July 3, 1995
by Charlie Marsh

The long-awaited LEOFF I medical costs statewide study conducted during 1994 by the State Actuary, for which cities and counties paid S150,000 has been completed. It was due in December, 1994.

The report in finished form was presented initially to the legislative Joint Committee on Pension Policy (JCPP) on June 13 at Vancouver. I attended by request of the State Association of Retired Officers.

No testimony was permitted. Rather, the entire time was consumed. on an exploratory discussion/dialogue basis between Committee members and an analytical staffer from the actuary's office.

Volumes could be restated here in summarizing meeting discussion on some rather bothersome issues, non-duty disability being one of them, and in conjunction with the 57-page report loaded with graphs, charts, etc. However, I will hold this writing to a minimum and yet present an enlightened overview of the study by selecting pertinent excerpts from the printed report.

Accordingly, text from this point and on-to following pages is 99.9% verbatim language from the report until noted to the contrary.

REPORT EXCERPTS

The major stimulus behind this benefits study is the long held conventional wisdom that the LEOFF I medical benefits pose a major financial problem to political subdivisions, particularly as to long term care. Until this study, however, only anecdotal data have been provided to support this position.

The study, therefore, sets as its major goal the determination of the extent of financial liability facing political subdivisions as a result of the LEOFF I medical reports. As corollaries to this goal, two questions were addressed:

1.       Will these political subdivisions have the ability to meet the projected liability?
2.       Is there future increased risk facing the individual LEOFF I employer?

 
Secondarily, the study attempts to meet the additional purpose of informing legislators of this area of LEOFF which seldom comes before them.

Background Information. LEOFF I membership is divided among 39 counties, 157 cities, 59 county fire districts and 5 miscellaneous political subdivisions. Individual employers are solely responsible for the LEOFF I medical services benefit.

LEOFF I is a closed system (i.e., no new membership). Therefore, active members will move to zero and retirees will continue to grow. In fact, essentially there will be no active members by 2015 and by 2025, membership is estimated at approximately 3,000, none of which will be in active service.

Active LEOFF I membership has an average age of 47, those retired for service have an average age of 66, and those retired for disability have an average age of 58. Retirees overall have an average age just under 60. Two-thirds of all retirees are on disability retirement.

As of January 1, 1994, there were 8,872 LEOFF I members divided into 5,396 retired for service or disability and 3,476 active members.

Projected Medical Costs. The present project cost of medical benefits through the death of the last LEOFF I member is estimated at $672 minim That figure equates to $76,000 for each of the current 8,872 LEOFF I members. That is, if this amount of money was invested in 1994 for each LEOFF I member, their employers would have sufficient funds to coverall future medical costs for the present 5,396 retired for service or disability and 3,476 active members.

The overall projected $672 million cost figure equating to $76,000 per individual member is based on the assumption that retirees pay their Medicare Part B premium.

The impact of Medicare is significant in medical claims payment for retirees age 65 or older. Cost to the employer who does not take advantage of the payments under Medicare Part A and Part B is an additional 209 percent. If the employer opts to pay the Part B premium for its eligible members, cost for those members would increase 22 per¬cent, but the expected claims would be reduced from 25 percent to 33 percent.

Employers Surveyed: In conducting the survey of 261 employers of LEOFF I active and retired members, to obtain information for the actuarial study, the number of employers were reduced to a represent¬ative sample. Selected were 99 employers consisting of 24 counties, 49 cities, 21 fire districts and the 5 miscellaneous districts.. However, 29 of the surveyed employers failed to respond or in few cases returned their survey but too late for inclusion in the actuarial study.

County employers not responding or too late were: Benton, Columbia, Pend Oreille, Skamania, and Spokane. City employers not responding or too late were: Bellevue, Bremerton, Everett, Long Beach, Marysville, Oak Harbor, Pasco, Redmond, Ritzville, Soap Lake, Spokane, Tenino, Vancouver, and Wenatchee. Eight of the first districts failed to .respond as did 2 of the special districts.

Other first class cities surveyed and returning their survey were: Aberdeen, Bellingham, Richland, Seattle, Tacoma, and Yakima. Larger counties responding were: Clark, Grays Harbor, King, Kitsap, Pierce, Snohomish, Whatcom, and Yakima.

Projected Medical Costs. The present project cost of medical benefits through the death of the last LEOFF I member is estimated at $672 minim That figure equates to $76,000 for each of the current 8,872 LEOFF I members. That is, if this amount of money was invested in 1994 for each LEOFF I member, their employers would have sufficient funds to coverall future medical costs for the present 5,396 retired for service or disability and 3,476 active members.

The overall projected $672 million cost figure equating to $76,000 per individual member is based on the assumption that retirees pay their Medicare Part B premium.

The impact of Medicare is significant in medical claims payment for retirees age 65 or older. Cost to the employer who does not take advantage of the payments under Medicare Part A and Part B is an additional 209 percent. If the employer opts to pay the Part B premium for its eligible members, cost for those members would increase 22 per¬cent, but the expected claims would be reduced from 25 percent to 33 percent.

