County Discovers $9.5 Million Health Plan Shortfall


Poor management leads to shortfall………………….

Cuyahoga County discovers $9.5 million health care plan shortfall

By Karen Farkas, 
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on September 23, 2016 at 9:22 AM, updated September 23, 2016 at 5:14 PM

CLEVELAND, Ohio – Cuyahoga County has frozen its regional health insurance program after discovering a $9.5 million budget shortfall — plus the depletion of a $12 million health care reserve fund.

The problems are in the county’s health insurance programs for employees as well as in a regional program, in which municipal governments and other public agencies take advantage of the county’s buying power to get low rates.

Employee claims in the county employees program, which is self-insured, have been higher than anticipated, County Executive Armond Budish told Wednesday. In the regional program, the county wasn’t charging its partners enough, meaning the 19 public agencies in the program had too-good-to-be-true rates.

“It’s painful,” Budish, who has been dealing with debt and financial misjudgmentssince he took office in January 2015, said Wednesday at a meeting with editors and reporters.

The county, which has a tight $374 million annual general fund budget, plans to cover the shortfall with rainy day funds — tax dollars the county has saved. The county is also overhauling the program to keep it solvent in the future.

The insurance issues pre-date Budish’s tenure as county executive. When Budish’s staff noticed the anomalies in the spring of 2015, Budish immediately asked for an independent audit to determine the depth and causes of the shortfalls.

The first phase of the audit was released Friday.

See the executive summary below or click here if on a mobile device. 

The full report can be read here or go to

Here’s what you should know.

How is the health care program supposed to operate?

The county is self-insured. The county’s 6,000 employees can choose from three health care plans, with MetroHealth (which is free to employees), Medical Mutual of Ohio and UnitedHealthcare.

The county pays an administrator to manage the plan and negotiate benefits and premiums. It pays for doctors visits and other services itself, offset by premiums paid by employees.

In 2010, the final year of a three-commissioner government, the county invited municipalities to join its health insurance plans.

That was a year after commissioners signed a six-figure contract with consulting firm Employee Benefits International. The county — under its first county executive and County Council — renewed the contract without soliciting competing bids in 2012.

With the regional plan, the county hoped to save money for cash-strapped cities, while costing county taxpayers nothing. Partners were to have between 10 and 250 employees.

The county human resources department would bill the majority of the partners a monthly premium per employee, based on rates recommended by EBI.

What happened?

EBI had an incentive to recruit partners, for it charged each municipality between $8 and $28 per employee, separate from any fee paid to the county, the audit said.

And the program — which grew to 2,400 partner employees — got bigger than original guidelines.

The premiums paid by the partners were lower than market rates, too low to cover the cost of their healthcare claims. The county, which was not supposed to have any financial responsibility for the program, had to cover the losses.

The problem wasn’t immediately apparent, though, because of a lag period. When new partners joined, they started paying into the system for months before claims were paid out, making the program appear to be flush.

As bills came due and more partners joined the program, the losses compounded.

The problem with the county employee account was simpler. Claims were higher than expected. Bills for treating chronic illnesses depleted available cash.

What did the county and auditors discover?

Fiscal Officer Dennis Kennedy said when he started in spring 2015 he found financial statements unclear. It was hard to determine where money was deposited and where payments were coming from, he said. Money for the county employee health care fund was mixed up with the regional fund.

“He saw red flags with health care plans,” Budish said.

The audit found more than two dozen problems, including:

  • Partner administrative fees were put in the pool to pay claims instead of being deposited into the general fund. That way, the county was never reimbursed for managing the program.
  • The county was permitted by contract to charge an administrative fee of 3 to 6 percent of insurance rates. Instead, the partners were charged either $8 or $15 per employee. Not charging the prescribed fee cost the county between $938,000 and $1.68 million, over the life of the program.
  • County contracts with participants in the regional plan prohibit charging retroactively to cover shortfalls, leaving the county to eat the losses.
  • Former employees and others who no longer qualified for coverage received $2.5 million in benefits.

What does EBI say?

“There are many things we would dispute,” said Jim Dustin, president of EBI, who has reviewed the audit results. “We will address the results very quickly, point by point. We believe we performed very efficiently and well.”

Dustin said his company has an excellent reputation in the industry and feels issues that were mentioned in the audit had been addressed “but had been ignored or not included in the information.”

He said there were many inaccuracies in the report. The company, which had no control over claims, was chosen by the county after going through a request for proposal process. Budish signed an extension of the contract in May 2015, he said.

The county was aware of the relationship between EBI and Wellness IQ, which was cited in the report as a potential conflict of interest.

“We are talking with our legal counsel,” he said. “We feel the inaccuracies pose potential issues for our customers. We have been doing this for a long time very successfully.”

What has the county done?

The county terminated contracts with EBI and Wellness IQ. Some county employees who oversaw the program have left.

The county froze the regional health care program, stopping any new partners from signing on.

The county recuperated the $2.5 million in benefits it shouldn’t have paid.

Ernst & Young was hired to establish new policies and procedures.

Oswald Cos. was hired to replace EBI to manage the health care plan. That company will receive no fees from regional partners.

What happens next?

The $9.5 million deficit will be covered by reserves and any leftover money in this year’s budget, Budish said. The reserve fund will be replenished over the next two to three years.

Premiums for partners will likely rise for 2016, but Budish said the rates will still be well below anything smaller governments could negotiate on their own.

The county will:

  • seek more partners to join the program, paying high enough rates to cover costs.
  • introduce a wellness plan, to make employees healthier and lead to fewer claims.

The county has referred the audit and other information to the law department.

“It is possible there could be litigation but we are not anticipating it,” Budish said. “It is very hard to figure out where the mistakes were. Our internal work wasn’t so great.”