City Ends Policy As It Begins To Pay Off

The city expects to collect at least $1.6 million in reimbursements for a sorely depleted medical fund from an insurance policy that hasn’t paid out in a decade.

But as the city looks to close a projected $15 million general fund deficit for the fiscal year that ended in June, it has decided to end that policy subscription, even as high employee medical claims continue to rise and rise.

At last week’s Board of Alders Finance Committee meeting in the Aldermanic Chambers on the second floor of City Hall, city Acting Budget Director Michael Gormany told the alders that the city will receive at least $1.6 million from its ​“stop loss” insurance policy because of the excess of high medical claims put in by public employees during the fiscal year that ended this June.

Per the terms of the policy, that money will go towards reducing the city’s projected $19 million deficit in its medical self-insurance fund; it cannot be used to help close the city’s projected $15 million general fund deficit.

“We finally passed the stop loss,” said Finance Committee Vice Chair and Westville Alder Adam Marchand during the hearing.

A stop loss policy protects self-insured employers like the City of New Haven from assuming the full risk of frequent, expensive individual medical claims put in by employees over the course of any given year.

Since the city is self-insured, it does not pay a fixed annual premium to an insurance provider for a fully insured plan. Instead, it pays for the entirety of each employee medical claim as those claims arise.

The city’s stop loss policy reimburses the city for individual claims that exceed $500,000, with a catch. For every claim that exceeds $500,000, the dollar amount above that threshold is put into a pool. Once that pool reaches $1.5 million, then the insurance provider picks up the cost of any additional money put into that pool from new $500,000-plus claims.

For example, once the city hits that $1.5 million threshold, a $700,000 medical claim will yield a $200,000 reimbursement from the policy.

Gormany told the alders that the city has not met that $1.5 million threshold, and therefore has not seen any reimbursements on this policy, since 2008.

At an April 2018 Finance Committee meeting, City Controller Daryl Jones told the alders that the stop loss policy costs the city $545,000 every year, and that that money comes out of the general fund budget.

In order to save money on a policy that hasn’t been used in so long, Jones told the alders at that same April meeting, the city plans to end its stop loss policy for the fiscal year that began July 1. City spokesman Laurence Grotheer confirmed this week that the city has indeed ended its stop loss policy subscription for Fiscal Year 2018 – 2019 (FY19).

“The decision was not influenced by the payment of claims this year,” he said. ​“The decision was influenced by a long-term strategy to suggest that the premiums were not a sound investment for the city.”

Nevertheless, for FY18, the policy has proven to be a sound investment in a year that saw a record number of high medical claims.

In the city’s latest monthly financial report that covers city expenditures and revenue through the end of May 2018, the city identifies nine individual medical claims in FY18 that exceeded $500,000. Those claims ranged as high as $1.58 million per claim.

Based on the stop loss policy calculation, the city expects $1.68 million in reimbursements as a result of these high claims.

Gormany told the alders on Monday that the specific numbers of those claims could change before the city finishes closing out its books for FY18 sometime in early September. Those claims, he said, could get even bigger, which means the corresponding reimbursements to the city would do the same.

“So the silver lining to the dark cloud,” Marchand said, ​“because it’s not good for people to be sick, it’s not good for people to have serious complicated issues. Nobody would want that. But the benefit of having the policy is that there is a potential for reimbursement that can help to reduce the deficit that we have in medical.”

That benefit, however, will soon come to an end, now that the city has decided to discontinue its stop loss policy, just as its begun to pay off.

Going Up, Up, Up…

Even though FY18 is the first year in a decade that the city will see money from its stop loss policy, previous year’s financial reports show that employee medical claims are only on the rise, both in terms of the amounts of individual claims as well as the frequency of high claims.

If the city continued its policy and if FY18 indeed proved to be an exceptionally high year in terms of amount and frequency of medical claims, the city would risk losing $545,000 each year from its general fund budget without receiving any reimbursements to mitigate the deficit in its medical fund budget.

But if FY18 proves to be a harbinger of higher and more frequent medical claims to come, then the city’s decision to ends its stop loss policy risks losing out on millions in potential reimbursements, and will likely require the city to increase its current $81 million general fund contribution to its medical fund budget sooner than the city would have liked.

Fiscal Year 2014 – 2015 (FY15) saw only three individual claims in excess of $500,000. The pool of policy eligible funds fell well below the $1.5 million threshold that year, reaching only $893,274.

In Fiscal Year 2015 – 2016 (FY16), the city had only two individual claims in excess of $500,000. The policy eligible funds that year added up to only $497,810.

In Fiscal Year 2016 – 2017 (FY17), the number of $500,000-plus claims jumped to eight, and added up to $1.43 million, just below the policy’s $1.5 million threshold.

As reported above, the first 11 months of FY18 saw nine claims above $500,000, with the pool of policy eligible funds reaching $3.18 million, and therefore yielding at least $1.68 million in reimbursements.

A closer look shows that FY18 was not only a record year in terms of individual medical claims above $500,000. It was also a record year in claims above $250,000.

In FY18 through May, the city has seen 35 individual medical claims in excess of $250,000, with the average high claim being $471,813. That compares to 25 claims above $250,000 in FY17, with an average high claim of $406,421. And only 21 individual claims above $250,000 in FY16, with the average high claim being $367,122.

According to the May 2018 financial report, the city’s total medical expenditures are projected to increase by 12 percent over last year’s expenditures, from $108.9 million to $121.4 million dollars. Medical expenditures increased by 5 percent from FY15 to FY16 and by 6.5 percent from FY16 to FY17.

After taking into account employee contributions, the city projects to cover nearly $92 million of employee medical costs for FY18. The city only budgeted $76.7 million for its medical self-insurance account last year.

Even after the alders voted to increase the city’s medical fund budget by $5 million for the fiscal year that began July 1, that only brings the total annual budgeted contribution for FY19 to $81 million. Which is over $10 million less than the city actually projects to pay in medical costs for FY18.

The independent Financial Review and Audit Commission (FRAC) has identified the rapid inflation of medical costs as the single most concerning factor of the city budget. In a March report, FRAC recommended that the city should expect medical expenses to increase roughly 5 to 8 percent each year.

Recent contract negotiations with city unions have resulted in modest salary increases in exchange for increased employee contributions for medical and retirement benefits. The city has not yet released information on how much money it expects to save in its medical balance through these new contracts.

Click here to read other stories about the city’s structural deficit.

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