Opt-Out Policy
"How Opt-Out Benefits the County"

Summary and History

Prior to 1992, all employees were required to participate in the County-sponsored medical plan or forfeit their Flexible Benefits Program Credit Allowance. In the spring of 1992, the Board of Supervisors authorized the addition of an option to decline medical coverage through the County (“Opting out”) without waiving participation in the Flexible Benefits Program. When they did so, they determined that there should be a charge to the employee’s Flexible Credit Allowance when the employee elects to opt out. In this way, the Opt-Out provision does not result in higher rates for those enrolled in the medical plans.

The Opt-Out fee is based on some basic assumptions about the County medical plan, County employees, and the relationship and responsibilities to one another.

• The purpose of offering a County medical plan to employees is to maintain a healthy work force, and to protect employees from financial hardship in the event of illness or injury to themselves or dependents.
• Employees in the Flexible Benefits Program should have the option to decline medical coverage and use Flexible Credits to purchase other benefits, as long as they have adequate medical coverage through another group plan, and as long as their decision does not impact the medical rates of those remaining in the plan.
• All County employees potentially benefit from the County medical program, whether they are currently in a plan or not. Employees can enroll in the plan during any open enrollment period, or mid-year if they lose their other coverage, so all employees are a part of a “risk-pool”.

The Medical Plan Opt-Out provision was developed in concert with an outside actuarial firm that determined a fee should be charged to any employee opting out. It was determined that:

• Nationally, about 20 percent of a plan’s participants generate 80 percent of the claimed costs in any given year.
• In most cases, those who opt out of a medical plan are the healthier population; employees expecting high expenses prefer the extra coverage.
• Since employees with more medical needs tend to stay in the plan, when employees opt out there are fewer premium dollars coming into the plan, but claim and administrative costs do not go down in the same proportion. This results in higher premiums for those remaining in the plan, unless a charge is applied for the right to opt out.

In the summer of 1999, the Medical Plan Opt-Out provision was revalued by the Segal Company, a national benefits consulting firm. The Segal study confirmed that the factors identified by the previous actuary still applied to the County plans, and the current method of determining the amount of the Opt-Out fee was actuarially valid.

Development of the Opt-Out Fee

It was recognized that when the Medical Plan Opt-Out provision was implemented, the loss of employees from the total insured risk pool would have an adverse impact on the premiums for those remaining in the County’s plans. Therefore, the County, with the assistance from its outside consultants developed a formula-driven model that incorporated valid actuarial assumptions to compensate for the loss of participants and premium dollars.

In the 1999 Segal study, it was stated that a typical private and/or public employer who offered an Opt-Out provision allowed from 25-45 percent as cash back based on the employee-only contribution rate. During the same time period, the County allowed nearly 60 percent of the flexible credit to be received as cash back, significantly exceeding the typical employer amount. For Plan Year 2006, it is proposed that the Opt-Out fee be established to allow for an average of 40 percent in cash back. Although the total cash back amounts are within trend data, the absolute dollar return is greater due the County’s method of composite rating of its medical plans.

The following are the basic principles and assumptions used to justify the development of an Opt-Out fee. Opt-Out encompasses a strategy to reasonably predict adverse impacts to the overall medical premiums and assess a mitigation factor to compensate for the provision in allowing individuals to participate in the medical benefits.

Demographic-related adverse selection - It is reasonable to assume that the age and sex of employees more likely to opt-out would generally represent a more favorable risk group, from an actuarial perspective. That is, assuming no more or less favorable health status overall, younger individuals generally represent a lower actuarial risk than do older individuals.

Coordination of Benefits (COB) – One of the major savings components in a group health plan is the coordination of benefits of employees that have coverage under another plan. Typically, employees that opt-out are those with “double coverage”. If these employees are allowed to opt-out, the risk pool loses both the COB savings and the premium paid into the plan. This combination leads to increased costs.

Health-related adverse selection – Depending on the restrictions imposed on employees opting-out, there is a factor of adverse selection associated with the fact that a person will be less likely to go without coverage or seek coverage elsewhere if there is some historical or current health condition. The extent of this adverse selection diminishes proportionately with the extent of the restrictions, generally as follows:

• No requirement of other coverage – greatest extent
• Requirement of other coverage
• Requirement of other group coverage
• Requirement of other comparable group coverage – least extent

Within these variations, another factor could be the extent to which the County requires actual documentation verifying such other coverage, versus an assumed level of coverage inherent with the election. Currently, the Opt-Out policy requires “proof” of other group coverage thereby minimizing the exposure of adverse selections.

Administrative Costs – Costs to administer plan benefits are spread over all employees. If Opt-Out employees are not included in the per employee administration fee calculation, this amount must be allocated among a smaller population which equates to higher overall per capita costs. Additionally, while nominal, there is a cost associated with the fact that other administrative expenses directly associated with the administration of the medical program itself (claims administration, stop-loss, etc.) may tend to be incrementally higher, since they must be spread over a smaller pool of employees.

Risk Pool Reduction – Insurance underwriting uses the theory of large numbers. That is, typically the larger the risk pool, the better. A large risk pool is more predictable overtime. Also, a larger risk pool has lower administrative costs, which translates into lower premiums. Therefore, allowing employees to opt-out reduces the size of the risk pool and can increase the cost of the plan.

Conclusion

The Opt-Out policy provides the employee the option to opt-out of medical coverage and in most cases receive a portion of their Flexible Credit Allowance in the form of “cash back”. The Opt-Out charge also provides the necessary protection and benefit to the County. As the employer, the Opt-Out assessment mitigates potential adverse impact to the cost of managing group health insurance. In absence of the Opt-Out policy the employer and the employee would both be disadvantaged.