays Based upon our review we would agree
with this, however employees have foregone pa` increases or accepted increases which were
below market rates in order to maintain the current benefit levels The town and collective
bargaining units have had explicit policies to negotiate for total compensation(wages and
benefits) Unless it can be clearl\ shown and widel` communicated that employees have made
these wage concessions in order to have these better plans, it ma` become difficult to pass
overrides to fund programs which citizens feel are better than those offered b` their own
employers
One issue for the Town to consider now as a part of wage negotiations is whether it is more cost-
effective to continue to provide richer benefits in lieu of salar\ increases during a period when
medical inflation is higher than the general inflation rate
Lexington Heath Benefits Review Committee Report DR4FT 27
Exhibit I November, 2004 Census and Monthly Premium Structure (per Employee/Retiree)
Plan Coverage Census Town% Town Contribution Employee/Retiree Contribution Total Working Rate
Medical
Blue Choice Individual 151 80% $440 80 $110.20 $551 00
Blue Choice Famil` 116 80% $1 143.20 $285 80 $1 429 00
Network Blue Individual 337 88% $337 92 $46 06 $384 00
Network Blue Famil` 576 88% $872 96 $119 04 $992 00
HPHC Individual 43 85% $369 75 $65.25 $435 00
HPHC Famil` 73 85% $885 80 $156 30 $1 042 00
Medex Individual 548 80% $252 80 $63.20 $316 00
Mngd Blue Srs Individual 44 80% $221 61 $94 98 $316 59
HPHC 1st Semorrt` Individual 40 80% $153 60 $38 40 $192 00
COBRA
Blue Choice Individual 1 $0 00 $551 00 $551 00
Network Blue Individual 7 $0 00 $384 00 $384 00
Network Blue Famil` 2 $0 00 $992 00 $992 00
HPHC Individual 2 $0 00 $435 00 $435 00
HPHC Famil` 1 $0 00 $1 042 00 $1 042 00
Dental
Delta Premier Individual 498 50% $21 30 $21 30 $42 60
Delta Premier I+ 1 454 50% $34.23 $34.23 $68 46
Delta Premier Famil` 382 50% $54 77 $54 77 $109 54
DeltaCare Individual 88 50% $11 92 $11 92 $23 84
DeltaCare I+ 1 27 50% $22 34 $22 34 $44 68
DeltaCare Famil` 12 50% $33 63 $33 63 $67.26
COBRA
Delta Premier Individual 8 $43 45 $0 00 $43 45
Delta Premier I+1 1 $69 83 $0 00 $69 83
Delta Premier Famil` 3 $111 73 $0 00 $111 73
DeltaCare Individual 1 $24 32 $0 00 $24 32
Lexington Heath Benefits Review Committee Report DR4FT 28
Exhibit II - Benefit Summaries
Blue Choice In- Blue Choice HMO Blue HPHC HMO
Network Out of Network/
Self-Referred
Deductible Not applicable $250 per person/ Not applicable Not applicable
$500 family
Co-Pay per Visit $5 20%coinsurance $5 $5
after deductible. No
routine care.
Out of Pocket Not applicable $1,250 per person/ Not applicable Not applicable
Maximum $2,500 family
Lifetime Maximum $2,000 000 $2,000 000 None None
Hospital In-Patient Covered in Full 20%coinsurance Covered in Full Covered in Full
(including after deductible.
maternity)
Hospital Out- Covered in Full. $25 20%coinsurance Covered in Full. $25 Covered in Full. $30
Patient emergencN room after deductible. emergencN room emergencN room
copaN it-not copaN it-not copaN it-not
admitted. admitted. admitted.
Skilled Nursing Up to 100 days/year 20%coinsurance(up Up to 100 days/year Up to 100 days/year
Facility to 100 days/year)
Laboratory Tests Covered in Full 20%coinsurance Covered in Full Covered in Full
after deductible.
Doctor Visits $5 Co-PaN 20%coinsurance $5 Co-PaN $5 Co-PaN
after deductible.
Mental Health
General Hospital Covered in Full 20%coinsurance Covered in Full Covered in Full
after deductible.
Specialty Hospital Biologically based 20%coinsurance Biologically based Up to 60 days/year
conditions covered after deductible. Up conditions covered
in full Other to 60 days/year in full Other
conditions to 60 conditions to 60
days/year days/year
Out-Patient $5 Co-PaN Up to 20%coinsurance $5 Co-PaN Up to $5 Co-PaN Up to
24 visits per year after deductible. Up 24 visits per year 24 individual visits
to 24 visits per year or 25 group visits per
year(to a maximum
of 25 total visits)
In-Patient Drug/ Up to 30 days/year 20%coinsurance Up to 30 days/year Up to 30 days/year
Alcohol in a substance abuse after deductible. Up in a substance abuse
facilitN to 30 days/year facilitN Unlimited
in general hospital.
Out-Patient Drug/ Up to 8 visits per 20%coinsurance Up to 8 visits per Up to 20 visits or
Alcohol year$5 copa,per after deductible. Up year $5 copaN per $500 in benefit
visit to 8visits per year visit value,whichever is
greater $5 copaN for
first 8 visits,$25
thereafter $5 copa,
for group therapN
Home Health Care Covered in Full. 20%coinsurance Covered in Full. Covered in Full.
after deductible.
