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Economics suggest state plan sale makes sense

Even as the Gov. Bobby Jindal Administration showed little gumption to pursue privatization of prison operations, by contrast it shows fortitude on another privatization issue that exercises these good old boys in the Legislature and state government, getting the state out of the business of running its own health benefits plan for its employees. Commissioner of Administration Paul Rainwater provided testimony to support the effort to sell the self-administered health benefits plan of the Office of Group Benefits under his department, a hopeful sign the Administration will move forward on this compelling and necessary change.

At present, only Utah does anything similar while all other states solely contract all administration to third parties while continuing to self-insure it. And Louisiana already does more of that than run its own plan: approximately three-quarters of state employees and retirees use plans run by third parties that it also self-insures, or are enrolled in plans both run and insured by third parties.

But because the state administers that plan for roughly 62,000 employees and retirees, which is called the preferred provider organization option, at 300 employees (that it, about half of the classified employees of the entire Division of Administration) to manage it this is, compared to states with similar-sized client bases, four times the number of such employees in Alabama, six times the number in Georgia, eight times the number in Arkansas, and 13 times the number in Florida that oversee benefits administration.
As such, right-sizing in this area would save the state about $10 million annually, perhaps more, and could net as much as $150 million in transferring the business to an outside administrator. But something Rainwater did not address is how much extra the PPO as admininsterred by the state already costs the state and its employees and retirees.

The fact is, under state operation, PPO rates for the upcoming half year that employees and retirees without Medicare will pay are significantly higher than for the major alternative, the statewide health maintenance organization option that is chosen by a majority of clients. While there are many different categories depending upon employment status, family composition, disability, and reception of other benefits, computing a rough weighted average (not including the few COBRA payers) shows PPO rates are 5.165 percent higher for the state share (which is anywhere from three to 6.5 times the share paid by the beneficiary) and 5.22 percent higher for the beneficiary’s share than the HMO charges. In dollar terms, while exact numbers are impossible to determine without knowing into which categories how many fall, if we assumed all were active employees with insured families, that means employees in aggregate pay an extra $21.2 million annually and taxpayers an extra $33.3 million a year for having the PPO plan run as is.

Obviously, some minor part of this difference represents actuary estimates caused by differences in deductibles and copayments, as state law mandates comparability in benefits. But larger question is why the state would have taxpayers pick up the difference, through paying the state share, for choices made by some employees and retirees for a more expensive system? Why doesn’t the state just provide resources for a basic set of benefits and if clients want them structured a certain way, to have them pay all of the difference? Surely the state’s higher share cost in is in part a reflection of the higher costs involved by having state administration, above and beyond the staffing costs identified by Rainwater?

Rainwater also addressed a red herring argument of detractors, stating that a surplus of over a half a billion dollars administered by OGB to pay premiums could be lost by this sale. He said all of it would continue to be used for paying health insurance for its employees and retirees by the state regardless of any sale. In fact, much of the surplus has been generated in just the past few years through a succession of rate increases (except once always lower than requested by OGB, including this year when none was granted). In other words, OGB has overcharged taxpayers and enrollees, which also suggests new management might more appropriately price the product.

Not addressed by Rainwater was the absurdity of some opponents in their trying to paint this change as a money-loser to the state. If that’s so, why does almost every other state follow a similar arrangement? And then why isn’t Louisiana pushing to dump the HMO plan administrator and having the state run all the plans if there’s some theoretical superiority to having government do it? Not surprisingly, those that oppose remain silent on these philosophical points nor can provide any evidence that HMO plan costs are higher than they would be without state involvement.

For this change to occur, the Administration needs only assent of the Joint Legislative Committee on the Budget on the contract of sale. If that shows any kind of savings, it would be difficult politically to reject that. That’s less daunting than legislation passing to produce the result, which may explain the more aggressive effort from Jindal on this as opposed to prison operation privatization.

Democrats, good old boy legislators, bureaucrats, and their allies who would rather protect state jobs than taxpayers and want to throw anything out there to criticize Jindal keep trying to spin conspiracy theories about the idea (the most unhinged being it was part of some scheme to allow Jindal staffers to parachute into private sector jobs), but the beneficial economics of it all to state employees, its retirees, and taxpayers are clear. Let’s hope Jindal doesn’t lose his nerve on this part of the privatization agenda.

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