Health Care Costand the

City of Arlington Health Benefit

Employee / Retiree Discussion

April 2004

Overview Budget Overview

Global Health Care Condition

City of Arlington Health Plan

Workforce Demographics

Long Term Liability

Provision of Health Benefit, 2005 & Beyond

Discussion

Budget Overview

Positive Developments

Sales tax allocations for three of the last four months are up

Amount budgeted for sales tax can be achieved with flat receipts for the remainder of the fiscal year

Positive end-of-year fund balance projected

Caution Required

Recent sales tax increases have been less than the prior year decreases for the same period

A persistent structural problem remains

Deficit Recovery Projection

$(30,000,000)

$(25,000,000)

$(20,000,000)

$(15,000,000)

$(10,000,000)

$(5,000,000)

$-

$5,000,000

$10,000,000

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

5% Revenue Grow th 4.5% Revenue Grow th 4% Revenue Grow th

Fiscal Year 2005

Avoid further program cuts, service level reductions and layoffs

Restore training and professional development

Minimize further erosion of our competitive pay position

Health Care

Global Health Care Cost of health care

Frequently in the news Driven recent changes in legislation Organizations are aggressively pursuing solutions

Market Perspective National League of Cities - “Health care is the

top financial pressure facing cities nationwide”

USA Today – “The rising cost of medical inflation isn’t just a temporary blip but the beginning of a new era that will force employers and employees to make some tough choices.”

Drivers of Health Care Cost Traditional low or no premium HMOS

Result - reduced consumer incentives to consider alternative lower-priced doctors and/or services

Market Consolidation

Malpractice Law Suits

Skilled Health Care Worker Shortage

“Wellness” is losing ground to medication as the solution

Source: Health Futures Inc.

Prescription Drugs Kaiser Family Foundation - Three

factors drive the increases in prescription drug spending Increased number of prescriptions

74% increase over last 10 years

Changes in types of drugs used

New drugs replacing old and R&D spending increased from $10 to $32 Billion in last 10 years

Manufacturer price increases for existing drugs

7.3% average annual increase over past 10 years

City of Arlington

City FY 2004 Operating Budget

Total Budget $ 312,893,138

Salaries & Benefits $ 157,237,506

Benefits $ 39,695,533

Health Benefits $ 16,144,480

Retiree Health Benefits $ 2,758,823

Health Benefit % Payroll2002 11.7%

2003 12.5%

2004 13.7%

In 2003, double digit average increases in trend continued. At the current rate of increase, it is projected that the cost of health care coverage will average 25% of wages or more in less than five years for many plan sponsors.

The Segal Group, Segal Health Plan

Cost Trend Survey

For the city this would be $29.3M if this projection is applied to present payroll.

COA Health Care IncreasesYear EE Premium City Premium Total % Increase

2000 $1,860,497 $8,422,269 $10,282,766 24%

2001 $2,378,394 $10,503,963 $12,877,357 25%

2002 $2,621,683 $11,511,182 $14,132,865 10%

2003 $2,943,630 $14,253,235 $17,196,865 22%

2004 $4,842,637 $17,169,350 $22,011,987 28%

2005 Regional Trend = 18%

• Premium rates are set prior to the plan year. Total actual contributions may vary based on actual enrollment.

These numbers have been changed since the presentation to employees and retirees. The original numbers were projections. These modified numbers are actuals.

Recent Adjustments

2003 Strategies Adjustments

Self Funded New Claims Administrator

United HealthCare Open Access Model No primary care physician No referral required to a specialist Fewer restrictions on prescription

formulary Expanded Network

2003 Results $1 million annual cost avoided

Health Fund Activity

$3.06 million deficit

City contributed $1.58 million over & above premium amount

$1.48 million was pushed into FY 2004

Dollars Flowing Out ▲ Dollars Flowing In ▼

Utilization Revenues

Access to Care Migration

Claims RIF Effect

2004 Strategies Plan Design Changes

Increased Physician, prescription, and ambulance co-pays

Added Co-insurance on hospital, out-patient, emergency room and

other related services

Introduced Maximum out-of-pocket expense on the HMO plans

Subsidized The PPO plan at the same level as the HMO plan

Eliminated One HMO and one PPO plan

2004 Results

Cost Sharing Changes:

City Contribution : 83% to 78%

Employee / Retiree: 17% to 22%

6 Largest Metroplex City Comparison

Average 2003 City Contribution: 62%

$198M = total health care costs

$123M = total employer share

2004 Results 2004 rates appear to be adequate to Fund

Claims and expenses

Required reserve amount, and

The remaining $1.48 million 2003 deficit

Adjustments in 2003 and 2004 Strengthened the health fund

Increased access to quality health care

Assisted in managing long term liability

Maintained a competitive plan design in an evolving market

Comparative Market Value

Hay comparison data

Among Public & Private Employers, Arlington’s plan is above the 75th percentile in value.