Lexington Heath Benefits Review Committee Report DR4FT 29
Blue Choice In- Blue Choice Out of HMO Blue HPHC HMO
Network Network/Self-
Referred
Prescription Drugs $5 generic/$10 $5 generic/$10 $5 generic/$10 $5 generic/$10
preferred brand/$25 preferred brand/$25 preferred brand/$25 preferred brand/$25
non preferred non preferred non preferred non preferred
pharmac,
Up to a 30 da, Up to a 30 da, Up to a 30 da, $10/$20/$75 mail
supply from a supply from a supply from a order
pharmac, or 90 da, pharmac, or 90 da, pharmac, or 90 da,
supply mail order supply mail order supply mail order Up to a 30 da,
supply from a
pharmac, or 90 da,
supply mail order
Medicare Supplement Plans(Plan coverage plus Medica•e)
Medex Managed Blue HPHC First Seniority
Deductible Not applicable Not applicable Not applicable
Co-Pay per Visit None(No routine care.) $10 $15
Out of Pocket Maximum Not applicable Not applicable Not applicable
Lifetime Maximum Not applicable Not applicable Not applicable
Hospital In-Patient Covered in Full Covered in Full. Covered in Full
(including maternity)
Hospital Out-Patient Covered in Full. Covered in Full. $50 Covered in Full. $50
deductible for emergent, emergent,room copal if
room unless admitted. not admitted.
Skilled Nursing Facility Full coverage for 100 days. Covered in Full Covered in Full
$10/day for 101-365
Laboratory Tests Covered in Full Covered in full. Covered in Full
Doctor Visits Covered in Full $10 per visit. $15 per visit
Mental Health
General Hospital Covered in Full 20%coinsurance after Covered in Full up to 190
deductible. days
Specialty Hospital Biologically based Biologically based Covered in Full up to 190
conditions covered in full conditions covered in full days.
Other conditions to 60 Other conditions to 60
days/year days/year
Out-Patient Up to 24 visits per year $10 per visit. No limit for $15 Co-Pad visit 1-8,$25
biologically based. Up to for 9-20 then 50%. $15
24 visits per year for other for group visit 1-20 then
50%.
In-Patient Drug/ Up to 30 days/year in a 20%coinsurance after Up to 90 days in a
Alcohol substance abuse facilitN deductible. Up to 30 days/ Medicare covered hospital.
year Additional Lifetime
reserve of 60 days.
Medex Managed Blue HPHC First Seniority
Out-Patient Drug/ Up to 8 visits per year$5 $10 per visit. Up to 8 $15 Co-Pad visit 1-8,$25
Alcohol copa,per visit visits or$500 per year for 9-20 then 50%. $15
for group visit 1-20 then
50%.
Home Health Care Covered in Full. Covered in Full. Covered in Full.
Lexington Heath Benefits Review Committee Report DR4FT 30
Medex Managed Blue HPHC First Seniority
Prescription Drugs $50 deductible,then full 25%copa, generic,50% $10 genenc/$20 preferred
coverage for genencs and preferred brand,75%brand brand/$35 non preferred
80%for brands at pharmac, $20/$40/$105
pharmac, Mail order$5/$30/$50 for mail order
90 day supply
Mail order$2/$10 for 90 Up to a 30 da, supply from
da, supply a pharmac, or 90 da,
supply mail order
Dental Programs Delta Premier DeltaCare in Network DeltaCare out of network
Deductible for out-of- Not applicable Not applicable $100 per person,no family
network services maximum
Preventative Full coverage for most Full coverage for most The Plan will pa,20%less
diagnostic and preventative diagnostic and preventative than it would have paid for
services once ever 6 services once ever 6 services in network.
months months
Combined Deductible for $50 Individual/$100 Not applicable
Basic&Major Family
Restorative
Basic Restorative Covered at 80%after Copayment schedule bThe Plan will pa,20%less
deductible type of service. $1,00() than it would have paid for
maximum per calendar services in network.
year for oral surgerti
endodontics,&
penodontics.
Major Restorative Covered at 50%after Copayment schedule bThe Plan will pa,20%less
deductible type of service. $1,00() than it would have paid for
maximum per calendar services in network.
year for oral surgerti
endodontics,&
penodontics.
Lexington Heath Benefits Review Committee Report DR4FT 31
Appendix C
Review of Comparable Town Benefits Survey
To better understand the costs of Lexington Health Benefits and the health benefits marketplace
for eastern Massachusetts municipalities,the Committee conducted a surve` of comparable
local cities and cities We selected towns used b` unions for comparison purposes in wage
agreements and selected other cities and towns with similar demographics and financial status A
surve` instrument was developed and modified based upon feedback from town staff and
committee members Twent\ nine towns were contacted b\ phone,the surve` was faxed and
phone follow up was conducted as needed. Twent\ four towns responded with most of the
requested information. Information included health plans offered, benefit levels, employee
premiums, and questions about other benefits offered, including Dental benefits, chiropractic
coverage and pharmac` benefits Lexington offered to share the results of the surve` with
respondents
Survey Results
The detailed findings of the surve` are contained in the attached spreadsheets
Lexington offers a generall` similar set of traditional health plans to most of the towns Blue
Choice, HMO Blue and Harvard Pilgrim were the most frequentl` offered plans The Metro
Suburban Health Purchasing Collaborative also offers Tufts PPO Tufts POS and Fallon and a
NAA(Out of Area)plan.
