Axene Actuary Report

February 1, 2007

Mr. Ben Mellon

Seattle Fire Fighters Local 27

3920 15^th Place West

Seattle, WA 98119

Re: Health Benefits Analysis

Dear Mr. Mellon:

Axene Health Partners, LLC (AHP), an actuarial consulting firm, was engaged by Seattle Fire Fighters Local 27 (FFL27) to analyze insurance risk issues associated with FFL27 changing from being a participant in the City of Seattle's (the City's) insured health benefit program to sponsoring a health benefit program exclusively for FFL27, funded and managed by FFL27 as a self-funded program.  AHP has summarized the major findings of our analysis in this letter to provide background for members of FFL27 as they consider the proposed change.

There were four major risk issues we attempted to address with our actuarial analysis:

• 1) The potential for increasing provider discount by using a provider network different than the network used by the City,
• 2) Any difference in the distribution of FFL27 claims over time and as compared to the distribution of City claims for all participating entities including FFL27,
• 3) The pattern of claim increases for FFL27 over time and
• 4) The potential for continuation of recent large FFL27 claims.

A summary of our findings is provided below.  The major conclusions that can be drawn from our findings include:

• FFL27 can reduce the average level of Allowed Charges for health care related services received by FFL27 members and their dependents significantly (10% or more) if a change in the provider network, from Aetna to another carrier, is made.
• A change in provider network can be made without requiring a significant change in the provider relationships FFL27 members and their dependents have historically relied on for health care services AND
• A change in provider network may expand the number of health care services received by FFL27 members and their dependents to which in-network cost-sharing and discounts apply.
• The proportion of FFL27 members and their dependents that have annual Allowed Cost that exceeds $150,000 is greater than for the City participants in general or in our benchmark data so catastrophic protection for members (i.e., appropriate out-of-pocket limits) and for the FFL27 self-funded plan is an important design consideration.
• With higher-than-expected incidence of catastrophic claims (i.e., Allowed Cost that exceeds $150,000), appropriate medical management of serious illness and injury need to be applied to ensure Allowed Cost incurred is appropriate and provides real value to the participant receiving treatment.
• Recent FFL27 experience (8/2005 through 7/2006 paid claims as compared to prior periods) shows a greater-than-expected increase in the claim level. To minimize the risk of adverse future experience, a self-funded program needs to include appropriate individual and aggregate stop loss protection.

In addition to these conclusions based on our review of FFL27 claims experience, more generalized advantages and disadvantages of self-funding should be considered.  Generalized advantages and disadvantages of self-funding is beyond the scope this letter since the purpose of this letter is to summarize our analysis findings.  The following provides additional information from our analysis.

Potential for Increased Provider Discount

We discussed a potential move to self-funding by FFL27 with three major local health benefits carriers - Regence, Premera and First Choice.  All three of these carriers believe they have an advantage in the prices they have negotiated with health care providers over Aetna, the carrier providing the current provider network for the City health benefits program. 

Regence volunteered to complete an analysis of FFL27 paid claims to determine the impact of using the Regence provider network on total claims cost.  This analysis shows:

Level of Claim Dollars Can Be Reduced by 13.6%: The average provider fee discount achieved by FFL27 using Aetna's provider network, as shown in the FFL27 claims data, is 32.8%.  FFL27 could have achieved an average discount of 42.0% if the Regence provider network had been used.  This would potentially reduce FFL27 claims for the period analyzed from $6.53 million (based on Aetna's provider network) to $5.64 million (by changing to Regence's provider network), a savings of $0.89 million or 13.6%.

Greater Portion of Claims Would Be "In-network": The analysis also shows that, had the Regence provider network been used, a larger portion of total claims would have been "in-network" as compared to using the Aetna network

• Ø $230,266 in Billed Charges not "in" the Aetna network would have been "in" the Regence network,
• Ø only $49,641 in Billed Charges that were "in" the Aetna network would NOT have been "in" the Regence network).

