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Guest Commentary: Economic Logic Backs Sale of State Benefits Office

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Annual savings of approximately $60 million with no compromise to quality

Even as the Gov. Bobby Jindal Administration showed little gumption to pursue privatization of prison operations, it has shown fortitude on another privatization issue: getting the state out of the business of running its health benefits plan for its employees. Commissioner of Administration Paul Rainwater provided testimony to support the sale of the self-administered health benefits plan of his department’s Office of Group Benefits, 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 such administrative duties to third parties to self-insure. And Louisiana already does more than run its own plan: approximately three-quarters of state employees and retirees use state-insured third party plans or are enrolled in plans both run and insured by third parties.

But to administer its plan for roughly 62,000 employees and retirees – the preferred provider option (PPO) – the state employs 300 individuals (about half of the classified employees of the entire Division of Administration). Compared to states with similar-sized client bases, that is four times the number of administrative employees in Alabama, six times the number in Georgia, eight times the number in Arkansas, and 13 times the number in Florida. 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 already costs the state and its employees and retirees. Under state operation, PPO rates for the upcoming half year, that employees and retirees without Medicare will pay, are significantly higher than for the alternative chosen by a majority of clients, the statewide health maintenance organization option.

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. Exact dollar numbers are impossible to determine without a category breakdown, but if we assume all to be active employees with insured families, they in aggregate pay an extra $21.2 million annually and taxpayers an extra $33.3 million for having the PPO plan run as is.

Obviously, some part of this difference represents actuary estimates caused by differences in deductibles and copayments. But the larger question is why the state would have taxpayers pick up the difference 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, have them pay all of the difference? Surely the state’s higher share cost 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, these were 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.

Rainwater did not address, however, the absurdity of some opponents in their attempts 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 have the state run all the plans if there’s some theoretical superiority to having government do it? Not surprisingly, opponents remain silent on these philosophical points, nor can they 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 saving, it would be difficult politically to reject. 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.

Jeffrey Sadow is an associate professor of political science at Louisiana State University, Shreveport. The original version of this article first appeared on Sadow’s blog, “Between the Lines.” You can also follow him on twitter.

  • Anonymous

    Concerning the premiums charged, OGB adjusts rates according to actuary computations, unless specifically instructed to ignore those by the DoA. OGB can no longer run a deficit as was done at one time. Also, comparing the PPO premium to the HMO premium in the manner you are doing is misleading. You are comparing a PPO plan with an HMO plan. For a like comparison, simply compare the costs of a private company taking over the PPO to the costs of OGB’s retention of the plan. I believe this was already done last year when BCBS’s proposal was rejected.

    You are correct that it would possibly be better to have one plan for all state employees. However, the fact that there are more than one is not OGB’s fault. Politics, especially in Louisiana, plays a big role in such things. OGB is quite often told what to do by the administration, and it must do as directed.