Interim Joint Committee on Appropriations and Revenue


Minutes of the<MeetNo1> 4th Meeting

of the 2003 Interim


<MeetMDY1> September 18, 2003


The<MeetNo2> 4th meeting of the Interim Joint Committee on Appropriations and Revenue was held on<Day> Thursday,<MeetMDY2> September 18, 2003, at<MeetTime> 1:00 p.m., in<Room> the Brown and Williamson Club at Papa John's Cardinal Stadium, Louisville, Ky. Representative Harry Moberly, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Harry Moberly, Jr., Co-Chair; Senators Paul Herron, Jr., Ray Jones, II, Daniel Kelly, Alice Kerr, Dan Seum, Robert Stivers, and Jack Westwood; Representatives Royce Adams, Rocky Adkins, Scott Brinkman, Dwight Butler, Jim Callahan, Mike Cherry, Larry Clark, Robert Damron, Bob DeWeese, Jon Draud, Danny Ford, Joni Jenkins, Mary Lou Marzian, Thomas McKee, Lonnie Napier, Fred Nesler, Stephen Nunn, Charles Siler, John Will Stacy, John Vincent, Jim Wayne, Robin L. Webb, and Rob Wilkey.


Guests Appearing Before the Committee:  Mayor Jerry Abramson, City of Louisville; Dr. James Ramsey, President, University of Louisville; and Secretary Carol Palmore, Personnel Cabinet.


Guests:  Gay Dwyer, Kentucky Retail Federation; Greg Brotzge; Bart Baldwin, CWLA; L. D. Cobb, STC; Clyde Caudill, JCPS/ACS; Carol Roberts and Scott Wegenast, Ky Action; Sam Crawford, Jefferson Co. Farm Bureau; Joe Ewalt, Ky League of Cities; Alicia J. Sells, Ky School Boards; Paul Blanchard, EKU; Donna G. Brown, D. Brown & Associates; and Sarah Nicholson, Ky Hospital Association.


LRC Staff:  Terry K. Jones, Pam Thomas, Lou Pierce and Kathy King.



Chairman Moberly thanked Dr. Ramsey, the University of Louisville staff, Mayor Abramson and local city officials for the hospitality extended to members of the committee. Chairman Moberly recognized Representative Clark for introductory remarks.


Representative Clark said the city of Louisville is proud to serve as host to members of the legislative budget committee. He said Louisville is the 16th largest city in the U.S. and its city/county merger has allowed the Louisville community to move forward.


Mayor Abramson said the legislature and the community of Louisville have formed a partnership that has resulted in the creation of a successful city/county government merger, a downtown international convention center expansion, and development of the waterfront. This partnership with the legislature was formed in 1987 with expansion of the airport. In 1987, the airport was generating $10 million in state taxes when the city of Louisville put up $50 million for the airport expansion. This past year, the airport generated over $148 million in state taxes. Mayor Abramson said about 300 to 350 homes in the airport district still need to be relocated under the original plan. He said an investment made in the Louisville community ends up having a tremendous ripple effect throughout Kentucky in jobs, revenue, and in quality of life.


Dr. Ramsey said the location of the meeting at Papa John's Cardinal Stadium may be unusual because it is an athletic facility, but meeting at the stadium is appropriate because it represents some of the economic changes that are occurring in Kentucky. Eight to ten years ago, the stadium site was a maintenance yard for the Louisville and Nashville railroad. That railroad no longer exists, and a number of Louisville's other large employers have downsized, or they no longer exist. These changes have had an impact on the region's economy and the state's economy leading to a "new" economy. Dr. Ramsey said the University of Louisville accepts the responsibility of being a driver of economic opportunity to help in the transition to this "new" economy. In the early 1970s, the University of Louisville was a private municipal university with about 4,000 students. Today, there are 21,000 students, and this fall's freshman class is the best freshman class in the history of the University of Louisville in terms of ACT scores and grade point averages. Dr. Ramsey said the University of Louisville is focused on providing more educational opportunities to its students, to the people of Kentucky, and to become a preeminent metropolitan research institution through the "Bucks for Brains" program. He said the University just recently became the recipient of an $11.1 million grant, the largest federal grant in the university's history, on behalf of Dr. Don Miller and his cancer research program.


Representative Clark said Kentucky's universities are centers for today's economic development and the "Bucks for Brains' program that the legislature funded is truly an important and valuable program to the region and for Kentucky.


Representative Wayne said he is hopeful that the committee will be responsive to Mayor Abramson and Louisville's leadership in a request for $20 million that is needed to buy out the rest of the homes that are located in the airport district.


