[Vpaaetal] Insurance Merger with ERS

[vpaaetal@TAMU-Commerce.edu]

Employees Retirement System of Texas

Actuarial Study of the Costs and Actions Involved in the 
Merger of the Texas A&M University System Group Benefits Plans into the
State Employees Group Benefits Plans Administered by the Employees
Retirement System


This actuarial study is conducted at the request of the Employees
Retirement System of Texas (ERS) in response to a directive from the Texas
Legislature to examine the costs and actions necessary to merge the Texas
A&M University System (TAMUS) group benefit plans into the state employees
group benefits plans administered by ERS.  The former are referred to
collectively herein as the TAMUS program, while the latter are referred to
as the GBP.  

Background 

Article III of the General Appropriations Act, 2004-2005 Biennium
(FY04/05), Seventy-Eighth Legislature, Regular Session pertaining to the
appropriation for higher education group insurance included Rider No. 2
which states as follows:

2.	Actuarial Study. The Employees Retirement System is directed to conduct
an actuarial study to determine the costs and actions necessary to merge
employees currently insured under group benefit plans offered by the Texas
A&M University System into the state employee group benefit plans
administered by the Employees Retirement System. The Texas A&M University
System and the Employees Retirement System shall cooperate in assessing the
costs and actions needed to replace all Texas A&M University System
employee group benefit plans with the state employee group benefit plans
administered by the Employees Retirement System under Chapter 1551 of the
Insurance Code. This study shall be provided to the Legislative Budget
Board and the Governor by no later than September 1, 2004. The Texas A&M
University System and the Employees Retirement System shall evenly divide
the costs of this study using existing resources. The replacement of the
Texas A&M University System's benefit plans with the state employee group
benefit plans administered by the Employees Retirement System may not take
place unless authorized under certain conditions set by general law.

The rider requires a determination of the actuarial impact of the potential
merger on both TAMUS and the GBP.  In order to make this determination, we
have analyzed the actuarial experience as well as the risk composition of
the TAMUS membership in order to project the anticipated impact on GBP
cost.  This analysis provides the expected impact on GBP costs and
contribution rates as well as the information necessary for TAMUS to
evaluate the impact of the proposed merger on its insurance costs.  In
conducting the actuarial analysis, we have also identified and commented on
other, more general factors which we believe are also important to
consideration of this issue.

The study focuses primarily on the health coverage due to its dominance in
the TAMUS program and the GBP.  We have also analyzed the impact of the
merger on TAMUS and GBP optional coverages, but such analysis is less
extensive than that applicable to the health coverage.  In addition, we
have compared the appropriation for TAMUS with that applicable to higher
education institutions participating in the GBP in order to provide
perspective from which to consider the full impact on TAMUS of the merger
under consideration.


Comments Regarding the Differing Risk Characteristics of the Plans

Throughout this document references are made to the costs of the two
programs and comparisons are made between pre-merger and post-merger costs.
 It is extremely important to emphasize that both programs are equally
efficiently managed, financed and administered.  Both use the same health
care provider network administered by the same vendor.  The pharmacy
benefit managers of both programs operate in very similar manners.  Both
programs are easily large enough to have predictable experience that is
immune to sharp variations due to statistical anomalies.  In short neither
is employing any techniques that would change the underlying risk of the
other.  As noted below, in this case the whole is equal to the sum of the
parts.

As a result, and this cannot be overemphasized, the differences in cost
between the two programs pre-merger are entirely attributable to
differences in the risk composition of the two groups and benefit
differentials.  As discussed below, the merger would not change the risk
characteristics of the two populations; instead, it would change the manner
in which the costs are spread.  In any insured population, some members of
the population subsidize others, e.g., the healthy subsidize the unhealthy,
the young subsidize the old, those who do not have accidents subsidize
those who do, etc.  Of course the membership of these segments is
ever-changing and, in most cases, an individual does not know which group
he will fall into during a given period.   Basically, the decision that
TAMUS will be called upon to make in connection with the legislative
directive comes down to whether TAMUS and its members are better off
standing on their own or sharing risk with the current membership of the GBP.