Employers Surveyed: In conducting the survey of 261 employers of LEOFF I active and retired members, to obtain information for the actuarial study, the number of employers were reduced to a representative sample. Selected were 99 employers consisting of 24 counties, 49 cities, 21 fire districts and the 5 miscellaneous districts.. However, 29 of the surveyed employers failed to respond or in few cases returned their survey but too late for inclusion in the actuarial study.

County employers not responding or too late were: Benton, Columbia, Pend Oreille, Skamania, and Spokane. City employers not responding or too late were: Bellevue, Bremerton, Everett, Long Beach, Marysville, Oak Harbor, Pasco, Redmond, Ritzville, Soap Lake, Spokane, Tenino, Vancouver, and Wenatchee. Eight of the first districts failed to .respond as did 2 of the special districts.

Other first class cities surveyed and returning their survey were: Aberdeen, Bellingham, Richland, Seattle, Tacoma, and Yakima. Larger counties responding were: Clark, Grays Harbor, King, Kitsap, Pierce, Snohomish, Whatcom, and Yakima.

Survey Questionnaire: The questionnaire contained a basic set of questions used in each version and addressed the following areas of concern:

1. Employer Profile. Pertained to employers, retirees, salary and budget information for use in placing medical costs in context rather than for actuarial purposes.

2. Medical Coverage. Questions were asked to learn the extent to which LEOFF I retirees are being covered under Medicare.

3. NursingHome/Long-Term Care. These questions were aimed at learning whether the LEOFF I nursing home Medical benefits were covered by present insurance, and current extent and level of long term care among LEOFF I retirees.

4. Direct Costs for Medical Benefits. This set of questions sought the amount of non-insured costs experienced by the LEOFF I employer.

5. Pre-Funding and Measurement of Retiree Medical Benefits Obligations. These questions sought to find which of the first class cities had used revenues available to them because they had pre-LEOFF retirement systems.
available to them because they had pre-LEOFF retirement systems.

Nursing Homes: In response to the question, "How are nursing home! long term care benefits provided to your LEOFF I retirees; insurance plan or self-insurance?, 50 employers responded that they self-insure and 12 employers responded they provided long term care through insurance.

Liability: The stated goal at the outset of the study was to determine if mandated LEOFF I medical benefits pose a serious financial liability to political subdivisions statewide. After reviewing the results of the actuarial valuation it is determined that, although significant, they will not pose a serious additional problem or. a statewide basis. This does not mean, however, that some individual employers may not face serious fund outlays, particularly due to long term care admissions.

The Expected Post-Retirement Benefits Obligations for both medical and long term care are projected to be $672 million. Viewed simply as a single payment, it appears quite large. But this number represents the total expected obligation for which, until the death of the last retired member, the LEOFF I political subdivision employers statewide are responsible. Applied to the 256 LEOFF I employers, this equates to approximately $2.6 million each, spread over 20 years. On a per capita basis, the Expected Post-Retirement Benefits Obligation is approximately $76,000 per LEOFF I member.

Risk: A question was asked at the beginning of the study, "Is there future increased risk facing political subdivision LEOFF I employers?" That question is difficult to answer. An actuarial valuation projects costs based on demographic and economic assumptions and historical information. These provide a single set of determinants to be used in a static process and result in a single set of conclusions. A valuation however, does not address risk - that is - to deviate from expected expenses or to experience unanticipated expenses.

The question of risk does exist. That risk exists on three levels: risk statewide, risk to individual employers, and capacity to pay.

Viewing the LEOFF I medical benefits in terms of future risk statewide, there are three determining factors:

• Medical inflation may be higher than anticipated.
• LEOFF I members may utilize their medical benefit entitlement, as now provided, at a higher rate.
• Individual disability boards, through their approval, may increase the level of benefits beyond what is now approved.

There is a key aspect which may affect utilization - the age of the LEOFF retirees. They are young, as a group, and utilization is expected to increase as this group ages. This is particularly true in the area of long term care. LEOFF I employers presently are not equipped to deal with multiple long term care admissions. They would be well advised to seriously consider some method of pooling to level these costs.

Finally, the disability boards have the ability to enhance benefits. After talking with some board members, it appears some boards may disapprove a medical service claim one time and approve an identical claim another time. There are legal ramifications to this. Recent court decisions related to retirement benefits have held that practices may supersede the statutory law. Because of this, boards need to communicate with employers, who must pay the bills, whether or not they agree to any enhanced benefit.

Individual Employers: LEOFF I medical benefits pose two types of risk for individual employers. The first relates to those medical benefits, exclusive of long term care. The risk associated with these benefits is minimal. Almost all LEOFF I employers are involved in insurance programs where employers pool their risk so that no one employer bears the cost of a major event.

The second relates to long term care. Unlike the medical benefits, the risk for long term care is not pooled. Potentially, a single employer may be liable for the entire cost of a major event. Especially for smaller employers, it would prove helpful to be able to estimate the probability of a large expenditure occurring. Another aspect of long term care is the length of stay.

