Benefits Analysis:

The School District of Philadelphias Principals Benefit Plan

Part 3: Benefits Analysis Consultation Performed By: 912689137 & 910888078 RMI 3501 Dr. Drennan Fall 2011

Table of Contents PART 3: BENEFITS ANALYSIS BACKGROUND OVERALL DESIGN CONSIDERATIONS AND OBJECTIVES IN OFFERING EMPLOYEE BENEFITS -APPEASING THE UNION AND RETAINING TALENT PROBLEMS, ISSUES, CONCERNS AND CONSIDERATIONS IN THE DESIGN OF HEALTH BENEFITS -FULLY-INSURED VS. SELF-INSURED FUNDING DESCISIONS -KEYSTONE HEALTH PLAN EAST (HMO) -PERSONAL CHOICE (PPO) -FLEX (DENTAL PPO) -VISION RIDER/ KEYSTONE VISION RIDER (VISION BENEFITS) -SELECT DRUG COVERAGE (PRESCRIPTION DRUG COVERAGE) -RETIREE HEALTH COVERAGE PROBLEMS, ISSUES, CONCERNS AND CONSIDERATIONS IN THE DESIGN OF OTHER TYPES OF NON-RETIREMENT BENEFITS -WAGE CONTINUATION -FSAS/CRAS THE IMPACT OF REGULATORY COMPLIANCE IN BENEFIT PLAN DESIGN AND OPERATION -ERISA -COBRA -PA ACTS 110/43 -HIPAA -PPACA - EXTENSION OF DEPENDENT COVERAGE AGE -PPACA - FREE PREVENTIVE CARE -PPACA- ELIMINATION OF PRE-EXISTING CONDITIONS FOR CHILDREN (PECS) -PPACA - HEALTH FSA CONTRIBUTION LIMITS -PPACA - PLAN COMMUNICATION CONCLUSION FUTURE CONSIDERATIONS BIBLIOGRAPHY 6 6 6 7 7 7 7 8 8 8 8 9 9 9 11 1 1 1 1 2 2 3 3 4 4 5 5

Part 3 Benefits Analysis Background:

The School District of Philadelphia (SDP) was established in 1818 and today it is the eighth largest school district in the nation overseeing 267 schools. Amid budget concerns in 2001, the state of Pennsylvania assumed control of SDP and the governor was given the power to appoint a share of the five new School Reform Commission members. Susan Gilbert, Executive Director of Employee Support Operations at SDP, helped us gather information about the Districts Principals benefits plan. She held her current position prior to Pennsylvanias take over of the SDP, and played a key role in redesigning the benefits plans of the SDP. Currently, Ms. Gilbert is in charge of all the benefit plans for the SDP.

Overall Design Considerations and Objectives in Offering Employee Benefits:

In 2001, the Pennsylvania state government assumed control of SDP due to large deficits and poor management. Knowing that SDP had to continue to offer benefits to retain talent and meet union demands, it sought to redesign the benefits plan to contain costs while at the same time providing comprehensive benefits.

Appeasing the Union and Retaining Talent The principals union, CASA Local 502, negotiated with the School District of Philadelphia to provide many benefits on a non-contributory basis. This arrangement also benefits SDP by helping it retain talent. SDP competes for principals with Benefits Analysis: School District of Philadelphia Principals Benefit Plan 1

independent, parochial, and suburban public schools. By offering benefits such as healthcare, dental, vision, prescription drug, and life insurance on a non-contributory basis, SDP seeks to prevent principals from defecting to other schools and appease the union. Additionally, the School District offers voluntary benefits that allow principals to utilize the tax advantages provided by Section 125 of the Internal Revenue Code (IRC) in an attempt to retain talent. By offering voluntary benefits that allow principals to take advantage of the Section 125 of the IRC and providing benefits on a non-contributory basis, the School District hopes to retain its talent. Ms. Gilbert mentions that it is difficult to actually determine whether the benefit plan for the principals is actually working due to the fact that the School District has been downsizing across all levels, evidenced by the fact that 50 percent of the employees in Ms. Gilberts department have been dismissed and SDP is planning on closing more schools over the next few years.

