Changes to the way Bloomfield Township pays for employee and retiree healthcare benefits will provide an estimated annual savings of nearly $1.1 million without changing coverage to participants, township officials said.
Bloomfield Township Supervisor Leo Savoie said he gave a brief overview at the board's August 16 meeting about potential budget cuts needed to close a funding gap to meet state requirements related to other post-employee benefits (OPEB). He said discussions with the township's healthcare benefits consultants led to implementing a self-funding health care system that will provide an annual savings of $1.1 million.
John Vance, partner at Manquen Vance advisors, formerly Cornerstone Municipal Advisory Group, said by changing the way the township pays its healthcare costs to its provider, Cigna, it can dramatically reduce the amount of fixed fees it pays each year.
"This concept of self-funding, in a nutshell, changes the way the township pays its bill to Cigna, and by changing the bill, it doesn't change its financial claim liability," Vance said. "The claim liability the township owes is the same whether it pays its bill now or next year with healthcare trend or inflation... what does change are the fixed fees the township pays to its carrier and it pays to the federal government."
Under the township's current healthcare contract with Cigna, the township is considered by the state and federal government to be a fully-insured municipality. However, he said the township already has several self-funded elements. For instance, when employees or retirees use their benefits, the township pays the required portion of the claim. However, under the fully-insured method, the claims are paid the following year under an "experience rating" amount. Under a self-funded system, the employer pays the exact claims in the year they are incurred.
Vance said the goal of the change is to reduce costs while maintaining the exact same benefits to employees and retirees. Essentially, that means finding savings and efficiencies in the healthcare market without having it borne on the back of participants.
By becoming a self-funded program, the township pays actual costs incurred by the township to its healthcare provider, while insured programs pay an estimate of those costs each year based on the previous year's costs. As such, he said there are some fees that are charged to insured programs that aren't applied to self-funded programs.
For instance, insured municipalities in 2020 will pay a federal insurance premium tax equal to 2.7 percent of premiums. By switching to a self-funded program, the township can avoid paying more than $240,000 in federal taxes. Likewise, insured programs are required to pay a state premium tax of .95 percent, which would total nearly $75,000.
Vance said the state assesses a fee of $2.40 per member, per month to insured programs, which doesn't apply to self-funded programs. The change to a self-funded program would provide a savings of about $20,000.
"The big, high-profile item here is number four, this is the majority of how you are going to reduce your costs: the state of Michigan requires all carriers in Michigan that offer fully-insured business to offer two fees called 'pooling' and 'retention,'" Vance said. "These are fees the state of Michigan requires of carriers to hold for insured groups. No carrier in Michigan just pays it and eats that money. They all pass it along to the employer."
By moving to a self-funded program, Vance said the township can avoid those costs, which will provide an estimated savings of about $450,000.
"This may seem like an unbelievable amount of money just by changing how you pay your bill, but what I'll tell you is that this is tried-and-true," Vance said. "We have moved about 15 clients from your current type of arrangement to the proposed type of arrangement, and these fees do not exist on a self-funded platform, but they do exist when you're insured."
The last item involved prescription drug rebates. As an insured employer, the township doesn't currently receive any rebates offered by drug manufacturers to the insurance provider. By moving to self-funding, Vance said they were able to negotiate with Cigna to provide a 75 percent share of rebates as a pass-through savings, equating to about $300,000 annually.
Trustee Dani Walsh questioned whether the savings to the township would be borne by the township or employees at some other point, and if so, how.
"Literally, everything you pay Cigna to do today, they do as a self-funded client," Vance said. "They process claims the same way, the benefits, the call center, it's all going to be the same. Whatever the employee costs are and the plan design, that stays the same.
"You are literally changing the way you pay your bill to Cigna. That's what's happening here. And by doing that, you are changing to a true self-funded plan, and you avoid all those taxes and fees... claims do ebb and flow, and claims may go up, but they go up regardless... the liability and risk to the township doesn't change."