Representative Adkins said he has toured the cancer research center at the University of Louisville and the research that is taking place there is quite impressive and encouraging. The federal grant that Dr. Miller has received will enable him to further research to find a cure for cancer and a better way to treat cancer patients. Representative Adkins said most everyone has experienced the effects of this terrible disease. He said the Bucks for Brains program is an amazing program that is making great progress in cancer research and funding for the program must be continued.


Chairman Moberly asked for a motion to approve the minutes of the meeting held on August 31, 2003. Representative Siler moved for approval of the minutes. The motion was seconded by Representative Brinkman and adopted by voice vote.


Secretary Carol Palmore presented an update on state employees' health insurance. She said a survey was done comparing Kentucky's health insurance coverage with health insurance coverage for large employers throughout the United States (identified as employers with 500 or more employees), and also with other states. The survey received responses from 32 other states and 1,402 large employers. In almost all Kentucky counties, the Commonwealth pays for a PPO, single Option-A plan, or the lowest priced option in the county where the employee lives, or works. Secretary Palmore said Kentucky is in line with other states and large employers until the comparison with employee contributions and family contributions. For example, Kentucky's co-pay for physician office visits for 2003 is $10.00. For large employers, in 2002, their co-pay averaged $15.00 in 2002, and for other states that responded, the average was $13.00 per visit in 2002. For large employers in the United States, employees pay $57.00 on average per month toward the cost of their single insurance coverage. For the states that responded to the survey, employees pay approximately $48.00 per month toward the cost of their single coverage. In Kentucky, if employees choose the lowest cost Option-A PPO, there is no cost to the employee and the state picks up the full cost. For family coverage, employees of large employers pay approximately $202 per month toward family coverage. In other states, they pay approximately $227 per month for family coverage. In Kentucky, family coverage cost anywhere from $404 to $596 per month in 2003. Secretary Palmore said this issue has been presented to the Public Employee Health Insurance Board and the Employee Advisory Committee and their response is that Kentucky's state employees believe they have a contract that insures single health insurance coverage free of cost. However, many of those employees are not choosing the least expensive Option-A plan, which they can get free of charge. Instead, they have been choosing HMO or POS plans, which are high usage plans. Because of the increase in high usage plans, premiums for those plans have risen.


Representative Wilkey said the survey shows a high percentage of large employers and other states as being self-insured. He asked how being self-insured affects premium costs. Secretary Palmore said being self-insured gives an employer more flexibility to allocate premiums and costs among and between employees.


Representative Wilkey asked if a self-insured program lowers the costs over the long run. Secretary Palmore said she does not know that it lowers the costs, but it does give a greater degree of flexibility to change benefits, or change benefit modules that may hold down costs simply because there is more control.


Representative Damron said self-insured programs do have the flexibility and ability to change benefits that may result in a savings but it could also restrict the number of employee choices, or the availability of an insurance plan.


Representative Damron asked how much family plans would be reduced if every individual plan was charged $50.00 per month. Secretary Palmore said the Public Employee Health Insurance Board has calculated the costs of subsidizing 25 percent, 50 percent, 75 percent, and 100 percent of dependent coverage. She said she does not have the calculations with her today but can provide them. She said there is some savings.


Representative Damron asked how flexible spending impacts health insurance rates. Secretary Palmore said approximately 33,000 employees, or 22.5 percent of the 174,000-member state group waive their health insurance coverage for a flexible spending account. The state's policy is that if a person chooses not to take health insurance then that person can take the entire state contribution, which is $234, and place that into a pre-taxed flexible medical insurance account to spend throughout the year. Approximately $93 million is being flexed by individual employees into flexible spending accounts in 2003. In the survey with other states and large employers, Kentucky is way above the norm in terms of the amount of money that is allowed for flexible spending accounts. Most states and large employers do not offer an alternative spending account.


Representative Webb said her district includes one of seven counties in the region where health insurance costs are much higher than other counties throughout the state. She said that it is important for the committee to know all the cost figures relating to contributions toward single plans and flexible spending. Secretary Palmore said she would provide these cost figures.


Chairman Moberly and Representative Cherry asked why family coverage for Kentucky's state employees is so much higher than family coverage for other states and large employers. Secretary Palmore said other states and large employers take a different approach to providing health insurance for their employees. Their employees must pay something towards their single health insurance coverage, which on the average is $48 for other states and $57 a month for other employers. This money is then used to subsidize family coverage to lower the costs. Kentucky provides its state employees insurance free of charge.


Representative Cherry asked if most state employees have family coverage. Secretary Palmore said the majority of state employees have single coverage.