Problems, Issues, Concerns, and Considerations in the Design of Health Benefits:

Fully-Insured vs. Self-insured - Funding Decisions: In addition to retaining talent, SDP also sought to contain costs when redesigning its health plan. According to Ms. Gilbert, SDP was fully insured through Independence Blue Cross prior to the year 2001. However, after Pennsylvanias assumption of control, SDP became self- insured with the intent to reduce costs. By self-funding their healthcare plan, prescription drug plan, and vision plan, the School District of Philadelphia saves approximately $20 million each year. Benefits Analysis: School District of Philadelphia Principals Benefit Plan 2

SDP uses a Voluntary Employee Beneficiary Association (VEBA) IRC Section 501(c)(9) trust as the funding vehicle for their self- funded health plans and AON consulting services are used to determine how much money will be needed to provide the self-funded benefits each year. SDP is responsible for all contributions to the VEBA because its healthcare plans are offered on a non-contributory basis. Additionally, to protect against catastrophic loss, SDP has specific stop-loss insurance with Robert L. Johnson Insurance Service (RLJ). In the past, SDP had stop-loss insurance with a face value of $500,000 but recently increased the face value to $550,000 to reduce costs further. Keystone Health Plan East (HMO): SDP offers an HMO, on a non-contributory basis. According to Ms. Gilbert, this health plan has the lowest enrollment. SDP must be aware of the fact that the cost of providing HMOs rose by 10.8 percent during the year 2010 and it has had double-digit growth each of the last eight years1. SDP should consider changing its financing strategy from non-contributory to contributory with the contribution rate being sufficient to offset healthcare cost inflation. Additionally, SDP should consider offering free wellness benefits programs such as, gym memberships and consultations to a dietician, to mitigate the risk of high claims due to poor health. Personal Choice (PPO): Due to the fact that SDP is currently offering a PPO, the plan with the highest enrollment, on a non-contributory basis, it should be aware that the cost of providing PPOs rose by 10.9 percent in 2010 and it has had double digit growth each of the last

Source 2010 Healthcare Trend Survey Benefits Analysis: School District of Philadelphia Principals Benefit Plan 3

eight years1. SDP should consider changing its financing strategy of non-contributory to contributory to offset the growth in cost of providing a PPO. Similar to the HMO suggestion, SDP should consider offering free wellness benefits programs such as, gym memberships and dietician consultations, to mitigate the risk of high claims due to poor health. Flex (Dental PPO): SDP offers its principals and dependents a fully insured dental plan with United Concordia, an insurer with an A. M. Best Rating of A-2 on a non-contributory basis. It has three classes of coverage according to the complexity of the procedures. Class I, II, and III, and also orthodontics. Classes I and II and 100 percent covered since they are preventive and minor and major procedures respectively. Class III is cosmetic and it covers 80 percent for, inlays, onlays, and crown repairs and 60 percent for prosthetic and denture repairs. It also covers the orthodontics 50 percent. There are no issues with this plan since it covers most of the principals and their dependents needs, this is why SDP decided to sign with United Concordia. In order to contain costs, SDP should consider offering its dental plan on a contributory basis with the principals contribution being 10 or 20 percent of the premium. Many firms are shifting towards a voluntary dental plan3, so by offering its dental plan on a contributory basis, SDP can still attain its goal of retaining talent and offering a competitive benefit. Vision Rider/Vision Keystone Rider (Vision Benefits): SDP offers a self-funded vision plan to its principals on a non-contributory basis. It offers vision options between Vision Rider, Vision Keystone Rider, or both, through
2 3

Source A.M. Best Rating: www.ambest.com Source: Dental Insurance, the Third Most Requested Benefit, Can Be Voluntary Benefits Analysis: School District of Philadelphia Principals Benefit Plan 4