Disability Boards: The role of disability boards is fundamentally relative to LEOFF I medical benefits. It is within each board's authority to grant or deny unspecified benefits. These decisions have a fiscal impact on the individual employer. Two aspects of boards and their decision-making process need to be put into special focus. These are consistency of decisions and future medical benefits decisions.
 
A second aspect of disability boards need further review. Given the age of the LEOFF I active membership, the determination of disability will soon be non-existent. In the near future the main decisions of boards will relate to medical benefits.

If this is the case, the question must be asked, "Is the mechanism of the disability board the best one for managing medical and long term care decisions?" It might prove more efficient to have claims management providers, with the same responsibilities of disability boards, provide these determinations.

Consistency of Benefits: The medical services benefits are set forth in RCW 41.26.030(20) and the court has stated, "The definition of ‘medical services’ is specific and unambiguous." These enumerated services constitute a minimum level or a benefit floor. The authority Of the disability boards in the approval of these benefits is also- clearly stated in RCW 41.26.150: "The disability board shall designate the medical services available to an sick or disabled member." (RCW 41.26.150(1)(b)).

The term designate is defined as follows: "1. to work or point out; indicate, show, specify. 2. to denote, indicate, signify. 3. to name, entitle, style..."

The designation statement appears to indicate that each disability board is to identify and specify not only the basic medical services that are enumerated in statute, but also those medical services the board will approve over and above the minimum levels.

In the limited review for this study, a significant number of boards and employers indicated that medical services are approved on a case by case basis. Very few have established written medical services policy. Without a declared policy document, inconsistency of deter mination will certainly occur.

Future Medical Benefits Decisions: Presently two-thirds of LEOFF I retirees are retired for disability. Without minimizing disabilities within LEOFF it is a reality that when member is eligible to retire, the member is more disability than from service. The LEOFF I disability benefit is 50% of salary at the time of dis¬ability and the benefit is exempt from taxation.

From this data, it is reasonable to conclude that determining dis¬ability as a function of disability boards is fast coming to an end. Other than monitoring the progress of disabled retirees, the only function which will be exercised is approval of medical benefits.
Is this an appropriate function for those boards?

If it is clearly distinguished what benefits are to be approved, LEOFF I medical benefits would appear to be a candidate for a third party administrator. All of the statutory safeguards could be established in adopting this type of procedure. Any future variation which the respective jurisdiction felt justified could easily be made a part of the third parties' procedures.

Page 5 concludes extractions from the actuary's report.

Using an entire page for those few words seems a waste of paper. In that belief, I'll add a few comments for filler.

For those unfamiliar, the Joint Committee on Pension Policy (JCPP) con-sists of 16 legislators - 4 House and 4 Senate Republicans, and 4 House and 4 Senate Democrats. Committee members choose four from within their numbers to serve as an executive committee. It is this committee which, by and large, proves to be the movers and shakers. The JCPP has become dominant force within the legislative process on all retirement and pension issues.

It's to be expected that the actuary's report will receive considerable attention from the JCPP and particularly areas afforded questionable protection from the Bakenhus decision. Coming to mind is an item or two that could be at risk. Neutering disability boards is one.

The 72 pension boards statewide, referred by statute as LEOFF T disability boards, became an instant target at the June meeting by directive to the executive committee to commence a comprehensive study of the boards. Where that inquiry leads is anyone's guess at this time.

The actuary's report suggests that "claim management providers" with the Same responsibilitiesof disability boards, assume the function of managing medical and long care decisions. Yet other report language suggests that LEOFF I medical benefits appear a candidate for a "third party administrator" with statutory safeguards. It's unclear if claims management providers are meant to be the same as third party administrator.

In any event, it smells a little fishy when recalling several attempts during the 1970s and early 1980s to abolish disability boards and transfer their functions to the Department of Labor & Industries.

Prime mover in those past years to eliminate disability boards is still in the Legislature. Moreover, he is on the JCPP; perhaps on the executive committee. Since day one of LEOFF, he has shown utter contempt for non-duty disability and mandatory medical benefits, but failed to effect change. This individual is most intelligent which, when added to the craftiness attained by many years of legislative experience, makes for an unwieldy source to reckon with.

This is not to say that such or similar effort will again be made to relieve boards from their medical services function, or that the actuary's report will serve as a revival tool. But this much you can go to the bank on, the motivation to gaff LEOFF I in any manner remains his top legislative endeavor, and would quickly seize the opportunity if political dominance favors such achievement.

Regarding the strong report recommendation that LEOFF 1 employers participate in Medicare Part 8 coverage as a significant portion of medical costs, the likelihood appears quite certain that Congress will reduce Medicare assistance overall in their move to reduce federal spending. Should this prove true, impact on LEOFF I employers could be costly and thus greatly weaken current participation incentive.

Lastly, my thanks to Gene Brame, State Association Secretary for addressing envelopes and delivering same to me for this mailing.