Arizona (The Healthcare Group of Arizona)

Background – The Healthcare Group of Arizona (HCG) was created in 1985 to provide affordable and accessible health care coverage to sole proprietors, small businesses with 50 or fewer employees, and political subdivisions (e.g., a city, town, or county) of any size – making the program available to public school teachers, firefighters, and so on. The program was initially funded by a grant from the Robert Wood Johnson Foundation. In 1988, small employers in four counties were allowed to participate and the program was launched Statewide in 1993.

Full-time employees and dependents at qualifying firms are eligible to participate in the program. Employers with fewer than six employees must have 100 percent participation; otherwise, 80 percent of employees must enroll in a HCG plan. As of December 2006, there were 24,562 lives covered by HCG. Although few States or programs publish enrollment targets, HCG enrollment in December 2006 was below the July 2006 target of 27,698 and short of the January 2007 target of 43,381. HCG estimates that once enrollment reaches 100,000 the program could afford to provide individual coverage. HCG is a State-sponsored public-private partnership that is operated under the Arizona Health Care Cost Containment System (AHCCCS) but HCG is entirely separate from the State’s Medicaid and SCHIP (State Children’s Health Insurance Program). The State contracts with managed care organizations (MCOs) and a statewide preferred provider organization (PPO) for insurance plans. As of the 2005/2006 State budget, HCG is completely self-funded via premiums.

Program History – HCG was created by the Arizona State legislature in 1985 to provide affordable and accessible health care coverage to sole proprietors, small businesses with 50 or fewer employees, and political subdivisions. The State estimates that 96 percent of employers in the State are small businesses and that fewer than 30 percent offer health insurance to employees. HCG was initially operated under AHCCCS and began in November of 1986 with a $400,000 grant from the Robert Wood Johnson Foundation. In 1988, small employers in four counties were allowed to purchase health coverage for their employees from AHCCCS health plans through the HCG. In 1993, HCG availability to small businesses was expanded statewide. In the late nineties, three of the five managed care health plans participating in HCG withdrew from the program due to concerns over slow growth in program participation and the potential for significant financial losses from adverse selection. Since its inception, HCG had experienced difficulty growing enrollment beyond 20,000. Difficulties stemmed from a reluctance on the part of health plans to invest in marketing a product that competed with their Medicaid plans as well as fears on the part of plans that brokers were only enrolling high risk uninsurable individuals in HCG. The issue of enrolling high risk individuals led State lawmakers to pass a requirement that employers with more than 5 employees, wishing to participate in HCG, enroll at least 80 percent of their employees. The legislature also agreed to appropriate $8 million to protect the remaining health plans from substantial financial losses. In 2000, the legislature transferred administrative functions, including marketing/sales, rate setting, and enrollment and eligibility, to HCG administration.

HCG originally offered a single managed care benefit package, but the premium rate for the plan did not compare favorably with commercial premium rates in the small group market. HCG determined that the single plan design was not adequate to meet the unique demands of the small group market. To address this problem, HCG developed a new benefit design strategy in 2003 with multiple product offerings. There are currently three managed care benefit packages and four PPO packages; a fifth PPO package is being considered. HCG was implemented during a time of other health care reform in Arizona. In 1990, the State phased in behavioral health services for Medicaid recipients and in 1997 AHCCCS submitted a Federal amendment to cover adults and children up to 100 percent of the Federal poverty level (FPL). Arizona’s SCHIP, KidCare, was implemented in 1998. During the 2006/2007 legislative session, several measures were introduced to ease health insurance benefit requirements on small businesses and a tax credit was created for small businesses and employees.

Eligibility Requirements – Participation in HCG is limited to full-time (20+ hours per week) employees (and their families) of small businesses and sole proprietorships that have not offered insurance for at least six months. Participation is also open to political subdivisions (e.g., a city, town, or county) of any size. To participate, a small business must have 50 or fewer employees and the business cannot have had group health insurance for the past 180 days, or six months (excluding individual coverage). Additionally, the business must be an active business in Arizona for at least 60 days. Employers with one to five eligible employees are required to enroll 100 percent of their employees in HCG or provide a valid waiver from individuals who have other health care coverage. Employers with 6-50 eligible employees are required to enroll 80 percent of these employees or provide valid waivers indicating that the employees have insurance through other means. For political subdivisions, there are no employee limits or eligibility requirements. More than 90 percent of HCG’s covered lives work for businesses with three or fewer employees.