IBC in conjunction with Davis Vision. The Vision Rider can be acquired separately while the Vision Keystone Rider can only be obtain if the participant already has the Keystone Health Plan East (KHPE). The Vision Rider provides a vision card that does not have any copayment but the Vision Keystone provides a card that provides a $15 copayment, for the same coverage. Ms. Gilbert informed us that the Vision Keystone Rider is one of the reasons some principals enroll in the KHPE because it gives them two chances to use the vision benefits when added to the Vision Rider. SDP should keep this system because, principals being able to take advantage of the vision benefit twice in a two year span as compare to once, is a form of steerage to encourage them to enroll in the HMO rather than the PPO. And because KHPE has a lower cost per principal than the PPO, this saves SDP on the cost of providing healthcare benefit. Select Drug Program (Prescription Drug Coverage): SDP offers a self-funded prescription drug plan to its principals, on a noncontributory basis. The coverage is four tiered with each having its own copayment. The tiers are, generic on the formulary, brand name on the formulary, generic not on the formulary, and brand name not on the formulary. This plan encourages the use of generic drug on the formulary because it has the lowest co-payment of $15, which steers the principals to the use of generic drugs. Retiree Health Care: SDP does not offer retiree healthcare. If a principal retires before the age of 65 years, a principal is able to buy into the SDP principals risk pool through COBRA and PA act 110/43, according to Ms. Gilbert. If a principal retires after 65 they are eligible for Medicaid.

Benefits Analysis: School District of Philadelphia Principals Benefit Plan

Problems, Issues, Concerns, and Considerations in the Design of Other Types of Non-Retirement Benefits:
Wage Continuation: SDP offers optional wage continuation to its principals in lieu of short and long term disability. The costs to participate in this program are listed below: Wage Continuation Premiums Accumulated Sick Total Annual Leave Waiting Period Less than 10 days 10 but less than 30 days 30 but less than 60 days 60 but less than 90 days 90 but less than 120 days 120 but less than 150 days 150 but less than 180 days More than 180 days 7 Work Days 6 Work Days 5 Work Days 4 Work Days 3 Work Days 2 Work Days 1 Work Day O Work Days Employee Share per $100 per Pay Check Post- three years of employment $4.43 $3.15 $0.31 $0.00 $0.00 $0.00 $0.00 $0.00 Employee Share per $100 per Pay Check First three years of employment $2.95 $2.10 $0.31 $0.00 $0.00 $0.00 $0.00 $0.00

According to Ms. Gilbert, the reason behind charging higher rates for principals who have been working for SDP for over three years and with less than thirty days of accumulated sick leave is because these principals are believed to be high risk. FSAs/CRAs: SDP offers two types of FSAs and an two types of CRAs. The FSAs are dependent and health care. The CRAs are parking and transit/commuter. There are no issues with passing discrimination testing since SDP is only dealing with the principals Benefits Analysis: School District of Philadelphia Principals Benefit Plan 6

who are all on the same level. Additionally, SDP must be wary of PPACA and its changes to FSAs.

The Impact of Regulatory Compliance in Benefit Plan Design and Operation:

ERISA:

Since SDP offers no defined benefit retirement plan or retiree health care coverage, therefore, ERISA funding is not an issue. However, the principals are able and encouraged to take advantage of a defined benefit plan offered under PSERS.
COBRA: As SDP prepares to start closing schools, it will see an increase in the number of COBRA eligible principals. As a result, there is an increased potential for adverse selection because COBRA is guaranteed issue and the eligible principals do not need to buy coverage until they actually need it. As stated earlier, SDP also uses COBRA as a means to provide health care for early retirees until they are eligible for Medicare at age 65 years. PA Acts 110/43: Because SDP is a school employer in Pennsylvania, it is required to provide retired principals and their dependents the right to continue in the group health plan to which they belonged as employees, under PA Acts 110. Act 43, amended Act 110 by defining retirees as those who took superannuation retirement on or after age 62, retired with thirty years of service, or were receiving PSERS disability benefits.

