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CCH® BENEFITS — 5/4/07

Costly Indemnity Plan, Free Retiree Medical, And Minimal Employee Contributions Drain Illinois Finances

from Spencer’s Benefits Reports: The combination of an “excessively expensive” indemnity plan, low required employee contributions, and the provision of free health insurance to many retirees has made the state of Illinois’ group health plan “a significant drain on state finances,” according to a Civic Federation study released on April 16. The Federation is an independent, nonpartisan government research organization in Chicago.

The state of Illinois provides health insurance to more than 346,000 government employees, retirees, and their dependents. State spending on these plans has grown 131.4% between fiscal years 1998 and 2007 to $1.8 billion, representing 3.4% of the total state operating budget, the Federation noted.

The study states that Illinois’ health insurance programs are much more generous than the insurance programs of other state governments and those of the private sector. Illinois’ indemnity plan is much more expensive than its managed care plans and the indemnity plans of other states. A single enrollee in the indemnity plan costs the state $7,294 per year, significantly higher than the indemnity plans of North Carolina (89% higher) and New York (33% higher). Most organizations offering health insurance to their employees and retirees have eliminated indemnity plans in favor of less expensive managed care plans, the Federation pointed out. A much larger proportion of the state’s total enrollees (39%, including 71% of retirees) is enrolled in an indemnity plan than are enrolled on average nationwide (3%), the Federation observed.

Furthermore, state of Illinois retirees with more than 20 years of service (92.7% of its retirees) receive their health care benefits free of charge, at an annual cost to the state of $356.1 million. In addition, most of these retirees and their dependents are enrolled in the state’s most expensive health care coverage. This is a large contributing factor to the state’s growing liabilities for the group insurance plan, the Federation concluded.

In addition, the percentage of premium costs that active state of Illinois employees pay for their individual and family health insurance is significantly lower than the national averages reported by a recent Kaiser Family Foundation survey. The relatively low employee contributions shift to taxpayers a larger proportion of the state’s health insurance costs than do those of other states, the Federation study found.

To make the state’s employee and retiree health care plans more cost-effective, the Federation proposes the following changes:

1. Require the 92.7% of retirees who do not currently make any premium contribution for their health insurance to make contributions of 15%, 25%, or 41% of premiums, which would save the state $20.7 million, $89 million, or as much as $146 million, respectively.
2. Increasing employee contributions by even 1% would save the state $10.2 million, while raising contribution levels to match national averages (15% for individuals, 22% for families) would save as much as $67.3 million.
3. Eliminate the indemnity plan and transfer enrollees into less expensive managed care plans, such as preferred provider organizations or HMOs, which could save the state between $176.6 million and $253.4 million per year.

The Federation’s report, State of Illinois Employee Health Insurance Plans: Analysis and Recommendations for Cost Containment, is available at http://www.civicfed.org.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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