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. In

accordance with Utah Code 49-20-401: “[PEHP] shall: act as a selfinsurer of employee benefit plans and administer those plans.” The

state must participate in the program on behalf of its employees;

however, other employers, including political subdivisions and

educational institutions, are eligible, but are not required, to

participate in the program on behalf of their employees.

PEHP administers health insurance programs for public agencies

including: State of Utah, counties, cities, special service districts, and

school districts. Currently, PEHP provides health insurance coverage

to state employees through six different plans.

Utah Retirement Systems (URS) is an independent governmental

agency and PEHP is a program within URS. PEHP was created by

the state legislature and began as a division of state government.

Group Insurance was established by mandate in 1961 to provide

insurance coverage for public employees. In 1976, Group Insurance

was made a division of URS. Then in 1977, the administration of the

health insurance program was brought in-house, and the Public

Employees Health Program was established.

PEHP offers all benefit plans on a self-funded basis. Self-funding

health insurance is where employers assume responsibility for health

care losses of its covered employees.

The main reason PEHP self-funds is to avoid some of the

insurance costs by having employers retain the risk. Participating

employers, such as the State of Utah, self-fund to retain the “profits”

that normally flow to the insurance company. If the State of Utah did

not self-fund, the state would pay premiums that include a profit

margin as well as a fee for PEHP to assume the risk.

Figure 1.3 PEHP’s State Pool Financial Summary for Fiscal Year

2010. PEHP receives its revenue from all of the employer groups’

premiums. The premiums are used to pay for the various incurred

expenditures.

PEHP’s Medical Pool Operational Balance

Category Amount Percent of Total Expenditures

Total Revenue $ 259,272,475

Health/ RX Claims Paid 230,366,684 96 %

Other Expenditures* 436,612

Admin Expense 10,247,394 4 %

Total Expenses 240,177,466

Net 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 paid

approximately $259 million in total premiums and approximately

$230 million of the premiums were applied to pay for medical and

prescription claims, which accounts for 96 percent of total

expenditures for the state risk pool. The net total of $19 million

excess revenue remained at year’s end to cover unexpected claims.

PEHP’s premium rates, which is the amount the employee and the

employer pay together, for the state risk pool have increased

approximately 22 percent for Advantage and Summit Care plans (for

both single and family plans), from fiscal years 2005-2009.

The Public Employees Health Program (PEHP) does not compare

well against other carriers in the local insurance industry. We

compared PEHP (using the state’s insurance pool) to six major

insurance carriers in Utah in terms of claim costs, contract rates with

health providers, utilization, and administrative costs. The

comparison showed the following:

 PEHP has higher medical, hospital, and pharmacy claim costs

than other carriers.

 PEHP’s contract rates with health providers are not as

competitive as rates of most carriers.

 PEHP has a higher utilization of office visits and number of

days spent in the hospital than other carriers.

 PEHP has lower claim administrative costs than all other

carriers.

PEHP’s Administrative Costs Are

Lower than Other Insurance Carriers’ Costs

As part of the local carrier comparison, we also looked at

administrative costs. Administrative costs are only 4 percent of the

state pool’s total expenditures for fiscal year 2010. PEHP’s

administrative costs were the lowest of the local insurance carriers

participating in this audit.

In 2009, the state realized about $2.5 million in cost savings due

to PEHP’s low administrative costs, when compared to the other

carriers.

PEHP’s low administrative costs, when compared with commercial

insurance carriers’ costs, are expected because PEHP self-funds their

health plans. PEHP is not a for-profit insurance carrier like most of

the carriers that participated in this audit. For this administrative cost

comparison each carrier removed premium tax,

commissions, and reinsurance charges.