City Cuts Benefit Cost

September 5, 2006
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GRAND RAPIDS — While businesses have had the cost of health insurance soar by double-digit amounts the last few years, the city of Grand Rapids has had the cost of its coverage plummet by double digits the past two years.

Back in fiscal year 2005, a year that started on July 1, 2004, the city was looking at an estimated cost of $32.3 million to provide health insurance coverage to its employees and retirees. That imposing figure was a $3.5 million increase from the previous fiscal year, a hike of more than 12 percent.

The premium increase the city was facing then was the last in a long line of price surges. Here is the tale of the tape:

  • In FY00, the city paid $16.4 million for coverage.
  • In FY01, the city paid $19.0 million, a hike of 16 percent from FY00.
  • In FY02, the city paid $21.3 million, a hike of 12 percent from FY01.
  • In FY03, the city paid $24.5 million, a hike of 15 percent from FY02.
  • In FY04, the city paid $28.8 million, a hike of 18 percent from FY03.

The city watched its health insurance premium rise from $16.4 million to $28.8 million in just four years, an increase of 76 percent and one well above inflation. If those increases had been tied to the Consumer Price Index, the city would have paid $17.9 million in FY04, or $10.9 million less than it did pay.

So when a renewal notice of $32.3 million for FY05 arrived, City Manager Kurt Kimball said a change had to be made.

It cost the city $27.7 million in FY05 to provide coverage for employees and retirees, an amount more than $1 million less than it paid the previous year. The city's premium was $27.9 million for the just completed fiscal year, still below the amount it paid two years ago.

By the way, the city provided health insurance for 7,117 employees and retirees during FY06. The retirees included both pre-65 and post-65 former workers.

Mari Beth Jelks, director of human resources for the city, said reforming the health insurance plan began in 2003 when then-Director of Human Resources David Etheridge formed a management task force to look into what improvements could be made.

Jelks, who served on the task force, added that the city's union represented the employees in the effort in a series of separate meetings. She said the recommendations that went to city commissioners, who approved the suggestions, came from both groups.

"Specific recommendations included restructuring the health plan's administration to decentralize health plan functions from the control of single vendor to health plan administration through three specialized and best practice vendors," wrote Jelks in a memo that was circulated to commissioners.

So instead of staying with a local insurer, the city entered into agreements with three out-of-town companies that concentrate in different areas.

Benefit Source Inc. of West Des Moines, Iowa, became the plan's administrator and managed the benefits. RxAmerica of Salt Lake City serves as the pharmacy benefits manager. PPOM of Southfield became the provider, with a network of 57,000 physicians and 470 hospitals in Michigan, Ohio, Indiana and parts of Kentucky

"Last year's first annual report revealed that the taskforce's recommended changes resulted in a savings of more than $4 million in the first year of implementation," said Jelks.

While the city's cost has remained stable the past two years, the nation has seen costs rise by an average of 14 percent in 2005 and 12 percent in 2006. According to a report written by two consultants, the city is likely to save $41.3 million on its health insurance cost over the first five years of its new plan because it changed vendors.    

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