For Medicare supplement retiree plans, virtuall` all towns offered Medex and most also offered
HPHC s First Seniorrt` product, a much less costl` Medicare HMO product with expanded
benefit.
Eighteen towns, including Lexington, offered$5 co-pays for Physician and Ambulator\ services
Three towns have co-pays of$10 per visit; one town has an$8 co-pa` $ and the remainder were
mixed in their benefits Eleven towns have $25 Emergenc` Room co-pays Five towns have $50
ER co-pays five have $25-$50 co-pays and the remainder were mixed. With the exception of
Brookline and Sudburn Lexington and six other towns had the next lowest levels of pharmac`
co-pays - $5 generic/$10 brand/and$25 formularn Mail order rates for Lexington were similar
but generall` for a 90 da` suppl` Seven towns had similar rates
Of the 24 respondents, seven reported Annual Limits on out of pocket employee expenses
Lexington has a$1 000/$2,000 polic` one town(Newton)had a similar benefit. All others were
higher— such as $2,200/$4 400 in Concord and$1 600/$3,200 in Dover
Lexington offers some coverage and benefits that are not offered b` other towns Chiropractic
services are covered b` Lexington with a$5 co-pa` up to 20 visits This is similar to Brookline
Fourteen towns reported offering the coverage but most of them onl` offered it in certain but not
all plans Woburn had a limit of 12 visits per year
Twent\ towns reported offering Dental insurance, but we onl` received rate sheets for thirteen.
Lexington picks up 50%of the premium for Delta Premier and Delta Care Ten of the other
towns did not contribute to the Dental coverage (100%employee premiums) Sudburn and
Wellesle` contributed 25%and 47%respectivel` for DeltaCare coverage, not Delta Premier
Lexington Heath Benefits Review Committee Report DR4FT 32
Eighteen towns offer life insurance benefits two do not Of those that offer the benefits,
Lexington offered what appeared to be the standard benefit of 50%of the premium for$5 000
employees are responsible for the premium of additional insurance up to $74K. Three towns
Blue Choice offered$10 000 policies -onl`
one of those reported optional
50% 1 1--"__ additional coverage (Wellesle`)
45%
40%
35% I I I Lexington was the onl` town that
Employee 30% _ I _ reported having used an Opt-Out
Share 250% program, where cash benefits
20% —
15% were paid for employees who
1o% _ _ _ ■ _ _ _ _ _ voluntaril` select their spouse s
0
insurance plan. Lexington s plan
Q e �Jr USF / _� �a d� g 6 was one-time onl` however
Towns Lexington employees contribute a
different percentage of the
premium for each of the covered plans 20%for Blue Choice 12%for HMO Blue, and, 15%for
HPHC This compares to averages of 29%, 18%and 19%respectivel` for the towns also offering
HMO Blue those plans The distributions of
50% r- employee shares for the three
45% I I plans are shown in the attached
35I �
35% charts
Employee30% r'
Share 20%
20% - Total premiums for the health
15% _ - - _ I plans offered b` Lexington were
o% - generall` comparable to other
towns higher than average for
�`tpmmmOOZ 2°aa,O., Co mos. ..,. ...
m o _ gBlue Choice and HPHC and lower
Towns than average for HMO Blue The
premiums van significantl`
HPHC
50%
45%
40%
35%
Employee 30%
Share 2
20% - -
15
10% li Ill - -- - '
or
.c
v
Towns
Lexington Heath Benefits Review Committee Report DR4FT 33
HMO Blue Total Premiums
$1 400-
$1,200-
4¢1I 4sr
RC, aliiiV
aats
$1 CICICI—'
00-
$1,200-
$1000 ® .a.. ,
$800-.— — — — — — —
Towns
$600-
$400- G c ® o c
$200-
o Individual
— _ _ ❑Family
$0 L. .,I E,_�I Eun amt E�I E Hina nz[ ll,] F at u]nun 1,, al ,I1 ,m_n ^e 1
loln]i.dual 4 I 44 41` 4F 41` 4_ 4_ 4_4 4F 41` 4`4
10Famll 4_li li p. 1' 4_ III'. Il0 00 III'. IP 00 l'I It' Il0 III'. C li 1
Premiums
Needham's Blue Choice Premium to be modified to $535 and $1528
Blue Choice Total Premium
$1,600—
$1 400—
$1,200 49
—
$1 000— .—
I
Premiums $aoo- '
$600—
$400—
$zoo— — — —
ILt
ILt
ILt
$0 o Individual
Lex Arl Brook Camb Hing Need Sudbury West Winch
o Family
o Individual 551 625 423 432 520 551 509 436 523
to Family 1429 1564 1131 1100 1234 1429 1300 1175 1395
Towns
Of the fourteen towns reporting Medex premiums and contribution rates, Lexington had a yen.
competitive premium rate at$316 overall. Onl` Arlington was lower at $292 per month and
Lexington Heath Benefits Review Committee Report DRIFT 34
Needham was the same as Lexington. Medex premiums were as high as $423 in Burlington.
Most towns, with the exception of Hingham and Needham, offered at least one other plan for
seniors Members of the West Suburban Health Plan offered as mans as 8 different options At
20%, Lexington was one of the lower towns for the Employee share of premium in Medex and
Medicare related coverage Most towns had 25%or more of the premium being picked up b` the
retiree Man` required the retiree to pick up 100%of the premium.
