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Insurance Insights

Setting Premium Rates for UT SELECT

The University of Texas System provides health benefits for System employees, retirees and their dependents through UT SELECT. UT SELECT is not a traditional insurance plan in which risk is transferred to a commercial insurance company. Instead, in order to minimize cost, the Plan is self-funded and administered by the Office of Employee Benefits (OEB). OEB contracts with third party administrators to establish health care provider networks, pay claims and assist with a myriad of communication and programmatic initiatives. Blue Cross Blue Shield of Texas administers medical benefits, while Medco Health Solutions administers pharmacy benefits. Although both serve in important roles, neither provides any form of insurance, nor do they make unilateral decisions regarding Plan benefits.

The risk associated with the Plan is financed with a combination of employer and employee contributions deposited in the Medical/Dental Fund maintained by the System solely for the purpose of providing medical and dental benefits for System personnel. Each month, employer and employee contributions are deposited in the Fund and used to pay claims and administrative expenses arising from eligible health care expenses incurred by UT SELECT participants. Contributions are invested and maintained in the Fund until such time as they are required to pay claims and expenses. In order to maximize financial controls and investment income, OEB requires the administrators to reimburse providers before requesting reimbursement from the System. By eliminating insurance company profits and sales commissions, minimizing administrative expenses and maximizing investment income, self-funding allows contribution rates to be set at the lowest level possible. Contribution rates are driven almost exclusively by the cost of the benefits paid by the Plan.

Each spring the OEB consulting actuaries carefully evaluate the UT SELECT experience data and the demographic characteristics of the Plan enrollment. They also examine developing trends in the cost and utilization of health care services and supplies, both in the Plan and in the health care economy in general. Based on this analysis, the actuaries develop projections of the Plan cost for the next fiscal year, taking into consideration anticipated changes in the level and/or characteristics of the Plan enrollment as well as any changes in Plan benefits and/or administrative arrangements. The actuaries then compare the projected Plan cost with the current revenue levels and determine the extent to which contribution rates must be adjusted to produce aggregate contribution revenue sufficient to provide for the anticipated cost of providing Plan benefits.

Although the Plan experience provides a good basis for projecting future cost, the actual cost will almost certainly vary from that which is expected. The potential for such variation must be taken into account by the actuaries in making rating recommendations and they must be sure the contribution rates are adequate to provide for a reasonable level of adverse experience; i.e., Plan cost that is higher than expected. The actuaries also consider other factors that may impact decisions concerning contribution rates such as the Legislative appropriation and the overall financial condition of the Fund.

Contribution rates are set about four months prior to the beginning of the fiscal year. Much can change over the next 16 months and there is a great deal of volatility inherent in health care cost and utilization. Inevitably, the actual cost will vary from that which is expected. There will be gains in some “good” years while there will be losses in other “bad” years. A major advantage to the self-funded arrangement is that gains in the good years are retained in the Fund and used to offset future rate increases or cover higher cost in the bad years.

The distribution of the contributions between the employer and the members is actually specified by the Legislature in a rider to the biennial appropriation bill. For a number of years, including FY08 and FY09, the bill has specified that the employer will pay 100% of the cost of basic health coverage for the employee or retiree and 50% of the cost of coverage for the dependents. The recommended contribution rates are established on this basis.

Based on this analysis and discussions with OEB staff, the actuaries and OEB make a recommendation to the Chancellor concerning the contribution rates required to generate the necessary level of revenue for the next fiscal year. The Chancellor considers the recommendation and makes the final decision concerning the contribution rates.

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