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Vero employee health costs soar
City pays out more than total it collects in taxes

STORY BY LISA ZAHNER, (Week of September 29, 2011)
Photo of Keith Gehring

Vero Beach now pays more for health insurance for city employees and retirees than the total money it collects in property taxes – a burden that has soared 23 percent in 2011 as the result of a three-tier scheme pushed by the same pricey consultant involved in the aborted municipal health clinic.

Vero’s projected health insurance cost of $9,281 per city employee and retiree is more than $1,500 higher than Indian River County’s projected cost of $7,777 per county employee – meaning Vero is paying almost $1 million more than it would if its employees had coverage comparable to the county health plan.

Vero’s costs are out of control because twice as many employees and retirees opted for the city’s most generous and costly health tier as the Gehring Group forecast. To make matters worse, the 1,143 employees, retirees and dependents on the city’s health-care plan are seeking treatment for serious accidents and major illnesses at a far higher rate than the Gehring Group’s actuarial projections.

In 2010, the Gehring Group – which is paid $236,000 per year in commissions to manage the city’s health, property and accident insurance – advised the City Council to switch from a single-tier health plan where employee coverage was free to a three-tier plan where only basic coverage remained free but employees could buy up to a middle or high tier.

“We were responding to a mandate last year from the City Council to cut $1 million from the health plan costs,” Kurt Gehring told Vero Beach 32963 last week.

Based on his calculations of the expected savings from the three-tier approach Gehring recommended, the City Council cut the funding it put into the health plan last year by 15 percent.  The $1 million drop in the amount of cash Vero needed to sink into the plan was billed as a savings that could be used to support city services.

But the savings turned out to be illusory.

According to Monte Falls, who served on the team assigned to work with Gehring on the health plan, the Gehring Group’s actuaries forecast that 20 percent of city employees would choose the cheapest coverage, 60 percent would enroll in the middle tier, and only 20 percent would opt for the highest tier.

While 20 percent did indeed opt for the basic, high-deductible plan, only 40 percent chose the middle tier and 40 percent opted to pay a higher out-of-pocket amount to stay on the premium plan they had enjoyed in the past.

Gehring said at a workshop in July that employees and retirees with known health conditions probably opted for the premium plan even though they had to pay higher premiums – but offered no explanation as to why his group did not factor that probability into its forecast of  enrollment and savings.

Then city employees, wary of the new health plan options, rushed to have a lot of procedures – including elective procedures – done before the Sept. 30, 2010 changeover.  Again, Gehring insisted last week this could not have been anticipated.

Finally, a high number of accidents outside the workplace – household accidents, recreational accidents and auto accidents – resulted in large claims for emergency care and prolonged recovery periods, Gehring said. 

“The biggest anomaly I’ve seen in your experience is the amount of accidents in people that are on your plan, in terms of actually having serious injuries where it wouldn’t be picked up by Worker’s Compensation or another form of insurance such as homeowner’s insurance, or they’ve already exhausted their automobile insurance,” Gehring Group analyst Christian Bergstrom said at the July budget workshop.

City employees also experienced a “high prevalence” of cancer and heart disease, which resulted in hospitalization, surgeries and expensive drug therapies, according to Gehring.

How could the consulting firm paid almost a quarter of a million dollars annually to advise Vero on insurance have been so far off on all of its projections?

“We were not wrong and it was not a mistake. Each year must be looked at on its own,” said Gehring last week, when asked to explain the dramatic difference between a 15 percent decrease in 2010 and a 23 percent increase in 2011.

But City Council members last week did not seem to be buying the Gehring Group’s explanation that the changes made in 2010 were never designed to offer the city a long-term solution to rising health-care costs, but were intended only to put a one-year Band-Aid on a city budget out of balance.

“The same thing could have happened even if we hadn’t made any changes to the plan,” insisted Vero Beach Risk Management Director Barbara Morey, a longtime supporter of the Gehring Group.

“But why would they recommend changes that were not a long-term solution?” asked Council Member Brian Heady. “I guess I just don’t understand. We pay them a lot of money and obviously we pay them that because they have some level of expertise in the area. I would hope the city would get better advice.”

“When the staff was told to cut the plan costs, all they did was go back to Gehring and ask what they should do. That’s not acceptable,” said Vice Mayor Pilar Turner said. “I am going to push for the management of the health plan to be put out to bid for next year, we need to find out what other options are out there because we can’t continue on like this.”

Health plan costs for Vero Beach city employees, retirees and their dependents are projected to be close to $7 million in the coming year.

The plan is self-funded.  Except for claims of more than $125,000 per employee and catastrophic aggregate claims, which are covered by stop-gap insurance, the city is wholly on the hook to pay the bill.

The previous two city councils under Mayors Kevin Sawnick and Sabe Abell struggled with how to combat increases in costs, which have risen dramatically from about $5,800 per employee and retiree in 2006.

In 2009, the Gehring Group persuaded Morey and the then city manager – and nearly persuaded the council at that time – that the way to go was to start a health clinic for municipal employees.  When that idea was ultimately rejected as, at best, a gamble for the taxpayers, Gehring and his team retooled insurance options to include the three different plans.

Instead of providing a Cadillac plan for all the employees, the consultants recommended the city only pay for a Chevy and give employees the option of upgrading to a Buick or a Caddy on their own.

For employees, the monthly cost of individual coverage under the Chevy plan remained zero but this plan now had higher deductibles and co-pays.  The employee contribution for family coverage on this tier is now $314 – less than the old plan, reflecting the higher deductibles and co-pays.

For the Buick plan, the monthly cost of individual coverage is $29.54 per month, and the employee contribution for family coverage on this tier is $408.60.

For the Cadillac plan, which provides the same benefits employees were getting at no cost before 2010, the monthly cost of individual coverage is $73.84.  The employee contribution for family coverage on this tier – which was $366.02 before 2010 – now is $547.90.

In retrospect, it seems hard to understand why actuaries and experts on health plans would have failed to anticipate that any employee with a family member facing serious health issues would opt for the Cadillac policy even at an increase in premiums of $180 a month.  In practice, that appears to be exactly what happened.

The result of this miscalculation was predictable.  Instead of producing savings, the anticipated cost of the new three-level plan soared by 23 percent – forcing the city to come up with about $1.3 million more in the coming year. News of that increase came after the city budget had already been put together, assuming a conservative, industry-standard 10 percent increase in costs.

Finding an extra $700,000 more in an already tight budget was a scramble for new Finance Director Cindy Lawson and new City Manager Jim O’Connor in their initial days on the job.

Ultimately, that unexpected increase was spread among all city funds and departments, with about $188,000 being charged to the General Fund, $274,000 being added to what the city takes from the electric utility and $151,000 charged to collections by the water-sewer utility.

Indian River County’s projected health plan costs for the coming year are $7,777 per employee – $1,504 less than Vero Beach. According to Indian River County Budget Director Jason Brown, those costs are expected to remain stable in the coming year. “We are not budgeting for an increase in premiums for fiscal year 2011-12,” he said in an e-mail.

The city keeps a reserve of about $3.2 million in its plan to cover 60 days of claims and that fund will take a temporary hit to help defray the huge increase in plan costs.

Finance Director Lawson said she expects to get updated numbers from Gehring after the fiscal year is closed out the end of this month. When asked last week if he had an update on Vero Beach claims activity,  Gehring said “No,” adding, “Health insurance is not something you budget for month to month.”