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Analysts: SustiNet would cost the state hundreds of millions per year

  • by Arielle Levin Becker
  • April 4, 2011
  • View as "Clean Read" "Exit Clean Read"

The proposed state-run SustiNet health insurance plan could cost the state hundreds of millions of dollars a year, according to the legislature’s nonpartisan Office of Fiscal Analysis.

The analysis, released Monday night, offers the first nonpartisan projection of how SustiNet could affect the state’s finances. Although it does not provide a total dollar figure, the analysis cites a variety of potential added costs from the proposal, which calls for reorganizing existing state-funded health plans and selling state-run insurance to municipalities, small businesses, nonprofits and, eventually, anyone in the state who wants it.

Previous assertions about what SustiNet would cost have offered competing pictures. Supporters have cited estimates that the state could save more than $224 million a year with SustiNet, although most of the projected savings were the result of funding from the federal health reform law and could be achieved with or without SustiNet. Opponents have argued that SustiNet would likely increase state spending.

According to the analysis released Monday, the largest new cost to the state–between $222.8 million and $478.6 million a year–would come from offering coverage to low-income adults who earn slightly too much money to qualify for Medicaid.

Consultants to the board that developed the SustiNet plan projected that covering those adults would save the state millions of dollars, because the state would receive federal funding for it. The Office of Fiscal Analysis, or OFA, projected that the cost of offering coverage would exceed the federal funds the state would likely receive.

The SustiNet proposal has passed three legislative committees but must still receive approval from at least three more. It has drawn passionate support from many people who want a public insurance option for the state and say SustiNet will make health coverage more affordable, and passionate opposition from business groups and insurers who say it is too costly and sends a bad message to the state’s health insurance industry. Gov. Dannel P. Malloy has said he shares many of the goals of the proposal, but has expressed concern about several parts of it, including the potential cost.

“I believe in the goals of SustiNet,” he said Monday at a town-hall meeting in Norwalk. “I don’t believe in the vehicle as it’s currently designed.”

SustiNet backers late Monday issued statements questioning the OFA analysis.

Juan A. Figueroa, president of the Universal Health Care Foundation of Connecticut, which created the original plan for SustiNet, raised concerns about the projections for the cost of covering low-income adults, and said the OFA report appeared to underestimate the federal funding the state will get and overestimate the cost of providing coverage.

“In fact, our experts, including Dr. Jonathan Gruber, one of the nation’s leading economists at MIT, actually calculated savings of $50 million,” Figueroa said.

House Speaker Christopher G. Donovan, D-Meriden and a SustiNet supporter, said the OFA report needs to be reconciled with other estimates about covering low-income adults that suggest it will save the state money. Although the OFA report noted potential costs to the state, including up to $6 million a year for the quasi-public authority that would run SustiNet, Donovan focused on the report’s suggestion that if SustiNet could lower health care costs by 1 percent, the state could save between $56 million and $58.5 million.

“The fiscal impact statement demonstrates that better coordinating our health care purchasing under one agency umbrella is a good investment in the health future of our state,” he said. “Investing up to $6 million to receive just under $60 million in lower health care costs is a good investment.”

Projected Costs

The SustiNet bill calls for joining the health plans the state currently pays for–including the state employee and retiree plan and Medicaid–under a quasi-public authority. Those plans cover more than 768,000 people and are estimated to cost $4.67 billion in the 2012 fiscal year, according to OFA. A premise of the proposal is that having a large insurance pool and a single purchaser would save money and provide leverage to make changes that could improve care and slow the growth of health care spending.

The various state-funded plans would remain separate coverage pools. The Medicaid and state employee pools are large and varied enough that it’s not clear whether joining them to hire a benefits manager would produce savings, the OFA analysis said.

Under the proposal, the SustiNet Plan Authority would sell coverage in a separate pool, known as SustiNet G, to municipalities, small businesses and nonprofits as soon as is feasible. Ultimately, SustiNet G would be offered to all employers and individuals in the state. That health plan would be funded by premium payments from participants.

The analysis estimates that the SustiNet Plan Authority, which would oversee the plans, would cost less than $4 million in the first year and less than $6 million a year after that. The bill does not say how the authority will be funded, according to the analysis.