HPHC Total Premium
$1 600-
$1
400-
$1,200-
$1000-
Towns $800-
m 441, ® — — m
- — — — — — — — — — — — — — -
❑Individual
$600- - — — — — — — — — — — -0 Family
am
$400- _ -� -
$200- e
$0 _. _. _.._i
L_ rl Eel Eurl amt !n E d E Hina 'nu, Flat II-d 4 dhur 3It iter 4 HI ,t h
In dual 4 411 4_ 4- 4 4_ 4i
F3m1l! 11 It 4 t' LI L Ir4 14 Ili
Premiums
Other Reviews
Of the eleven towns tracked as comparables b` the Teachers Union for salar\ and benefit
negotiations for FY'05 Lexington ranked fourth in overall health insurance benefits The total
compensation level was ranked lower however The benefit is calculated based upon famil` plan
premiums for HMO Blue (the most frequentl` enrolled plan.
Another analysis of comparable towns was conducted b` town staff in the fall of 2004 looking at
health benefits as a percentage of total budgets In that analysis, Lexington ranked second,just
behind Arlington, with 10 7%of the budget devoted to health care costs Lexington ranked third
in health care costs per employee at $11 400 behind Brookline ($12,925) and Arlington
($12,158) The range was $5 667 to $12,925
Blue Cross compared Lexington s renewal rate calculations to Blue Cross `book of business
For the HMO Blue plan, Lexington s projected claims were $2717 692 vs Blue Cross claims at
$3,516 076 For the Medex plan, Lexington was $1 836 932 vs BCBS at$2,245,239
Lexington Heath Benefits Review Committee Report DR4FT 35
Appendix D
Consumer Directed Health Plans
HSAs, MSAs. HRAs and FSAs
Health Savings Accounts
A stud` b` America s Health Insurance Plans (AHIP) found that 346 000 people were covered b`
HSA plans purchased b` individuals b` September 2004 which is about 3-4%of the individual
market. That ma` not sound like much, but considering that mans of the biggest health insurance
companies didn t even offer them until the middle of the year last year this represents fairly rapid
adoption.
The table below shows that the products with high deductibles (close to the HSA contribution
limit)have been the most popular on the individual market. It also found that almost one-third of
the individuals covered b` HSA plans were previously uninsured.
Description of HSA HDHP Policies Individual Market-Best Selling Product
Single Family
Average Annual Deductible $2,856 $5 425
Average Annual $3 068 $5 781
Out-Of-Pocket Limit
Average Lifetime $3 8 million $3 8 million
Maximum Benefit
In terms of the employer market,the stud` reported that about 100 000 individuals were in HSA
plans offered b` their employers b` September 2004 with three-quarters of those being
employees of small businesses HSAs were part of the Medicare law which passed Congress in
November of 2003 and became effective in Januar\ 2004 well after most employers had settled
on their health care arrangements for 2004 Millions of people in government and in the private
sector have been offered the opportunity to select a high-deductible plan with a health savings
account, and the upcoming March survey b` AHIP (due for release in April or May)will provide
data on how mans individuals have chosen to take the HSA option.
There are three types of accounts that can be used to help fund employee health care expenses
flexible spending accounts, medical savings accounts, and health reimbursement arrangements
Flexible spending accounts
The Town currently offers Flexible Spending Accounts
Health care flexible spending accounts are employer-established benefit plans that reimburse
employees for specified medical expenses as the\ are incurred. The employee contributes funds
to the account through a salary reduction agreement and is able to withdraw the funds set aside to
pay for medical bills The salary reduction agreement means that any funds set aside in a flexible
spending account escape both income tax and Social Security tax. Employers may contribute to
these accounts as well.
Lexington Heath Benefits Review Committee Report DR4FT 36
There is no statutory limit on the amount of money that can be contributed to health care flexible
spending accounts Once the amount of contribution has been designated during the open
enrollment period that occurs once each year the employee is not allowed to change the amount
or drop out of the plan during the year unless he or she experiences a change of family status B`
law the employee forfeits an unspent funds in the account at the end of the year There have
been proposals introduced in Congress to ease this "use it or lose it" rule b\ allowing up to $500
to be carried over to the next year. such proposals have not been enacted.
Medical savings accounts
Medical savings accounts are savings accounts used to pay for unreimbursed health care
expenses These accounts can accumulate tax-deferred interest similar to individual retirement
accounts (IRAs)
Funds are controlled and owned b\ the account holder The employee or the employer--never
both--makes contributions In order to qualif\ the employee must be covered b` a high-
deductible health insurance plan and must be self-employed or employed b\ a firm with 50 or
fewer employees For 2004 the annual deductible for qualifying high-deductible insurance was
between$1 700 and$2,500 for self-onl` coverage For famil` coverage,the deductible could not
be less than$3,350 or more than$5050
Savings are rolled over ever` year and are portable, regardless of employment status Funds can
be used on a pretax basis to pay for long-term care insurance premiums, health insurance
premiums paid while unemployed, and COBRA premiums
Funds can accumulate earnings, which are not taxed unless funds are withdrawn for nonmedical
expenses If withdrawn for nonmedical purposes b\ employees under the age of 65 savings are
considered taxable income and are subject to income taxes in addition to a 15-percent penalty tax.
