Opting to drop self-insurance proved advantageous to county

Published June 26, 2006

by JOANNE WOJCIK

jwojcik@BusinessInsurance.com

REDWOOD CITY, Calif.--In the early 1990s, San Mateo County did the opposite of what many employers that were experiencing double-digit annual increases in the health care costs had done. It decided to get out of self-insurance.

Because of adverse selection, the cost of the county's self-funded preferred provider organization plan was growing at a faster clip than that of its fully insured health maintenance organization plans, according to Paul Hackleman, benefits manager.

"We would take a look each year at open enrollment at the people who left, and we found that from 1990 through 1993 most of those leaving were the lower utilizers," he said.

But rather than switch entirely to HMOs, which at the time had the lowest premiums, "we wanted to preserve where we could the ability for people to seek almost universal choice" and decided to replace the self-funded PPO with a point-of-service plan with similar benefits.

But, also unlike many private sector employers, the county couldn't just make the change. It first had to get approval from the labor unions that represented the majority of its workforce.

Fortunately for the county, however, Mr. Hackleman had the foresight to establish a joint Labor-Management Health Care Cost Containment Committee that was already aware of the problem.

"So we went to labor (unions) and said this wasn't going to serve us long term, and if the objective was to retain a plan other than HMOs, we were going to lose that capability, so we needed a new model to work for all of the constituencies," Mr. Hackleman recounted.

Other research Mr. Hackleman conducted helped to seal the deal. His analysis found that participation in the self-insured PPO plan had dropped to just 16%, and because management employees' premiums for the plan were being picked up 100% by the county, vs. 80% for represented employees, "there was a preponderance of management in the plan. In fact, when we had the discussion with labor it was clear that only a small pool of their members could afford to be in the plan," he said.

By comparison, the county pays 90% of the premiums for represented employees and their dependents who are enrolled in HMOs.

Nine insurers bid on the county's request for proposals for the new fully insured POS option, and Blue Shield of California was selected to underwrite the new plan beginning in 1994.

Since then, the average increase for all of the county's health plans combined has consistently been two or three percentage pointslower than the average trend rate reported by U.S. employers nationally. As a result, Mr. Hacklemanestimates the premiums paid bythe county and its employees and retirees are about 11% less than they would have been had theynot made the health plan changes and added the various healthand fitness programs (see story, page 16).

In fact, a five-year analysis by Stanford University of the county's first wave of health and fitness programs--showed that San Mateo County had reduced health care claims by 44%, improved fitness by 37.5%, improved nutrition status by 74.1%, decreased the incidence of high blood pressure by 30% and decreased cancer risk by 52.2%.

In addition to the Blue Shield POS plan, the county offers two health maintenance organizations: A staff-model HMO underwritten by Kaiser Permanente Medical Group Inc. of Redwood City, Calif., and an independent practice association HMO underwritten by Hartford, Conn.-based Aetna Inc.

Approximately 130 county retirees and their dependents are enrolled in a Secure Horizons plan, which is underwritten by PacifiCare Health Systems, a division of UnitedHealth Group of Minnetonka, Minn.

The plans' contracts are reviewed every five years, except for Kaiser, which is the only staff-model HMO operating in California, so it has no competition. Currently 51% of the county's employees are enrolled in the Kaiser plan. The rest are fairly evenly divided between Aetna and Blue Shield.

Currently, about 7,000 active employees and their dependents and about 2,500 retirees and their dependents are enrolled in the county's health benefit plans. The current benefits budget is $55 million, while the county's total annual operating budget is $1.5 billion.