Value Components

• Employee monthly premium

• Co-pays

• Deductibles

• Out-of-pocket maximums

• Employer contributions

Comparative Market Value Scenario – Hospital Stay = $10,000 +1 year

worth of premiums – EE Only

$3,276$3,181$3,180

$2,820$2,740$2,731

$2,150$1,908

$1,700$760

$396

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

Dallas

Ft Worth

Plano

Carrollton

Gr Prairie

AISD

Arlington

Garland

Richardson

Mesquite

Irving

Comparative Market Value Scenario – Hospital Stay = $10,000 +1 year

worth of premiums – EE + 1

$8,719$5,592

$5,311$4,296

$4,060$3,696

$3,589$3,404

$3,240$2,450

$1,182

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000

AISD

Dallas

Ft Worth

Garland

Gr Prairie

Plano

Carrollton

Richardson

Arlington

Mesquite

Irving

Comparative Market Value Scenario – Hospital Stay = $10,000 +1 year

worth of premiums – EE + F

$11,115$7,332

$6,192$6,096

$5,140$4,410$4,308

$4,070$3,944

$3,100$1,947

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000

AISD

Garland

Ft Worth

Dallas

Gr Prairie

Carrollton

Plano

Arlington

Richardson

Mesquite

Irving

Retiree Health Benefit

COA Retiree Demographics Retiree Breakdown (3/1/04)

467 current retirees & surviving spouses

437 currently eligible for retirement as of 3/1/04

285 additional employees eligible for retirement in the next 5 years

1,189 potential retirees in the next 5 years

Retiree Health Benefits

Minimum of 10 years of service with City for employer paid health benefit subsidy

10-14 – 60% 25-29 – 90%

15-19 – 70% 30+ - 100%

20-24 – 80%

Dependent subsidy currently = 70%

Comparative Market Value Scenario – Hospital Stay = $10,000 +1 year worth of

premiums – Retiree + 1

$11,147$6,516

$4,944$4,566

$4,292$4,286

$3,188$3,000

$2,460

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000

Carrollton

Garland

Dallas

Gr Prairie

Richardson

Irving

Arlington

Ft Worth

Mesquite

Metroplex Cities SubsidiesCity Retiree

SubsidyDependent

SubsidyCity Cost

25 + 1Retiree Cost

25 + 1

Ft Worth 33 – 100% 30-50% $622.20 $ 0.00

Dallas 60% 30% Unknown $162.00

Mesquite 4% per yr of svc

2.6% per yr of svc

$568.78 $163.36

Arlington 60-100% 70% $643.43 $165.69

Gr Prairie

* Mid yr adj.

10-90% 10-90% $688.80 $172.20

Plano $11 per yr of svc

None $275.00 $232.06

Richardson $350.00 None $350.00 $321.00

Irving $168.75 None $168.75 $336.32

Garland $242 per mo None $242.00 $418.00

Carrollton None None $ 0.00 $703.88

Value Rank

2

7

1

3

6

Insf. Data

5

4

8

9

Projected Retiree Benefit Cost

Calendar

Year

Current Retirees

Future Retirees

Total

2004 $ 2,900,000 $ 100,000 $ 3,000,000

2005 $ 3,400,000 $ 300,000 $ 3,700,000

2006 $ 3,800,000 $ 600,000 $ 4,400,000

2007 $ 4,300,000 $ 900,000 $ 5,200,000

• Current Pay-as-you-go funding:

Governmental Accounting Standards Board (GASB)

Accounting Standards effective 2007

No more pay-as-you-go funding

Required to account for long term liability on an annual basis

Cities’ long term liability includes:

Current employees’ future retirement benefit

Current retirees’ remaining retirement benefit

Standard requires cities to account for / fund the long term liability now

Governmental Accounting Standards Board (GASB)

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

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

2004 2005 2006 2007 2008 2009

GASB

Pay/Go

2005 and Beyond Partnership with qualified technical expert

– The Hay Group

Study design and cost sharing approaches

Propose strategy in May/June

Communication

HR Update

Employee / Retiree Meetings

Consumer Awareness “Employer’s can’t continue to absorb double-digit

health care premium increases year after year and remain competitive in the global marketplace…

Public payers into the healthcare system must hold up their end of the bargain, and health plan enrollees need to become more active consumers with a better understanding of the true costs of care…

Otherwise more working Americans won’t be able to afford their health plans and will join the ranks of the uninsured.”

Kate Sullivan, U.S. Chamber of Commerce Director of health policy. June 2002

Considerations Medicare Changes

GASB requirements

Retirement Health Savings Plan

Technology

Shared Services Project

New Technology = Increased ability to pursue creative solutions

Priorities Increase

Options

Consumer Awareness

Reduce

Long-term Healthcare Liability

Proactively pursue

Competitive Cost Containment Measures

Next Steps

HR / Consultant proposal of options in May/June

Review with City Council

Follow-up Employee/Retiree meetings June/July

Discussion