Program Funding – As of the 2005/2006 budget, the HCG is totally self-funded from premiums. For fiscal year 2005, 6 percent of all premium revenues were allocated to fund HCG’s administrative operations. The percent of the premiums required to fund HCG operations is determined by expected membership growth and the mix of health benefits members are expected to choose. The premiums are actuarially set and MCOs are paid monthly capitation. Premiums vary depending on the HCG benefit package purchased and the plan selected. Contracted MCOs are at risk for the medical losses from their enrolled members and they must maintain adequate financial equity to cover short term losses and the State has risk only for the PPO product which is managed by HCG directly. HCG retains 5 percent of all premiums (PPO and MCO) to fund a financial stability reserve, which is used to protect plans from substantial loss. Premiums paid for all plans are used to fund the reserve, so premiums paid into one plan may be used to subsidize another plan. The financial stability reserve is used to reconcile the health plans for medical losses above an aggregate medical loss ratio of 86 percent annually. HCG also uses a small portion of each premium paid to purchase a commercial reinsurance product to protect plans from patients whose claims exceed $125,000 per occurrence. Reinsurance Per Member Per Month (PMPM) is allocated from each premium to pay the commercial reinsurance carrier.

Prior to the 2005/2006 budget year, the State subsidized the program with approximately $8 million per year in State funds (beginning in 1999). The subsidy has since been discontinued and the program is now self-funded from premiums. Simultaneous to the elimination of the subsidy, the State also permitted HCG additional flexibility with regard to benefit design and permitted the creation of PPO packages. The HCG estimates that plan premiums increased 15 to 30 percent (depending on the plan) during the 18 months following the elimination of the subsidy. Although enrollment did not decline, there was some shifting to lower cost HCG products. There are no guidelines for employer/employee premium responsibility. Employers or Employees may pay anywhere from 0 to 100 percent of the premium.

Program Design – HCG is a State-sponsored (but self-funded) public-private partnership. The HCG is operated under the Arizona Health Care Cost Containment System (AHCCCS) and is administered as totally separate from Arizona’s Title XIX and XXI programs. HCG contracts with private MCOs and a statewide PPO network for insurance plans marketed to small employers. Prior to 2004, only health plans contracted with AHCCCS to serve the Medicaid market were allowed to provide coverage through HCG. Although HCG continues to give preference to Medicaid-participating plans, any commercial plan may apply for participation. Currently, only Medicaid-participating MCOs provide the managed care coverage under HCG and the PPO is the same plan that is available to State employees. Dental and vision coverage are provided by private firms as will be behavioral health services. Although HCG imposes no limit on the number of participating plans, participation is naturally limited by the need to ensure sufficient membership in each plan. HCG handles the marketing of the plans. Until 2004, only health plans that contracted with AHCCCS to serve the Medicaid market were allowed to provide coverage to small businesses through HCG. Legislative changes implemented in 2004 opened the program to commercial insurers.

Delivery of Services – HCG contracts with three managed care network contractors and a third party administrator contracted with the Arizona Medical Care Foundation for the PPO network. The managed care plans are offered by Care1st Health Plan, University Physicians Health Plan, and Mercy Healthcare Group. Avidity HCS is the third party administrator that contracts with the Arizona Medical Care Foundation for the HCG PPO plan. The MCOs are Medicaid-participating plans and have extensive provider networks. A PPO is also available and HCG makes use of preferred provided networks. Provider networks include hospitals, primary care providers, specialists, and ancillary providers. Participating plans typically bring their existing network of contracted providers and then add providers as needed to support their HCG product. Safety net providers, such as community health centers and Federally qualified health centers (FQHCs), are included in the HCG provider networks. A dental HMO (health maintenance organization) benefit is offered through Employer Dental Services and a vision plan is offered through Avesis Vision. Employers select which plans to offer their employees and services are provided via an employee-selected plan.

Payment and Reimbursement – HCG has two senior actuarial staff that provide analysis and recommendations on capitation to be paid to MCO contractors. They also analyze and make recommendations on healthcare benefit plan premiums. These staff members are responsible for analyzing medical cost encounter data and projecting trends in utilization and cost. The plan rate is community-rated (premiums are based on age, gender, and county). The HCG actuaries use both medical loss trend factors and size of the group to determine premiums. As such, a group with only one subscriber would have one set of community premiums and groups of two or more subscribers would have another set of premiums. HCG has established specific geographic regions of the State to base its community rated premiums and premiums are analyzed based on medical loss experience within a given geographic area.

