Utah's Public Employees Health Plan: An Audit
Last week both the Salt Lake Tribune (here) and the Deseret News (here) reported that the Utah Legislative Inspector General had published a report about Utah's unique method for providing health benefits to state and other public employees: PEHP. You can find the full audit report here. The newspapers both reported that the legislative auditor general criticized PEHP, which is accurate. But it is important to understand the entire context of the audit before passing judgment on PEHP. Here are some excerpts from the Legislative Auditor General:
The Public Employees Health Program (PEHP) is a non-profit,self-funded trust managed by the Utah State Retirement Board. Inaccordance with Utah Code 49-20-401: “[PEHP] shall: act as a selfinsurer of employee benefit plans and administer those plans.” Thestate must participate in the program on behalf of its employees;however, other employers, including political subdivisions andeducational institutions, are eligible, but are not required, toparticipate in the program on behalf of their employees.PEHP administers health insurance programs for public agenciesincluding: State of Utah, counties, cities, special service districts, andschool districts. Currently, PEHP provides health insurance coverageto state employees through six different plans.Utah Retirement Systems (URS) is an independent governmentalagency and PEHP is a program within URS. PEHP was created bythe state legislature and began as a division of state government.Group Insurance was established by mandate in 1961 to provideinsurance coverage for public employees. In 1976, Group Insurancewas made a division of URS. Then in 1977, the administration of thehealth insurance program was brought in-house, and the PublicEmployees Health Program was established.PEHP offers all benefit plans on a self-funded basis. Self-fundinghealth insurance is where employers assume responsibility for healthcare losses of its covered employees.The main reason PEHP self-funds is to avoid some of theinsurance costs by having employers retain the risk. Participatingemployers, such as the State of Utah, self-fund to retain the “profits”that normally flow to the insurance company. If the State of Utah didnot self-fund, the state would pay premiums that include a profitmargin as well as a fee for PEHP to assume the risk.Figure 1.3 PEHP’s State Pool Financial Summary for Fiscal Year2010. PEHP receives its revenue from all of the employer groups’premiums. The premiums are used to pay for the various incurredexpenditures.PEHP’s Medical Pool Operational BalanceCategory Amount Percent of Total ExpendituresTotal Revenue $ 259,272,475Health/ RX Claims Paid 230,366,684 96 %Other Expenditures* 436,612Admin Expense 10,247,394 4 %Total Expenses 240,177,466Net Total (Reserves) $ 19,095,009*Other expenditures include Reinsurance Premiums, Provisions for unpaid claims and claims incurred but not reported, Reinsurance Claims Paid, Network Access Fees, and Experience Dividends. The State of Utah received a $20 million reimbursement for Reinsurance Claims Paid, which leads to a positive “Other Expenditures” amount.According to Figure 1.3, the state and its employees paidapproximately $259 million in total premiums and approximately$230 million of the premiums were applied to pay for medical andprescription claims, which accounts for 96 percent of totalexpenditures for the state risk pool. The net total of $19 millionexcess revenue remained at year’s end to cover unexpected claims.PEHP’s premium rates, which is the amount the employee and theemployer pay together, for the state risk pool have increasedapproximately 22 percent for Advantage and Summit Care plans (forboth single and family plans), from fiscal years 2005-2009.The Public Employees Health Program (PEHP) does not comparewell against other carriers in the local insurance industry. Wecompared PEHP (using the state’s insurance pool) to six majorinsurance carriers in Utah in terms of claim costs, contract rates withhealth providers, utilization, and administrative costs. Thecomparison showed the following: PEHP has higher medical, hospital, and pharmacy claim coststhan other carriers. PEHP’s contract rates with health providers are not ascompetitive as rates of most carriers. PEHP has a higher utilization of office visits and number ofdays spent in the hospital than other carriers. PEHP has lower claim administrative costs than all othercarriers.PEHP’s Administrative Costs AreLower than Other Insurance Carriers’ CostsAs part of the local carrier comparison, we also looked atadministrative costs. Administrative costs are only 4 percent of thestate pool’s total expenditures for fiscal year 2010. PEHP’sadministrative costs were the lowest of the local insurance carriersparticipating in this audit.In 2009, the state realized about $2.5 million in cost savings dueto PEHP’s low administrative costs, when compared to the othercarriers.PEHP’s low administrative costs, when compared with commercialinsurance carriers’ costs, are expected because PEHP self-funds theirhealth plans. PEHP is not a for-profit insurance carrier like most ofthe carriers that participated in this audit. For this administrative costcomparison each carrier removed premium tax,commissions, and reinsurance charges.