Summary and Conclusions

The following summarizes the key findings of this analysis:

1.	A review of the methodology used to develop the state appropriation for
higher education group insurance indicates that the merger alone would not
result in an increase in the TAMUS appropriation.  In fact, application to
TAMUS of the same methodology as was applied in the development of the
appropriation for insurance for ERS higher education institutions would
have produced a lower general revenue (GR) appropriation for TAMUS for the
FY04/05 biennium.

2.	The actuarial analysis indicates, on average, that provision of the
GBP-level of health benefits by ERS for the TAMUS membership would be less
expensive than provision of those benefits for the GBP membership.  The
less expensive nature of the TAMUS membership is attributable to
demographic, geographic and health status characteristics of the TAMUS that
are more favorable than those of the GBP membership.  The less expensive
nature of TAMUS is not unexpected for a higher education institution.

3.	Merger of two separate insurance pools has no impact on the per capita
cost of benefits for the members of the respective pools since both are
equally efficiently managed.  The total benefit cost for the merged program
would be the same as the sum of the benefit cost for the two programs
before merger, assuming that both continue the same level of benefits.  The
merger, however, would result in a per capita cost for the merged program
that is different from that of either of the separate programs.  The per
capita cost for the merged program will be greater than that of the program
that was less expensive before the merger and less than that of the program
that was more expensive before the merger.  In this case, following the
proposed merger, the per capita cost to TAMUS would be greater and the per
capita cost of the GBP would be slightly less.

4.	The cost of the merger to TAMUS and its members (used herein to refer to
employees and retirees) would be even greater than that which would be
incurred through picking up a share of the higher cost associated with
current members of the GBP.  This additional cost would result from the
more generous benefits provided through HealthSelect, the plan in which
almost two-thirds of the TAMUS membership would be expected to enroll.  For
current A&M Care members, the additional cost to TAMUS institutions and
agencies resulting from their enrollment in HealthSelect would be expected
to about $12.1 million per year, while the additional cost to the members
would be about $3.9 million per year, based on FY05 costs.

5.	Because of significant differences in the manner in which the two
programs allocate cost among members with and without dependent coverage,
there would be significant shifts in equities among the members depending
upon whether or not they purchase dependent coverage.  For example, TAMUS
members who currently purchase A&M Care 350 member only coverage would
experience a reduction in their contribution of almost $34 per month (even
though they would have better benefits), while members purchasing member
and family coverage would experience an increase in their contribution of
over $69 per month, although they, too would have better benefits.  Within
the TAMUS membership there would be vast differences in the impact of the
merger.

6.	Because the GBP does not include multiple plan options, current A&M Care
1250 and A&M Care 65+ members purchasing dependent coverage would
experience large increases in monthly contributions, albeit in return for
substantially more generous benefits.

7.	TAMUS members purchasing optional coverages would experience significant
changes in cost.  Those with dental coverage would save money under the
GBP, while those with life and/or long term disability coverage would spend
more.  Of course, many combinations of changes in cost would occur
depending on the mix of optional coverage.  As a result, the acceptance of
the merger would vary greatly among the TAMUS members.

8.	Both programs would have many transitional issues to overcome as TAMUS
relinquishes control and ERS assumes control.  For ERS, there would be
substantial additional work with accompanying expense and many
complications as the staff seeks to communicate the GBP, a new and
different program, to some 28,500 new members and an equal additional
number of dependents.  For TAMUS, there would be major adjustments required
to become comfortable with an arrangement in which it could offer input,
but over which it has no authority.

Based on this analysis, under the proposed merger, TAMUS would experience
no financial benefit while losing the ability to independently design and
manage insurance benefits for its employees and retirees.  At the same
time, while the merger would seem to offer some minor cost distribution
advantages to GBP members, it would significantly increase the complexity
of ERS communication and administration, at least over the short term. 

The remainder of this document presents a detailed discussion of the
analysis as well as our observations.