Benefits Analysis: School District of Philadelphia Principals Benefit Plan

HIPAA: Post 2001 During our interview, Ms. Gilbert showed us the file room, which had all the files of all the employees including the medical history. HIPAA compliance might become an issue with SDP. Ms. Gilbert said 50 percent of her staff has been dismissed and as a result, it might be difficult for the remaining staff members to perform the administrative duties associated with the HIPAA compliance. PPACA - Extension of Dependent Coverage Age: Prior to PPACA, SDP offered coverage to dependent children up till the age of 25, if they were unmarried and in a four year accredited college or university. Under PPACA, dependent care age has been extended to the age of 26 years4, and the dependent children do not have to be in a four years college or university. SDP is well equipped to adapt to this change as they already provided generous coverage up until the age of 25 years in some cases. PPACA - Free Preventive Care: Under PPACA, all employee benefits plan have to offer free preventive care4. SDP will have to adjust its health plans as both its HMO and PPO have preventive care options that require co-payments. PPACA - Elimination of Pre-Existing Conditions for Children (PECs): Under PPACA, PECs are not allowed to influence the insurability of children 19 years and below4. SDP has no issues with complying with this section of PPACA because it is currently offering coverage beyond the age of 19 years to its handicapped dependents, under their parents coverage, who meet the requirements.

Source: Preparing for Health Care Reform A Chronological Guide for Employers Benefits Analysis: School District of Philadelphia Principals Benefit Plan 8

PPACA - Health FSA Contribution Limits: Under PPACA, employee salary reduction to health FSAs is limited to $2500 a year4. SDP is already in compliant with this regulation as its health FSA maximum is $2500. Plan Communication: With the healthcare regulation changing rapidly, SDP must be sure to communicate the changes to its employees. It currently uses various techniques to communicate with its principals such as, Summary Plan Description (SPD), Summary Material Modification, emails, and fliers. Additionally, the School district has a employee benefits website http://webgui.phila.k12.pa.us/offices/b/benefits where principals can fin information. In addition to the communication techniques already used by SDP, it should also consider having benefits fairs to ensure that its employees understand their health plans and the regulations governing them.

Conclusion - Future Considerations:

As stated earlier, the costs for HMOs and PPOs have been rising with doubledigit growth for the last eight years. SDP should consider shifting their financing structure from non-contributory to a contributory basis, with the contribution level being adequate to offset the rising costs. Additionally, SDP should consider providing free wellness programs to mitigate the claims arising out of poor health. SDP should consider offering its dental benefits on a contributory basis. As healthcare costs rise, more and more employers are providing dental benefits on a voluntary basis. By offering dental plan on a contributory basis, SDP offers a more competitive benefit than potential Benefits Analysis: School District of Philadelphia Principals Benefit Plan 9

competitors and at the same time saves costs. We recognize that persuading CASA local 502 to relinquish noncontributory benefits could potentially be difficult and may not be possible at this time; however through the use of wellness programs such as free gym memberships, or incentives to cease unhealthy activities such as smoking we believe that SDP can reduce healthcare claims costs overtime. Additionally, as various aspects of PPACA go in to effect over the next few years, SDP must be sure to communicate these changes to their employees. This will involve heavy utilization of the communication channels already in place and possibly some new ones such as face-to-face meetings with principals to be sure that they understand their benefits. Similarly, SDP must be sure that it complies with COBRA as it prepares to close schools over the next few years. SDP should be sure to have protocols in place for notifying principals of their ability to access this coverage. Post 2001, SDP has been able to continue to offer competitive benefits while at the same time reducing costs. However, SDP must be wary of the rising costs of healthcare and the changing regulatory requirements to ensure that it is able to continue providing competitive benefits.

Benefits Analysis: School District of Philadelphia Principals Benefit Plan

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Bibliography Gilbert, Susan. Personal interview. 29 Nov. 2011.

AON Consulting. "Source 2010 Healthcare Trend Survey." 2010: 5-6. Print.

"United Concordia Dental Plans of PA Inc." Best's Credit Rating Center- Company Information for Unted Concordia Dental Plans of PA Inc.. A.M. Best, 2 Nov. 2011. Web. 7 Dec. 2011.

Bridgeford, Lydell C. "Dental Insurance, the Third Most Requested Benefit, Can Be Voluntary." Employee Benefits News 2 Nov. 2011. Web. 7 Dec. 2011. CEBS. Preparing for Health Care Reform A Chronological Guide for Employers 2010: 1-5. Print

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