Breakout Session # 806 Louis A. Kent, Chief Actuary, FCE Benefits Administrators

1. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

2. Strategies in a Runaway Health Market Breakout Session # 806 Louis A. Kent, Chief Actuary, FCE Benefits Administrators Date 4.27.2004 Time 1:00 PM NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

3. Background • The Service Contract Act or Davis Bacon and Related Acts: • Set up a “Fringe Requirement” • Allows an Employer to pay his Fringe Requirement in Cash • Requires an Employer who pays his Fringe in Cash to pay Payroll taxes as part of G&A NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

4. The Desirability of Benefits • It costs $2.36 per hour to provide a Fringe Benefit Plan. • It can cost as much as $2.83 to pay out that Fringe in Cash • This can translate to 5% of the direct labor budget (using $10.00/hr) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

5. What Kinds of Benefits? • Statutory Benefits are not included • Permissible Benefits include: • Health (Medical, Dental, Vision) • Life (AD&D, Travel Accident) • Disability (Long Term, Short Term) • Retirement (401k) • Severance • Sick Pay NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

6. Why Health Insurance? • Quality of Life Benefit (Employees want it) • Difficult to get on a Non Group Basis • Easy target for Organizers • Lowers your Workers Compensation Costs NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

7. What’s Happening in Health Insurance? • Managed Care has worn off • An HMO may cost more than a PPO today • Rate Increases are in the double digits • Co-pays, Cost Share, Restrictive formularies are all on the rise • The Providers have organized to raise costs, and the Insurance Companies are raising their rates to make a profit. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

8. San Francisco Chronicle • “Large employers in Northern California saw their average health care costs rise 12.3 percent in 2003, and they expect those costs to jump an additional 15.4 percent next year, according to a survey being released today by a human resource consulting firm. “ NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

9. Fringe Increases vs. Health Inflation NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

10. Premiums vs. Fringe Budget NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

11. Shortfall In Fringe Budget NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

12. How does the cost vary by Location? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

13. Are the Increases Region Specific? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

14. What does this have to do with Gas Prices? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

15. History of Trendby Funding Arrangement NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

16. Change In Health Premium by Type and Funding Arrangement NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

17. Is Self Funding the answer? • Un-funded plans and the Service Contract Act. • Does it make sense in your locations? • Are there other reasons for doing it? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

18. Un-funded plans and the Service Contract Act. • Since the Fringe is on a Per Employee Per Hour basis, only Actual Expenditures may count. • An Independent Trustee using a Non-Reversionary Exclusive Benefit Trust. • Some reasonable Relationship between Contributions and Benefits. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

19. Does it make sense in your locations? • Are there Carriers “buying market share”? • Do you have enough Employees to make it work, at least as a Stop Loss Insured Plan? • Do you want a uniform benefit package across State/Jurisdictional lines? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

20. Are there other reasons for doing it? • Uniform Plans • Good Experience helps Stabilize Premiums • Avoid expensive State Mandates • Part Timer Plans • Creative Plan Designs NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

21. Creative Plan Designs • Primary Care Plans • Catastrophic Plans • HRA/HDHP Concepts NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”

22. Conclusions • There are no easy answers • You have to design with the Fringe Budget in Mind… a Three Year Contract needs a Three Year Design. • If it were easy, everyone would be doing it and making money. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management within the Business Cycle”