If the employee becomes disabled or reaches Medicare eligibility age, distributions for
nonmedical expenses from the account are subject only to ordinary income tax,not the penalt`
tax.
The maximum contribution to a medical savings account for single coverage is 65 percent of the
deductible on the employee s health plan and 75 percent of the deductible for family coverage
For example, if an employee has a health plan with a deductible of$2,500 then he is allowed to
contribute a maximum of$1 625 to a medical savings account for single coverage With a family
plan deductible of$5 050 a maximum contribution of$3 787 is allowed.
Health Reimbursement Arrangements
Health reimbursement arrangements, also known as "health reimbursement accounts" or
"personal care accounts," are a type of health insurance plan that reimburses employees for
qualified medical expenses
Health reimbursement accounts consist of funds set aside by employers to reimburse employees
for qualified medical expenses,just as an insurance plan will reimburse covered individuals for
the cost of services incurred. Employers qualif\ for preferential tax treatment of funds placed in a
health reimbursement account in the same way that the\ qualif\ for tax advantages b\ funding an
insurance plan. (Employers can deduct the cost of an insurance plan--and now a health
reimbursement account --as a business expense)
Lexington Heath Benefits Review Committee Report DR4FT 37
Health reimbursement arrangements are open to employees of companies of all sizes, unlike
medical savings accounts that are only available for small business employees A health
reimbursement account provides "first-dollar" medical coverage until funds are exhausted. For
example, if an employee has a$500 qualifying medical expense,then the full amount will be
covered b` the health reimbursement arrangement if the funds are available in the account. Under
a health reimbursement account,the employer provides funds, not the employee All unused
funds are rolled over at the end of the year Former employees, including retirees, can have
continued access to unused reimbursement amounts Health reimbursement accounts remain with
the originating employer and do not follow an employee to new employment.
As for employers, a survey recently conducted iointls b` the Kaiser Family Foundation and the
Health Research and Educational Trust, 6 percent of all companies said the\ were very likely to
offer some type of high-deductible plan linked to a savings account in the next two years, while
21 percent said the\ were "somewhat likely"to do so Big employers, with 5 000 or more
workers, were more likely to offer the option. 22 percent said very likely and 28 percent
somewhat likely
Changing Individuals from Users of Health Care to Consumers ofHealth Care
As members of the health care committee, we are faced with the challenge of determining the
appropriate strategies necessary to attempt to contain the enormously fast growing costs of health
care Large corporations have been at the leading edge in this effort. While still early in its
development,there is a clear plan in place bs mans in the industry to change the mindset of
individuals from users of health care to consumers of health care The first step in this process
has been to shift the burden of cost from the company itself to the employee The following
table, provided bs Hewitt Associates, shows the trend in place with employers with more than
5 000 employees
Categories 1998 1999 2000 2001 2002 2003 200.1 1rr°o 2rr°o 3rr°o
Healthcare Costs $4100 $4400 $4700 $5000 $6000 $7000 $7800 11°o 30°o 56°o
Employers Pet 74 7°o 75 4°o 73 8°o 74 6°o 72.0°o 70°o 67 7°o
Employees(by payroll ded) 15 7°o 15.5°o 16 7°o 16 8°o 17 1°o 18.0°o 19.5°o
Employees(out of pocket) 9 6°o 9 1°o 9.5°o 8.6°o 10.9°o 12.0°o 12.8°o
Employers Cost $3062 $3318 $3468 $3730 $4320 $4900 $5280 8°o 22°o 41°o
Employees Cost $1038 $1082 $1232 $1270 $1680 $2100 $2520 20°o 50°o 98°o
While the growth in health care costs for large corporations has been 56%over the last three
years (16%per year) the cost to the employer has been 41%(12%per year) This has occurred
bs shifting the burden of health care costs bs the employee from 25 4%in 2001 to 32 3%in
2004 Employees of large corporations currently pay 19 5%of health care costs through payroll
deduction, usually in the form of insurance premiums and 12 8%in out of pocket costs, usually in
the form of co-pays and deductibles While it is clear the Lexington is nowhere near these
numbers,the national trends are evident.
Even with this effort,there has still been little sign of individuals acting as consumer of health
care instead of users As a result, stimulated bs government policies, large corporations have
started implementing the second step in the process bs shifting the perceived cost of health care
to individuals in the form of large deductibles rather than monthly premiums and small co-pays
The following analog` summarizes why this is occurring.
Imagine if a compam provided a food benefit plan to employees. Each month, employees would
have to bm $200 per month to the compam and each time the shopped, theti would have to pati
Lexington Heath Benefits Review Committee Report DR4FT 38
$10 to the food store. This would allow a famih to purchase all the food theti needed throughout
the year with the exception of certain items that were exempt from the plan In this situation it is
liken that individuals will go to the store and barb whatever theti want doing little to search for
bargains. Manufacturers will notice this buying pattern and do little to offer bargains. The result
is higher inflation over time for food products. \ow imagine if the compam changes the plan and
instead requires a$400 deductible before the food plan comes into plati The result will be a
more careful shopper who will search for the better deals.
Man` health care experts believe that changing the deductible structure will cause individuals to
feel the cost of health care, causing them to be more careful consumers Certainly there are
critics who claim that mans will forgo proper care and so it is important that an health insurance
plan pay for preventive care (such as an annual physical) and behavioral care (pay for programs
which might help individuals quit smoking or control weight) But outside these preventive care
programs, if individuals feel there is a was to save some of this deductible for a future year the\
ma` become more careful consumers, which will force health care providers to start providing
better pricing.
