OLA#: 016-03P

LEGISLATIVE ANALYST REPORT

TO: Honorable Members of the Board of Supervisors

FROM: Office of the Legislative Analyst

DATE: June 30, 2003

SUBJECT:Employee Suggestion #246: Cash Alternative to Benefits

EMPLOYEE SUGGESTION

Employee recommends that San Francisco implement a cash compensation option for City employees who opt out of City health care. Employee believes that if the City pays less than the average cost per person for health coverage, there is potential for savings.

EXECUTIVE SUMMARY

A cash in-lieu of benefits program could yield potential savings for San Francisco. However, more information must be gathered on actual costs and benefits of current cash in-lieu systems in other jurisdictions. In addition, the City should try to determine employee interest in such a program in order to better project costs and savings. If the City wishes to introduce a cash in-lieu program, participating employees must be required to prove that they are covered through a partner's plan or another provider.

ANALYSIS & RECOMMENDATIONS

Employees of the State of California are given the opportunity to either accept dental and health care coverage or reject it and receive a monthly cash compensation. Employees may only opt out if they can prove that they have alternative coverage. Individuals can receive between $128 and $155 per month depending on their position and what plans they are opting out of (health, dental, or both). The State pays a benefit allowance of between $266 per month for individuals and $679 per month for individuals with two or more dependants. The State pays between $111 and $524 less for every employee that would receive benefits, but opts for the cash alternative.

However, State Benefits Manager, William Page, acknowledges that the cash out program is not necessarily a cost-saver for California. He estimates that the majority of employees who opt to cash out their benefits are married to other State employees and would normally be under one plan. CalPERS, the State health insurance provider, will not cover an individual who is already a dependant under another CalPERS plan. Therefore, a number of recipients of in-lieu cash would not cost the state any additional money if the program did not exist.¹ However, the State's concentration of employees that are married to other State employees is likely higher than City employees in San Francisco. Most State employees are located in Sacramento, which is highly concentrated with State workers, whereas San Francisco has a greater diversity of occupation types.

Claire Zvanski, trustee and Commissioner of San Francisco's Health Service Board, believes that providing incentive for employees to opt out of health coverage will lead to "adverse selection". This is the effect of younger, healthier employees opting out of coverage, while older, more illness-prone employees maintain City coverage.

The economic effect of adverse selection could be especially harmful in San Francisco due to an aging employee population. The average age of employees covered by San Francisco's health services has risen from 45 to 47 years of age in just a few years. Health Service officials identify users between 57 and 62 years of age as the source of a majority of higher-cost claims. Adverse selection would raise the average age of covered employees closer to this range. The resulting smaller group with a concentrated "at-risk" membership could raise premiums further.

However, adverse selection could be limited if the City required all participants in a cash in-lieu program to provide proof of alternative coverage. This would limit participation to those who are covered under a spouse or partner's insurance plan. There would be little incentive for people to seek external plans as they would cost more than the value of the cash payment.

The cities of San Jose, Oakland, and Los Angeles also offer employees cash in-lieu of benefits options. These three cities offer between $100 and $150 per month and between 5% and 10% of eligible employees participate in the cash alternative. Though none of the cities track savings, benefit managers believe that these programs save money. San Francisco may wish to do a more in depth analysis of existing cash option programs in other cities in order to determine the actual costs and benefits.

It is possible to project savings of up to $5 million dollars per year, as shown in the chart below, from the introduction of a cash in-lieu program in San Francisco. However, a number of assumptions were made regarding participation and cost in order to arrive at this number:

· 1,484 employees currently enrolled in City health coverage will participate in a cash in-lieu program. This represents 5% of enrolled employees, which is the lowest participation rate among the three other cities offering this program.

· All participating employees would otherwise be covered at a cost to the City of $277.46 per bi-weekly pay period, the current average cost of medical coverage.

· The City will pay out $58.50 in cash in-lieu of benefits per employee each pay period. This is the average cash payment of the other three cities.

· All of the City's 2,200 employees that are not currently enrolled in health coverage will participate and receive cash.

Savings with 5% of eligible benefits recipients opting for a cash in-lieu plan
Total current enrollment = 29,686
5% of current enrollment = 1,484
Average amount currently paid out for benefits (bi-weekly per individual)	$277.46
Amount paid per individual for cash in-lieu program*	-$58.50
Total saved per individual (amount saved from benefits less amount spent on cash option)	$218.96
Total saved bi-weekly (with 1,484 individual opting for cash in-lieu plan)	$325,000
Amount saved per year	$8,450,000
Total current uncovered eligible employees	2,200
Amount paid per individual for cash in-lieu program*	$58.50
Total bi-weekly cost	$128,700
Cost per year	$3,346,200
Total saved per year (saved-cost)	$5,103,800
*Based on average bi-weekly payment of Oakland, San Jose, and Los Angeles cash in-lieu programs

Though there is potential for savings with such a program, more information must be gathered on actual costs and benefits. This could be done by performing in-depth analyses of current cash in-lieu systems in other jurisdictions. This type of study could also reveal unpredicted costs and the long-term impact of such programs. In addition, the City should try to determine employee interest in such a program in order to better project costs and savings. If the city finds that only employees not currently enrolled in City coverage are interested, the program should not be pursued.

¹ This may not be typical to local government as the State has a larger number of employees.