Court Likely to Decide Dispute Over State Employee Health Insurance

July 28, 2011

In April 2011, State of Illinois officials announced plans to award four new contracts for state employee health insurance to replace existing contracts that were scheduled to expire on June 30, 2011. The Illinois Department of Healthcare and Family Services (HFS) expected savings of approximately $102 million in FY2012 and more than $1 billion over the 10-year term of the new contracts.

However, nearly four months after the State’s announcement and a month after the existing contracts were due to expire, the new contracts have yet to be awarded. Instead, the State’s attempt to switch vendors has turned into a dispute over the General Assembly’s role in awarding group insurance contracts.

The dispute began when HFS officials informed the legislature’s Commission on Government Forecasting and Accountability (COGFA) about the selection of new vendors at a meeting on April 11, 2011. COGFA is a legislative support services agency that, among other duties, is charged with overseeing the administration of the state group insurance program. Under the State Employees Group Insurance Act of 1971, HFS must provide COGFA with an annual update each April on employee benefit programs to be offered for the next fiscal year, including information on any proposed contract awards. In addition, HFS is required to obtain the “advice and consent” of COGFA in order to offer health benefits that are self-insured by the State.

Under HFS’ proposed changes, two longtime state vendors—Health Alliance and Humana—were slated to lose their managed care contracts. The State Employees’ Group Health Insurance Program, which covers an estimated 351,566 participants, offers both managed care plans and traditional insurance. In a traditional insurance plan, patients are free to see the doctor of their choice; managed care plans generally restrict the choice of doctors.

Many lawmakers at the COGFA meeting criticized the proposed change in insurance vendors. (Links to audio recordings of COGFA meetings are available on its website.) Questions were raised about the accuracy of HFS’ savings estimates, the possibility that employees might be forced to switch doctors and whether COGFA had the authority to reject specific health insurance contracts.

At COGFA’s request, the Illinois Attorney General’s Office on May 18, 2011 issued an opinion on the commission’s authority with respect to individual insurance contracts. According to the opinion, COGFA has authority over HFS’ decision to use self-insurance but not over specific contracts.

Both Health Alliance and Humana filed protests about the bidding process with the State’s Chief Procurement Officer. On May 24, 2011, the Chief Procurement Officer ruled that the bidding process was in line with the Illinois Procurement Code.

At a COGFA meeting on May 25, 2011, commission members voted 8 to 3 to prohibit the State from continuing to use self-insurance. COGFA’s action affected two of the four contracts that HFS planned to award. An exception was made for the existing traditional insurance plan, the Quality Care Health Plan (QCHP), which is self-insured by the State. The contract with QCHP’s administrator will be allowed to expire at the end of FY2012.

Illinois has used self-insured managed care since the 1980s, according to HFS Director Julie Hamos. In a self-insured health plan, the employer assumes direct financial responsibility for costs of employees’ medical claims and typically contracts with a third-party administrator or insurer to provide administrative services. In a fully-insured health plan, the employer contracts with an insurance company or healthcare organization that assumes responsibility for employees’ health claims.

A 2010 survey of employers, including state and local governments, by the Kaiser Family Foundation found that 93% of employers with 5,000 or more workers had self-funded health plans. Self-insurance is less risky for large employers because they can spread the risk of costly claims over more workers. The Government Finance Officers Association stated in 2004 that self-insurance might be more efficient for some governments, although factors such as number of employees need to be taken into consideration.

On June 6, 2011, Health Alliance and Humana filed lawsuits in Sangamon County Circuit Court to overturn HFS’ proposed contract awards. On June 10, 2011, the court ordered HFS to temporarily halt any action on the two proposed self-insured contracts because of COGFA’s action. The State has appealed the decision.

Following the court’s ruling, COGFA agreed at a meeting on June 14, 2011 to allow HFS to negotiate 90-day emergency contracts with all existing and proposed managed care vendors. Director Hamos said at the June 14 meeting that vendors would not be allowed to require doctors to work exclusively with one vendor. HFS was unable to negotiate a new 90-day contract with Humana.

The potential change in insurance vendors affected roughly 200,000 plan participants. Because of the uncertainties regarding the COGFA and court actions, the time period for employees and retirees to select health plans for the year was extended until June 20, 2011; the period was initially scheduled to end on May 31.

Meanwhile, the General Assembly passed a bill (Senate Bill 178) authorizing COGFA to reject proposed health insurance contracts. Under the bill, a contract rejected by COGFA could not be executed without a joint resolution of the General Assembly. The bill was sent to Governor Pat Quinn on June 2, 2011 but has not been signed.

The total cost of the State’s employee and retiree health insurance—including the portion paid by employees—is estimated at roughly $2.4 billion in FY2012, up 83.3% from $1.3 billion in FY2003.