In both the managed care and PPO options, members are responsible for co-pays and co-insurance; the amounts vary by product and benefit plan. Managed care providers are typically paid Medicaid rates (which range from 95 to 105 percent of Medicare). The PPO providers are reimbursed according to a negotiated fee schedule. The MCOs and PPO directly negotiate payment rates for FQHCs and the program does not require MCOs or the PPO to pay cost-based rates.

Plan Benefits – HCG provides a cafeteria plan of benefit choices and options to the small business employer. An employer and employee can choose from a comprehensive, medium, or basic benefit plan. There are several deductible options that employees may choose based on price, deductible, and benefit coverage. To make premiums affordable to employers and employees, HCG has tried to develop a premium package for every employee income level and employer health care budget. There are three benefit plans offered under the managed care option and four benefit plans offered under the PPO option. A fifth PPO option, Medallion Copper, is currently being considered. Medallion Copper would be offered as a very basic and limited insurance product and would not be available to all purchasers, owing to concern that it may crowd out more appropriate and comprehensive insurance products. HCG has the authority to determine which packages will be offered to potential program participants. If, for example, Healthstyles Active is determined to be an inappropriate fit for a given employer, then HGCA will not make that package available to the employer. Approximately 90 percent of HGCA’s covered lives are enrolled in one of the managed care packages.

Managed Care Options:

Healthstyles Classic is the richest managed care benefit package, intended for employees with existing diseases or chronic conditions and employees wanting the added security of a wide range of benefits. Individual deductible options are available at the $500, $1,000, and $2,000 level and family deductibles are equal to twice the individual level.

Healthstyles Secure is intended for healthier employees with fewer health care needs beyond routine and preventive care. There are little or no co-pays for most physician office visits, diagnostic services, and prescriptions. Maternity services are excluded from the plan. Individual deductible options are available at the $500 and $1,000 level and family deductibles are equal to twice the individual level.

Healthstyles Active is a variation of the Healthstyles Secure plan, but with a lower premium and higher co-pays and co-insurance. Maternity services are excluded from the plan. Healthstyles Active is HCG’s low-cost managed care plan. Co-payments and co-insurance are higher. The plan is designed to offer physician office visits, a drug benefit, and emergency medical coverage. Ancillary services have higher co-pays. Individual deductible options are available at the $500 level and family deductibles are equal to twice the individual level.

Table 1: HCG Covered Services under Healthstyles HMO Plans

Table 2: HCG Healthstyles HMO Deductible (Exclusions) and Benefit Limits

Table 3: HCG Healthstyles Co-Payments and Co-Insurance

Medallion Platinum is similar to the Healthstyles Classic and is the richest, most comprehensive of the PPO plans intended for individuals with existing health conditions or diseases requiring on-going medical care, and those individuals wanting the added security of a wide range of benefits. Medallion Platinum also includes inpatient and outpatient behavioral health services, more generous benefit limits on outpatient and acute ancillary services, and a four-tier formulary that includes generic, preferred, non-preferred, and high-cost injectible drugs with varying co-payments and co-insurance. Deductible options are available at the $500, $1,000, and $2,000 level, but unlike Healthstyles, there is no $0 option. Family deductibles are equal to twice the individual level.

Medallion Platinum Plus is a high-deductible, consumer-driven benefit plan that meets Federal requirements for pairing with an optional Health Savings Account (HSA). HCG does not offer the HSA itself, but will make a referral available with the nation's largest HSA provider, HSA Bank. Platinum Plus also includes inpatient and outpatient behavioral health services, more generous benefit limits on outpatient and acute ancillary services, and a four-tier formulary that includes generic, preferred, non-preferred, and high-cost injectible drugs with varying co-payments and co-insurance. Deductible options are available at $1,250 and $2,250 levels and family deductibles are equal to twice the individual level.

Medallion Gold is similar to Healthstyles Secure and is a medium range benefit intended primarily for individuals with limited health needs and manageable conditions. Medallion Gold also includes outpatient mental health services, and deductible options are available at the $500, $1,000 and $2,000 level. Family deductibles are equal to twice the individual level.

Medallion Silver is similar to Healthstyles Active and is intended for individuals who are generally healthy but want low co-pay access for physician office visits, a good drug benefit, emergency medical coverage, and are willing to pay high co-insurance for ancillary services. Deductible options are available at the $500, $1,000, and $2,000 level and family deductibles are equal to twice the individual level.