Through the establishment of Medical Savings Accounts and Health Reimbursement
Arrangements, government policy is now in place to help employers with this strateg` A survey
of big employers with more than 5 000 workers recently conducted Jointly b` the Kaiser Famil`
Foundation and the Health Research and Educational Trust that 22 percent of all companies said
the\ were very likely to offer some type of high-deductible plan linked to a savings account in the
next two years, while 28 percent said the\ were "somewhat likely"to do so If we really want to
take steps to control future health care costs, we should follow the lead of those who have been
most successful in controlling these costs, i.e the large companies
Medical Savings Accounts-Summary
What is an MSA?
A Medical Savings Account ("MSA") is a tax-sheltered savings account similar to a traditional
IRA, but only for medical expenses
How does it work?
The MSA works in conjunction with a special "high-deductible" health insurance policy
Families deposit money into the MSA which is 100%tax-deductible Insurance covers health
expenses in excess of the deductible while the money in the MSA is used to pay the deductible
These tax-free dollars can also be used to pay for medical expenses not covered under traditional
insurance policies, such as dental, vision and alternative medicines Any money not used for the
deductible in any one year can accumulate toward future medical expenses in subsequent years
What is the range of deductibles that must exist in a high-deductible plan?
Congress has set the range of deductibles which can qualify for a high-deductible plan. For single
insured s,the available deductibles currently range from a minimum of$1 700 to a maximum of
$2,500 For families (defined as one adult and one or more other family members) the minimum
deductible available is $3,350 per family and the maximum is $5 050 per family
Lexington Heath Benefits Review Committee Report DR4FT 39
How can doctors be chosen?
With an MSA an doctor and an hospital can be chosen, however significant savings are
available if the insurance includes a PPO (preferred provider)network.
What happens medical expenses exceed the amount of the deductible?
If medical expenses for an given year reach the deductible of the MSA major medical insurance
polic` the polic` will take over and pa` all additional qualified expenses
What if medical expenses do not reach the deductible?
The less mone` spent on medical expenses,the more will remain in the MSA. It will earn a
return while in the custodial account. Depending on the Medical Savings Account administrator
all or some of it can be invested in IRS approved mutual funds, stocks and/or bonds According to
AMA statistics,the odds of the average adult American being hospitalized in an given year are
about 1 in 12 Therefore, it is likel` that mans families will not utilize their entire deductible,
allowing it to grow for future use
How often can MSA contributions be made?
Contributions can be made annuall` into the MSA account and are full` deductible in the year the
contribution was made
What about taxes on the money in the account not used for medical expenses?
All mone` deposited in the MSA account remains 100%tax-free along with earnings generated
on those dollars At age 65 the remaining balance can be used for future medical expenses The
onl` time taxes are ever paid on principal or interest from the MSA is if the mone` is withdrawn
for non-medical expenses There is also a 15%penalt` for withdrawing funds for non-medical
expenses prior to age 65 Upon reaching age 65 taxes will be owed on the mone` withdrawn for
non-medical expenses but with no penalt`
What happens to MSA Ands upon death?
Just like an IRA,the MSA is an inheritable account.
What is the limit on how much can contributed into an MSA and written off on the annual tax
bill?
Under current tax law the maximum amount that can be contributed and deducted each year is
determined b` the size of the deductible In an individual plan,the maximum is 65%of the
deductible amount. In a famil` plan,the maximum is 75%of the deductible amount. (Example A
$5 000 famil` deductible qualifies for a maximum annual contribution of$3 750 )
Lexington Heath Benefits Review Committee Report DR4FT 40
Can an individual have an MSA in addition to an IRA or other qualified retirement plan?
Yes! Although an MSA operates under mans of the same rules that appl` to traditional IRAs, it is
not an IRA. An MSA is not a "retirement" plan--it is a"savings account" plan for medical
expenses In addition, unlike an IRA,there are no special income restrictions
Can premiums be deducted for an MSA qualified insurance policy?
Yes Premiums for the underlying MSA qualified high deductible health insurance polic` are
deductible to the same extent as premiums for an non-MSA qualified insurance polic` including
traditional HMO and PPO plans (this applies equall` to group plans as well as individual plans
for the self-employed) The main difference is that the actual amount of the deduction will be
smaller because the premiums will be smaller Also medical expenses are onl` deductible when
itemized on Schedule A, and then onl` when medical expenses exceed 7 5%of Adjusted Gross
Income while an MSA allows a deduction even if the total medical expenses are below this limit.
How large is the tax savings offered by an MSA?
If one assumes that the famil` MSA is full` funded at the maximum deductible allowed b` law
($5050) then a total of$3 787 a year will be deposited into the savings account. This entire
amount is 100%deductible on line 25 of the 1040 Form(regardless of whether a famil` itemized
deductions) Depending on the tax bracket,the tax savings can range from$562 for a famil` in
the 15%bracket to $1312 for a famil` in the 35%bracket.
Who can have an MSA?
The program is open to the self-employed and employer groups with 50 or fewer employees *
The covered individual must be covered b` an MSA qualified high deductible major medical
insurance polic` and not covered under "other health insurance" and must have net income at
least equal to the annual contribution.