Additional state costs, or potential costs, identified in the analysis include:

  • Covering state benefit mandates in the state employee and retiree plan. The plan is self-insured and not subject to state laws that require insurance plans to cover particular benefits. But the SustiNet bill requires all SustiNet plans to be subject to state insurance mandates, and the cost of the state employee and retiree plan could increase if it were required to cover more benefits.
  • Staffing costs for the state comptroller’s office. The bill would allow non-state public employers to buy coverage through the state employee and retiree plan, if the coalition of state employee unions agrees. If many non-state public employers choose to buy into the state employee plan, the comptroller’s office could need two more retirement and benefits officers, which would cost $185,117 in salaries and fringe benefits.
  • Loss of state revenue from the tax paid on health insurance premiums. Currently, municipalities and other non-state public employers that provide coverage through private insurers pay a premium tax of 1.75 percent per policy. If those employers shift coverage to the state employee plan, the state would receive less money from the insurance premium tax.

The largest projected cost to the state would come from having the state offer a “basic health plan” to low-income adults who earn slightly too much to qualify for Medicaid, beginning in 2014. Under federal health reform, those adults could buy health insurance with federal subsidies. Or the state could provide coverage for them and receive 95 percent of what the federal government would have spent on subsidies.

The state could offer the plan with or without SustiNet, but the SustiNet bill would require it.

The OFA analysis estimated that the basic health plan would cost the state between $222.8 million and $478.6 million a year to cover approximately 101,250 people. That would include roughly 16,000 adults the state currently covers in the HUSKY program for low-income children and their parents.

The state is projected to spend about $6,000 a year for each adult in HUSKY by 2014. But it’s not clear how much it would cost to cover the other adults who would be covered by the basic health plan, who don’t get state-funded coverage now. If they are similar to the adults in HUSKY, the basic health plan would cost $607.5 million. But if they are more like the adults covered by a new Medicaid program for low-income adults, whose coverage costs $9,000 a year per person, the program would cost $863.3 million, according to OFA.

The federal government would help pay for part of the cost, but it’s not yet clear how much.

For its analysis, OFA estimated that the federal subsidy would be $3,325 a year per person, leaving the state to cover between $2,675 and $5,675. For the 16,000 adults moved from HUSKY to the basic health plan, the state would save $5.2 million. But the added cost of covering the other 85,250 people would far exceed that, OFA projected.

The analysis noted that the state could save money through delivery system changes described in the bill. The changes include encouraging–but not mandating–the use of patient-centered medical homes, electronic medical records and payment reforms designed to improve care and slow the growth of health care spending. Because the SustiNet plan would cover between $5.6 billion and $5.85 billion in costs for state-funded groups, a 1 percent change in health care costs would mean a change in $56 million to $58.5 million in state spending. Adding other groups to SustiNet could increase those figures, the analysis said.

Previous projections

The projections provided by the SustiNet board consultants differ from the OFA analysis in part because they count different things.

The SustiNet board projections, based on modeling by Massachusetts Institute of Technology economist Jonathan Gruber, suggested that the state’s fiscal situation could be improved by between $226 million and $535 million by 2019.

But much of the projected savings come from a change the state already made, converting the former state-administered general assistance, or SAGA, program into Medicaid. The move, which occurred last year and was not related to SustiNet, added to the state’s expenses this fiscal year because more people qualify for the program. But it is expected to save money in the future because the federal government will pay a significantly larger share of the costs beginning in 2014 as part of health reform. Gruber projected the state would save $286 million in 2017 from this change.

The SustiNet board’s projections also said the state could see between $15 million and $19 million in increased tax revenue because some employers would stop offering insurance coverage when public coverage becomes available and increase workers’ pay. The OFA analysis did not address any potential effect on income tax revenues.

Another report, commissioned by America’s Health Insurance Plans, which lobbies for health insurers, offered a different picture of the proposal and warned that it would increase state spending.

The report, prepared by the consulting firm Hay Group, noted that state spending would increase in the analysis the SustiNet board used if the savings from the SAGA conversion were not included.

The report also warned that the state could be at risk if the premiums fail to cover the costs of providing care to SustiNet recipients. Because the plan would be self-insured, it would be responsible for paying claims.

“This is a significant issue given that with the size of the proposed SustiNet population even a very small underestimate in required premiums could result in significant liability for the state,” the report said.

The state already self-insures its health plan for state employees and retirees, and as of next year, will self-insure Medicaid programs too.

The report also argued that there are limits to the savings that can be achieved from having a large insurance pool, and that both the state employee pool and Medicaid pools are large enough that it’s not clear that adding to their size would provide more leverage in rate negotiations or significant administrative savings.

And it noted that there are not enough specifics to evaluate whether SustiNet could succeed in reining in spending through delivery system changes, and that both the public and private sector are already working on delivery system and payment reforms.

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