Posted: September 22, 2023
Rapid City
Agenda Item Summary

Agenda Item Ref. #: LF092723-05

Agenda Item Title:

Approve the Establishment of the Health Care Fund Recovery Fee

Origination Group:
Legal & Finance Committee
Origination Meeting Date:
City Council Hearing Date:
Staff Contact:
Daniel Ainslie, Finance Director
City Council Chambers
Agenda Item Summary:
In an effort to provide the most affordable health care benefit possible to the City’s public servants, the City began self-insuring this benefit since at least 1992.

In a self-funded insurance scenario, the employer (in this case the City of Rapid City) maintains an internal fund from which all health care insurance claims are paid. This technically increases the risk to the employer since the employer is directly responsible for any medical payments that occur and are covered by the plan. The City has mitigated this risk by purchasing a stop loss insurance coverage. This means that the bills from high cost patients are covered by the stop loss insurer for total annual claims that exceed $150,000 per patient. The benefit to a self-funded plan is that the profit, overhead and other expenses that are typically included in a regular insurance premium are saved. Rapid City’s average premium savings as compared to a regular insurance plan exceeds 20%.

Rapid City’s self-insurance plan is administered through Blue Cross/Blue Shield (Wellmark). This means that we have access to their network at their negotiated rates and they also provide the City with expert advice including actuarially determined suggested premiums.

The City’s health care fund balance reached its highest reserve of $9.6 million in February of 2018. Since then, the fund has faced significant headwinds:

Dec 31, 2018: 7,715,045
Dec 31, 2019: 6,647,415
Dec 31, 2020: 4,272,922
Dec 31, 2021: 2,105,609
Dec 31, 2022: 1,744,320
July 31, 2023: 1,893,704

The reason why the balance deteriorated so significantly was due to the revenue into the fund (premiums) being lower than the expenses paid by the fund (medical payments). The primary cause of this was the continued increase in the cost of providing health care (especially pharmaceuticals) and the lack of increases in the premiums paid by the plan participants (this cost is shared between the City and the employee).

Without a reserve from which health claims can be paid, the City would need to contract for a regular health insurance plan. This as previously mentioned would necessarily significantly increase premiums.

The City began addressing the significant deterioration of the Health Care Fund Balance through significant plan design changes. These changes have resulted in employees generally becoming wiser health care consumers and shouldering more of the cost of care which has reduced the rate of the increasing costs paid by the fund. In addition, the City began increasing the health care plan premiums based on Wellmark’s recommendations. However, the premiums are not allowed to increase by more than 14% due to a rule within the Health Care Committee Bylaws. As annual rates are compounded, despite recent 14% increases, the rates have not been able to meet the actuarially determined rates suggested by Blue Cross (please see attached pdf document titled “Historical Fund Timeline”).

The efforts that have been made (plan design changes and rate increases) have allowed the fund to become stabilized. However, in order to ensure the security of the Health Care Fund for the long term benefit of the employees, the Health Care Committee has made several modifications for 2024. These changes are meant to increase the attractiveness of the benefit to more employees, continue to stabilize the fund and rebuild the fund’s reserve. These changes include:

1. Setting an ideal fund balance policy of $4 million (40% of the anticipated costs incurred by the plan)

2. Establish a new High Deductible Health Care Plan (this type of plan has been requested frequently by many of the City’s more recent hires as the plans are generally more affordable and allow for a Health Savings Account which is portable to other employers, the 2024 premiums are set at the Blue Cross suggested premiums)

3. Elimination of the Enhanced Health Care Plan (for the last several years this plan was underutilized)

4. 14% increase in 2024 premiums for the Traditional Health Care Plan (despite increasing the premiums to the highest allowable extent the plans will still be between 1.4% and 8.6% lower than the actuarially determined suggested rates)

5. Elimination of the bi-monthly premium contributions and the start of contributions each pay period (since there are 26 pay periods, the effect of deducting health premiums each pay period effectively lowers the otherwise twice per month contribution by 7.7%, this will now cause the 2 “extra” pay periods to now include a health premium deduction, however the employees on the committee stated that most coworkers budget monthly based on two pay periods so the lower monthly health deduction would be a benefit)

6. Implementation of a new Health Care Recovery Fee for all active Employees who are plan participants

The new Health Care Recovery Fee would be a $25 per pay period fee that would be added in addition to the health care premium. This fee would be added to the premium, as such it would be included as part of the nontaxable income for employees. Meaning the actual impact for employees would be less than $25. The City would match this $25 contribution. The purpose of this additional fee would be to increase the Health Care Fund Balance. The total annual collection is anticipated to be slightly over $1.2 million. However, since the adopted premium rates for the traditional plan will not quite reach the anticipated cost of claims, the actual increased revenue is not anticipated to reach that figure.

Depending on future rate increases and actual claims paid, the Health Care Fund is anticipated to reach the $4 million reserve level sometime in 2026-2028. The proposal is that once the Fund’s reserve level is at or exceeds $4 million for four consecutive months, the fee would be halted. It would resume only if the Fund’s reserve level falls below $4 million for 4 consecutive months. This strategy will help ensure that any future impositions of the fee will be limited in nature as the amount of funds needed to reach the fund balance target will be far smaller than our current deficit.

The City contribution to the Health Care Recovery Fee is included in the adopted 2024 budget.

Funding Source & Fiscal Impact (if applicable):

Funding Cost Center
Is Funding Budgeted?:


Origination Recommendation Action:

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