"Other health insurance" does not include coverage for. dental care, disabilit` supplemental
health care plans, long-term care, vision care, Medicare supplements, and worker's compensation
*Legislation is pending that will loosen these requirements considerabl`
Can an MSA be used to pay premiums?
No this would be a non-medical withdrawal subject to taxes and penalt` However no penalt`
will appl` if the mone` is withdrawn to pa` premiums for qualified long-term care insurance or
health insurance, including a qualified mayor medical plan, while an individual is a) receiving
unemployment compensation or b) entitled to health care continuation programs, such as COBRA
Health Reimbursement Arrangement and Flexible Spending Accounts
What is an HRA
A health reimbursement arrangement ( `HRA') allows an employer to set aside a specified pool of
dollars to reimburse each employee s out-of-pocket medical expenses These medical expenses
Lexington Heath Benefits Review Committee Report DR4FT 41
ma` include deductibles, co-payments, prescription medications, dental services, and other
health-related expenses that ma` not be covered under the health-care plan. The dollars
contributed b\ the employer are tax-free for the employee
How does it work?
First,the employer determines the amount of money available in each employee s HRA for the
coverage period and establishes the types of expenses the funds can be used for Then employees
submit a Claims Processing Report for reimbursement. The funds will be subtracted from the
employee s HRA and set directly to the employee These reimbursed funds are not taxed.
What is an FSA?
A Flexible Spending Account ( FSA') allows an employee to set a portion of his/her wages for
out-of-pocket medical expenses FSA contributions are made on a pre-tax basis, lowering income
tax liabilities B\ law the employee forfeits any unspent funds in the account at the end of the
year
Can a HRA exist without an FSA?
No
Can a FSA exist without an HRA?
Yes
How does an HRA work with an FSA?
The employer funds the HRA while the employee funds the FSA. An FSA should reimburse first
since it is a use it or lose it plan. If the HRA is set up to cover only what the health plan covers,
the smart consumer can use the HRA to reimburse deductible and coinsurance, and use the FSA
to reimburse non-covered items such as eyeglasses, etc
What happens to HRA Ands not used by the end of the plan year?
The employer determines whether to allow the unused funds to be used in the next plan year
carry over a percentage of unused funds, or forfeit the unused funds
What happens to HRA Ands upon termination of an employee?
The employer can either keep the funds or allow the terminated employee to spend them over a
specified period of time
How can an HRA reduce health insurance costs?
Man\ employers look at an HRA as a vehicle to help them reduce, control and manage the costs
associated with their health insurance plan. One of the most common approaches is to combine
an HRA implementation with a change to a higher deductible major medical plan. The cost
savings result from reduced premiums for the higher deductible program. The HRA is used to
Lexington Heath Benefits Review Committee Report DR4FT 42
give back to employees some portion of the premium savings Also the new major medical plan
ma` eliminate co-pays for doctor visits, prescriptions, etc, so the employee has no out-of-pocket
expense until the HRA balance is gone At that time,the employee will incur out-of-pocket
expense onl` until the deductible is reached. This is often called a corridor deductible The
advantage is that mans employees will not full` utilize their HRA balance, and will have no out-
of-pocket expense at all. For these employees, carryover of unused HRA balances will offset the
corridor deductible in the future, which means the\ would have no out-of-pocket expense For
employees who have higher medical expenses,their costs are limited to the corridor In general,
employers have found that this approach will provide a better health plan(less out-of-pocket
costs) for a significant majorrt` of the workforce Also mans companies have found that the
growth in health care costs from year to year is slower when a larger deductible is implemented,
as employees get a sense of the cost of health care services and become a more careful consumer
of medical services
Lexington Heath Benefits Review Committee Report DR4FT 43
Appendix E
Background of Committee Members and Staff
Bob Beckwitt is Portfolio Manager Trilog\ Advisors Former Managing Director at Goldman
Sachs Former Portfolio Manager at Fidelit\ Investments He holds an SM in Finance from MIT
and a Princeton BA in Economics
Susan Bottan is Director of Budget and Finance, for Lexington Public Schools
Richard Dougherty is an organizational psychologist with significant experience in public sector
procurement, finance, Medicaid and child welfare polic\ He has assisted businesses and
government agencies in a range of development and change-oriented projects, involving managed
care implementation, qualit\ improvement and organizational and strategic change, often with a
focus on consumer and stakeholder input.
Rose Ducharme is Revenue Officer/Benefits Manager for the Town of Lexington.
Rick Eurich is a member of the Appropriation Committee
Thomas W Goodwin is a partner in a local CPA firm and former chairman of the Finance
Committee in Wakefield Mass For 6 years earlier in his career he was responsible for the
employee benefits of a 600-person multi-state employee group
Tom Griffiths is currentl` Chairman of the School Committee He is also a principal in Evans
Griffiths &Hart, Inc where, annuall\ he reviews the company's health care plans and their costs
Paul Hamburger is a Member of the Appropriation Committee and Town Meeting Member
Bill Kennedy is a Selectmen Liaison.
Nancy Meadows is a subscriber and has experience in benefits administration.
Tom Rand
Linda Roemer former professor of health polic\ at Simmons
Claudia Sheffield is Administrative Assistant, Town Manager s Office
Evelyn Silber has 20 years of experience in corporate benefits and 7 years of experience in HR
consulting. She is co-chair of the Personnel Advisor\ Board and has served on the Town-wide
Compensation Committee, and search committees for a Superintendent and Interim Town
Manager
Deborah Strod worked for 10 years at Massachusetts General Hospital in technolog\ transfer
and has done some graduate work in public health. She is a Town Meeting member in Lexington.