Representative Cherry said he has a flexible spending account but never uses the full amount and suspects that many other flex account users do not use the full $234 either. If the employees' flex account is stopped, the $93 million paid by the Commonwealth for health insurance expenditures does not represent a true savings. Secretary Palmore said it is true that there would not be $93 million savings if flex accounts are stopped because many of the employees who are getting health insurance through their spouses would choose to come back in the state plan if they cannot have their flex money. She said the purpose of showing the $93 million figure is to point out how much Kentucky differs from other states and large employers. Kentucky spends $234 a month for approximately 33,000 active employees waiving coverage. In other states, only four out of 36 respondents provide an alternative to health insurance waivers. Of the large employers surveyed, 25 percent offer employees an alternative benefit to put into flexible spending if those employees choose to have that rather than health insurance coverage.


Representative Clark asked what the Finance Cabinet does with the funds in the flexible spending account that are not spent at the year's end. Secretary Palmore said the funds stay in an account. However, for the last two years, the account has been swept in order to help with other shortcomings in the General Fund.


Representative Clark asked how much of the flexible spending account is actually spent. Secretary Palmore said that she does not have the exact amount with her, but it is about 55 percent.


Representative Vincent said state employees in some of the counties in the region he represents are paying $654 a month for family plan coverage while state employees in a neighboring county are paying $186 less for the exact same plan. He said the situation continues getting worse and it has become difficult to find insurers that will bid the area. Secretary Palmore said insurers are reluctant to bid the northeastern region because it would result in higher costs that jeopardize their ability to serve lower-cost areas. She said there were two emergency solicitations in the northeastern region resulting in one carrier charging different premiums in different parts of the state.


Senator Seum asked if the 33,000 active employees with flex spending have a spouse supplying insurance elsewhere. Secretary Palmore said it is believed that most of the employees would be getting insurance through their spouses.


Senator Seum asked how Kentucky compares on deductibles. Secretary Palmore said Kentucky's annual deductible is in line with other states and large employers. For 2003, it is $250 and the annual out-of-pocket maximum is $1,250.


Senator Seum asked about a self-insured plan. Secretary Palmore said it is her opinion that the whole purpose of insurance is to spread the risk, and in order to spread the risk, all of the risk needs to be put into one basket. She said when Kentucky Kare was in existence it was considered to be a cadillac plan, but it cost more than other plans. Employees who did not have a lot of health care needs began migrating to less expensive managed care plans because they did not want to pay out-of-pocket expenses. As a result, Kentucky Kare was left with the expensive insureds which caused them to have to keep raising their premiums causing even more people to drop out of Kentucky Kare.


Senator Westwood said a high risk plan may result in more competition. He asked how much it would cost the state to have a plan where all the high risk people are placed in one pool. Secretary Palmore said she does not have dollar figures but she does have percentages which shows the use of health care dollars by different populations. She said four percent of the entire employee group account for 43 percent of the costs.


Senator Stivers said if only four percent account for 43 percent of the health care costs, then what is the total amount paid for health insurance. Secretary Palmore said that based on the July 1, 2003 enrollment, the total dollar amount that the state pays toward health insurance for 2003 is approximately $573 million. If the amount that employees pay over the state amount is added in, the total amount for health insurance comes to $685 million.


Senator Stivers said the total amount of claims was $579 million in 2002, and 43 percent of that amount was taken up by four percent of the insured population, which comes to about $240 million. Secretary Palmore said the $579 million is what the insurance plans paid exclusive of any co-pays, or deductibles. Senator Stivers asked how much of the $579 million amount was paid in premiums by four percent of the population. Secretary Palmore said those insureds would pay the same premium as anyone else who has the same level of insurance policy.


Representative Damron said the purpose of regional rating was to produce a composite blend of rates across the state so there would not be high rates for some regions and low rates for others. He said providers in the northeastern region require a lot more reimbursement than other areas of the state where there is more competition between providers. Representative Damron asked if the cabinet did regional bidding. Secretary Palmore responded that the cabinet did do regional bidding but decided against it for 2003 because of a concern that regional rating would result in an upheaval in other areas of the state. Representative Damron said regional rating is necessary to get competition from carriers to bid those regions of the state where providers have restrictions on competition.


Representative Webb said she and other legislators representing the seven-county northeastern region have spent a great deal of time trying to solve the health insurance issue to no avail. Not only is the family contribution in this seven-county region higher, the state is also paying more than the $234 that it pays for everybody else for an individual plan. She asked Secretary Palmore to quote the price of a single option plan. Secretary Palmore said a CHA single coverage PPO is $436. Representative Webb said the difference in cost for her region than other regions is unconscionable. She said there must be some kind of back-up plan for regions where carriers will not bid because the current system is failing the state employees in her district. Secretary Palmore said carriers have not bid the seven-county northeastern region for the last two years. She suggested doing a cost comparison of the family plan in areas that have a Humana PPO plan and do an emergency appropriation to make up the difference in costs so that everyone is paying the same amount for family coverage.