This contributed to the additional savings described in the prior paragraph.  This also indicates that there would have been only a small amount of FFL27 claims activity where the "in-network" designation would have changed under a Regence network scenario, i.e., a change to the Regence network would likely cause only a nominal disruption for FFL27 participants.

A similar analysis of the potential impact of changing to the provider networks of other possible carriers/administrators (for example, Premera and First Choice) has not been completed.

Distribution of Claims

We prepared a summary of FFL27 and City (including FFL27) claims.  We compared these summary distributions with each other and with a benchmark distribution based on proprietary AHP claims data.  The comparisons show that

• FFL27 had more than expected claims in the amount cohorts between $1 and $1000 and in the amount cohorts of $150,000 and over.
• FFL27 also had more than expected claims in these amount cohorts ($1 to $1000 and $150,000 or more) using the Benchmark distribution as the basis for comparison.

The greater frequency of claims between $1 and $1000 implies that access to greater network discount will have a positive impact on a larger portion of FFL27 members than the portion that would be impacted in other City units.  The greater frequency of claims of $150,000 and over implies that FFL27 members with catastrophic claims will receive substantial savings if greater provider discounts are obtained.  Additionally, the greater frequency of claims at this catastrophic level indicates that the plan design needs to be sensitive to member out of pocket maximums and the need for a FFL27 self-funded plan to include appropriate individual catastrophic protection.

Pattern of Claim Increases

The following year-to-year increases are evident in the FFL27 claims data under the City's Aetna options:

2001 to 2002     112.13%

2002 to 2003     106.03%

2003 to 2004     107.49%

2004 to 2005     123.34%

The increases appear to be reasonable with the exception of the most recent period, 2004 to 2005.  This makes it appear that the most recent period was abnormally high but there is no guarantee that such aberrations will not occur in future years.  The 2005 results would be even higher if credit obtained from the stop loss carrier is excluded (123.34% would become approximately 135%).  In determining the year-to-year increases we have made appropriate normalizing adjustments as described in our report to the Board.

Potential for Continuation of Recent Large Claims

The aberrantly high 2005 claims experience is one of the issues that should be considered as part of the discussion of the potential impact of moving the FFL27 health benefits program to a self-funded basis.  As indicated above, the level of claims in excess of $150,000 in Allowed Charges was higher for FFL27 than expected based on Benchmark data and than experienced by the City program in total. 

• The City program had 0.37% of participants with Allowed Charges in excess of $150,000 during the experience period (Claims Paid 8/2005 through 7/2006)
• The large claims for the City totaled $25,147,000 in Allowed Charges, $339,824 per participant having a large claim
• FFL27 had 0.39% of participants with Allowed Charges in excess of $150,000, (FFL27 portion is 5% greater than the portion of the City participants with large claims)
• FFL27 large claims totaled $4,267,000 in Allowed Charges or $426,723 per participant having a large claim (25% higher than the average for City participants with large claims)
• In total, the level of large claims experienced by FFL27 was 30% higher than the level experienced by the City program in total

Management of large claims is a key element of self-funded administrative support.  It is reasonable for the Board to request for information from potential carriers regarding their approach to managing individuals with conditions that have the potential to produce large claim amounts.

As part of our analysis, we had Richard L. Liliedahl, MD, an AHP consultant, review the ICD-9 codes included in the data for 10 of the participants with large claim amounts.

We did not attempt to determine where each participant was in their treatment cycle but made a general assessment based on the treatment codes shown in the claim records.

Summary

There is nothing in our review of FFL27 claims data that indicates it is inappropriate for FFL27 to consider moving to a self-funded health benefits program.  The significant reduction FFL27 can achieve in historical claim levels by using a different provider network provides a financial margin that reduces the short-term risk of moving to self-funded basis but it does not eliminate the risk nor ensure that future trends will be at or below those for the City program.  With proper management and safeguards, a self-funded health benefits program appears to be a reasonable alternative for FFL27.

If there are questions about the information provided in this letter, please let me know using the contact information provided with this letter.

Sincerely,

Dennis J. Hulet, FSA, MAAA

Consulting Actuary