Lexington Heath Benefits Review Committee Report DR4FT 44
Appendix F
Resources for the Health Benefits Review Committee
Information from Lexington
1 `Group Health Insurance Funding Analysis reports from Group Benefits Strategies -
spreadsheets with costs, revenues and projections Fiscal Years 2002, 2003 2004 2005
and projections for 2006
2 Plan Summaries for Healthcare Plans offered b` town. Blue Choice,Network Blue,
Harvard Communrt` Health Plan, Medex
3 RFQ response report from March 2003
4 Enrollment Breakdown b` Individual/Family/Total Subscribers
High cost claims for Harvard Pilgrim for 2003
6 Top 25 drug prescriptions b` dollar cost from HCHP
7 Town of Lexington—ER and Office Visit Utilization
8 Town of Lexington—Large Loss Report
9 Town of Lexington—Retail vs Mail ordering of drugs
10 Town of Lexington—Top Therapeutic Classes
11 Municipal and School Salam categories
12 Blue Cross/Blue Shield Disease/Condition Report for calendar year 2004
13 Blue Cross/Blue Shield `Health Risk Issue Report for calendar year 2004
14 7/1/04 Renewal Rate Calculation note of Comparison of Blue Cross/Blue Shield book of
business vs Lexington—email dated 11/30/04 from Kevin Walsh of Group Benefits
Strategies to Rose Ducharm, Benefits Manager for Town of Lexington.
15 `Health Insurance Comparables memo from Kern Evans, Management Intern, and
Michael Young, Budget Officer to Linda Vine, Acting Town Manager September 14
2004
16 Memorandum of Understanding between the Town of Lexington and the Public
Employee Bargaining Coalition of the Town of Lexington Jul` 1 2003 —June 30 2005
17 `Coalition of Town Employees Health Insurance Bargaining Histon provided b` Vito
LaMura, Lexington Education Association President
Lexington Heath Benefits Review Committee Report DR4FT 45
18 List of comparable towns and contract language regarding methods of comparison from
Teachers contract, email from Vito LaMura 12/1/04 and list of comparable towns for
other departments in email from from Rose Ducharm to Richard Doughert\ 12/1/04
19 Longevth payments, clarification, email from Rose Ducharm to Deborah Strod 12/1/04
20 Histon of health benefits Lexington Minuteman, Sunda` Ma` 02, 2004b\ Richard
White, Town Manager
21 FY05 Comparable Towns data from Lexington Education Association Website, accessed
1/19/05
22 Spreadsheet showing cost savings b\ increasing part-time employees payments for
healthcare, from Bill Kenneth
23 Information on School employees enrollment from Susan Bottan in email 11/19/04
24 Consultation with Kevin Walsh of Group Benefits Strategies, Januar\ 26 2005
25 Surve` carried out b\ the Health Benefits Review Committee
Articles on Health Benefits
1 Employers to shifting health costs Plans ease sting for those at lower end of pa` scale
2 Boston Globe November 25 2004 b` Kimberl` Blanton
3 A Perspective on US Drug Reimportation Niteesh K. Choudhn MD FRCPC Allan
S Detsk` MD PhD FRCPC JAMA 200 ,293 358-362
4 The rising cost of health care explained, Massachusetts Municipal Association, March
17 2004 B` Man DeLai, Membership Services Coordinator MIIA summan of speech
b`
Nanc\ Turnbull of Harvard s School of Public Health,the keynote speaker at an
MMA forum on health care held Feb 26 2004
5 `Total Benefits The Kitchen Sink') Managed care-induced entitlement mentaht` ma` be
mone` down the drain Elayne Demb` editors,a;plansponsor com,NewsDash Januar\
2005 (NewsDash is a dail` on-line benefits newsletter sponsored b\ PlanSponsor com)
6 Ruling Could Force Boston to Pa` More for Health Care Boston Globe,November 20
2004 b` Andrea Estes
7 Drugstores Fret as Insurers Demand Pills b\ Mail Milt Freudenheim, Published.
Januar\ 1 2005 New York Times
8 Employers Unite in Effort to Curb Prescription Costs New York Times, Februan 3
2005 B` Milt Freudenheim
9 Your New Health Plan. Health savings accounts, like 401(k)s, will give employees more
choices --but also a greater share of the costs Business Week,November 8 2004
Lexington Heath Benefits Review Committee Report DR4ET 46
10 Howard Gleckman with Lorraine Woellert
11 When Employers Fund Retiree Health Care b` Kathleen Jenks Harm, ICMA
Retirement Corporation,Washington, DC (KHarm,a,Icmarc orn) as attachment to
information received from Brookline b` the Lexington 2020 Vision Budget Task Force
12 Working out at EMC—firm says getting employees to take more responsibilit\ for
health, costs paying off, Boston Globe August 5 2004b\ Diane E Lewis
13 `Towns Find Insurance Savings b` Sharing Plan Boston Globe September 26 2004b\
Alexander Reid
14 40 Percent in U S Use Prescription Drugs Associated Press Thursda\ December 2,
2004 b` Randolph E Schmid
Lexington Heath Benefits Review Committee Report DR4FT 47