Secretary Palmore explained health care enrollment by tier. She said approximately 68.6 percent of all members have a single policy; seven percent have couple; 13.5 percent have parent-plus; and 10.8 percent are enrolled in family coverage. There has been a steady decline in HMO enrollment and dependant coverage since 1999, but PPO enrollment has been increasing steadily. Secretary Palmore noted that this is important because Kentucky pays the full cost of PPO Option-A plans and the increase of enrollees will impact future rates beginning in 2005. Secretary Palmore went on to explain enrollment by carrier, enrollment by group, and health care costs by age groups. She said the age issue is important because the number of retirees in the Kentucky Employees Retirement System and the Kentucky Teachers' Retirement System grew by 12 percent from 2001 to 2003, and total expenses for health insurance per year including co-pays and deductibles that employees spend becomes more expensive as the population ages.


Senator Stivers asked for a breakdown of retirees from counties, cities, state police, and schools and universities. Secretary Palmore said she would provide that information.


Secretary Palmore said the highest utilizers of health care insurance have a POS Option-A plan, and they are using about $334 a month. The next highest is the HMO-A plan, which is $265.94 a month. She said it is difficult to figure averages on monthly charges because there are always high users and low users. Prescription drug utilization grew from 14.8 prescriptions per month per person in 2000, to 17 per month per person in 2002. The growth, however, was in the generic brand area rather than single-source, or multi-source brands. Secretary Palmore said 51 percent of the state employees health insurance group account for only seven percent of the insurance claims while four percent of the group account for 43 percent of the costs. The average cost per claim in the four percent group amounts to $25,900.


Senator Kelly asked if the state insurance group includes high risk people who came in because of the HB 250 consolidation. Secretary Palmore said, "No."


Chairman Moberly asked about an LRC study done to determine the impact that local employees and university retirees have on the state health insurance group. Secretary Palmore said the study was called the "Segal Report" and it was an evaluation of the number of local employee and university retirees and their costs. The cost was less than $5.00 per employee per month and the annual cost was about $14 million. Chairman Moberly said the study would be helpful to members of this committee.


Senator Kelly asked if there are buy-ins from other groups in the state health insurance group. Secretary Palmore said individuals cannot buy-in but the employees of employers who participate in a state-administered retirement system do become part of the state health insurance group when they retire. Senator Kelly asked if that includes employees of local governments and universities. Secretary Palmore said, "Yes." Representative Damron said there are young, active employees from cities, counties and universities that will be coming into the state system when they retire and there are estimates that the trend is going to continue to escalate. Secretary Palmore said the number of retirees will probably escalate through about 2014 or 2015, which is the last year of retirement for the baby boomer generation.


Senator Seum asked where the high-risk group are insured. Secretary Palmore said the high-risk group is in a separate pool that is administered through the Department of Insurance.


Representative Clark asked about health insurance benefits and retirement systems of the universities. Secretary Palmore said the University of Louisville and UK are self-insured and they also have a separate retirement system.


Secretary Palmore said health insurance costs are rising dramatically in Kentucky and across the nation. The average employer cost per employee per month across the entire state health insurance group in FY 2003 was $264.26. The cost in FY 2004 for the same benefit package will be approximately $280.03, an increase of 5.97 percent. A 16.18 percent increase is projected for FY 2005, and a further increase of 19.3 percent is projected for FY 2006. Again, the reason for the high increase is that employees are moving from HMOs and POSs where the employee was bearing the higher costs to the state-paid PPO plan where the state will have to pay for the utilization.


Representative DeWeese asked if the projected increases in health care insurance include retiring baby boomers. Secretary Palmore said the projections do include the number of new retirees coming into the system.


Representative Damron asked what happened to unspent flex spending accounts for teachers and school personnel. Secretary Palmore said school districts were allowed to keep what was left in their flex accounts during the year the state operated under the Governor's spending plan, but the accounts were swept after that because of budget constraints.


Chairman Moberly said it is important for the committee to be able to look at all options relating to health insurance benefits. He said it is going to be difficult to improve education, recruit teachers, and improve teacher salaries when their benefits are offset by the cost of their family plans. He said rising health care costs is a factor across state government and it will be a factor in the budget with a looming 35 percent increase that the next Governor and the legislature will be facing in the next biennium.


Secretary Palmore said after working with the health insurance program for a number of years, she would recommend that the entire state employees health insurance group be put into one risk pool. She said it will cost more money initially, but one risk pool is the only way to make sure all employees have the same benefits, the same costs, the same networks, and the same coverages. She said she hopes that the General Assembly and this committee will consider this recommendation.


With no further business, the meeting was adjourned at 2:50 p.m.