Medallion Copper is a basic plan intended for calendar year 2007 that will offer limited benefits for a modest monthly premium. Medallion Copper is intended for younger, healthy individuals requiring mostly routine primary care services and basic protection for emergencies. Benefits will include emergency and urgent care subject to co-insurance and annual expenditure caps, and limited access to physician office visits, inpatient hospitalization, outpatient diagnostics, and ambulatory surgery. Deducible options will be limited, and co-payments and co-insurance will be higher than other Medallion plans.

Table 4: HCG Covered Services under Medallion PPO Plans

Table 5: HCG Medallion PPO Deductible (Exclusions) and Benefit Limits

Table 6: HCG Medallion PPO Co-Payments and Co-Insurance

Impact of SPG Program – Money from the State planning grant (SPG) funded two studies to help with HCG product design. First, staff conducted a literature review on the topic of pent-up demand to help HCG identify the utilization characteristics of a newly insured population, and thereby modify their actuarial assumptions and pricing models. Second, HCG conducted focus groups with a representative sample of participating employer groups to determine 1) if HCG products and benefits were meeting their needs, 2) if HCG products and benefits were priced appropriately (i.e., affordably), and 3) what features and services keep them with HCG (and consequently, what would cause them to leave HCG). Findings from the focus groups resulted in changes in the HCG pharmacy benefit, as well as the addition of vision and dental coverage.

Lessons from Administering the Program – According to HCG administrators, in order to compete in the small group market a State must offer attractive benefit options, have adequate funding for marketing and member education, and have the ability to manage care. Strong actuarial and management decision support, reporting, databases, and analytical tools are seen as being critical to pricing and benefit management strategies. A State must decide which business model (e.g. Managed Care HMO, PPO, limited provider network) would work best and a decision must be made as to whether the program will be market driven and compete with the private sector or a subsidized program. Establishing a reinsurance stop-loss level that protects health plans against adverse selection and treating participating health plans as valued partners were also considered to be important lessons.

HCG is self-administered and uses a combination of HCG sales staff, sales staff hired through UPH (a participating MCO), and licensed producers (brokers) to meet enrollment targets. Legislation enacted in 2004 prohibits HCG from paying brokers a commission – as they are by commercial health plans. HCG pays brokers a one-time enrollment fee that ranges from $90 to $140 per subscriber enrolled. Because it is a one-time fee rather than a commission (commissions are usually 4 percent to 6 percent of premium in the small business market), many brokers are hesitant to enroll larger groups with HCG. Brokers have questioned why they do not receive a re-enrollment fee as with the commercial market, but this is legislatively prohibited. The broker enrollment fee is commensurate with local commercial plans and HCG believes that the addition of the fee and a strategy of broker education and contract execution have yielded positive results.

Although separate from Arizona’s Medicaid program, HCG does make use of the State’s Medicaid Management Information System (MMIS) for financials, membership tracking and eligibility determination, and premium collection. HCG has leveraged AHCCCS management expertise in managed care to create the health benefits packages and to manage the financial and medical risk associated with the providing health care coverage to the small business market. In the future, if HCG expands beyond the small group market, they recognize that pricing competitiveness and benefit compatibility with the private small group market does not necessarily translate into competitiveness and compatibility with regard to larger groups.

State law requires that HCG reimburse Medicaid for all expenses related to HCG administration. Although Information Technology (IT) services are shared, no State or Medicaid funds are used to cover HCG program costs.

Finally, program administrators wish that there was a source for a better profile of the working uninsured, on a county-by-county basis. Overall, State-level statistics are very reliable and come from respected sources (such as the U.S. Census Bureau and The Kaiser Foundation). County-level data are less reliable. HCG’s recent statewide assessment of the working uninsured was an effort to collect more reliable county-specific data.

Evaluation – A comprehensive evaluation of the program was conducted in 2002 and the Arizona legislature mandates a biannual report. HCG also undertakes consumer satisfaction surveys to determine areas for improvement or benefit redesign. The PPO option was designed following discussions with employers and employees in an effort to create a more marketable product. Market research conducted by HCG found that benefit packages and premiums offered through the program are comparable and competitive for very small employers. With regard to larger groups, especially those with younger low income employees, HCG has determined that there is a need to revise its premium schedule to be more competitive with the commercial market.

To date, HCG remains solvent as a self-funded program. Owing to rising medical costs, however, HCG administrators estimate that it may not be possible to operate without a subsidy unless membership reaches 50,000 members by July 2008. If HCG cannot attract enough small businesses to grow membership, or to keep premiums affordable, and manage medical costs it may be necessary for the State to subsidize the HCG premiums in the future.