Data Sources

As the consulting actuaries to ERS for insurance matters, we maintain an
extensive actuarial data base related to GBP benefit cost experience and
enrollment.  In addition, as ERS actuaries, we have access to all
information related to the operation and administration of the GBP such as
plan design, administrative arrangements, vendor contracts and internal
administrative expenses.  We have utilized all necessary GBP information in
this study.

TAMUS, with the assistance of various contractors associated with the TAMUS
program, has provided extensive enrollment and experience data as well as
information concerning plan benefits, rates and administrative arrangements.

Impact of a Potential Merger on the State Appropriation for the TAMUS Program

In our role as consulting actuary to ERS for insurance matters, we have
extensive background in the appropriation process for state agency and
higher education insurance provided through the GBP.  The observations and
conclusions presented herein in regard to the impact of a potential merger
on the state appropriation for the TAMUS program is based on our knowledge
of that process, not on discussions with the Legislative Budget Board or
other state officials.  For reasons stated below, we believe that a review
of the process used in developing the appropriation for FY04/05 provides a
reliable basis for our observations and conclusions.

Although the appropriations for state agency and higher education insurance
are developed independently of one another, the appropriations for all
higher education institutions are developed in a consistent manner, with
little variation among the methodologies applied in such development for
(a) the higher education institutions that participate in the GBP, (b)
TAMUS or (c) the University of Texas System (UTS).  Higher education and
state agency insurance appropriations are handled by different LBB analysts
and, at least in the House, proceed through different subcommittees.  While
there is communication among the various parties, there are differences in
the methodologies that are applied. While this leads to different results
for state agencies as compared to higher education institutions, it
produces very similar results for all higher education institutions.  In
fact, there is complete consistency in treatment among all ERS higher
education institutions.  This treatment differs only slightly from that
which is applied to TAMUS and UTS.

As a result, we believe that a merger is unlikely to increase the TAMUS
appropriation.  In fact, though the methodology is similar for ERS higher
education institutions, those institutions received about 1.5% less per
capita than both TAMUS and UT.  One might reasonably conclude from this
review that TAMUS might actually receive a smaller appropriation if it was
included among the ERS higher education institutions for appropriation
purposes.

Exhibit 1 presents a comparison of the determination of the actual FY04/05
GR funding for TAMUS with that which would have been determined under the
same methodology as was applied to ERS higher education institutions.
Overall, application of the ERS methodology to all TAMUS components would
have produced approximately $3.4 million less in GR funding for the biennium.

An important component of this differential is the statutory difference
between the two programs concerning the "Insurance Waiver".  Under the
statute governing the TAMUS program, a member may waive health coverage if
he/she certifies that he/she has other health coverage.  Such a member is
then entitled to 50% of the state contribution, an amount which is included
in determining the state appropriation.  For the current biennium, the
TAMUS appropriation includes approximately $1.5 million for those waiving
coverage.  Under the GBP, a member is not eligible for a state contribution
if he/she waives coverage.  We expect that the GBP provision would be
applied to TAMUS in the event of merger, thus reducing the appropriation,
at least initially.  Over time, TAMUS would receive an appropriation for
those members who decided that waiver was no longer in their best interests
and rejoined the plan.

The merger alone seems unlikely to affect the appropriation process.  It
seems that changes in the appropriation process for group insurance for all
higher education institutions  would be required in order for TAMUS to
receive additional funding, a proposition that seems unlikely under current
budgetary conditions.

Since it is unlikely that TAMUS would receive greater state funding if it
were to merge its program with the GBP, compelling expense reductions would
be necessary to make the merger attractive to TAMUS from a financial
perspective.

Impact on GBP Health Plan

In order to determine the impact of the merger on the GBP Health Plan we
have modeled the expected cost under the two GBP health plans, HealthSelect
and Scott and White Health Plan (SWHP) that would likely absorb 96% of the
TAMUS membership.  Current A&M Care members (comprising 63% of the total
membership) would be expected to enroll in HealthSelect, while current SWHP
members (comprising 33% of the total membership) would be expected to
remain in SWHP when merged into the GBP.  With the remaining 4% of the
membership spread among four HMOS, we did not attempt to model their
expected cost in GBP HMOs for which there is not an exact match between the
two programs.  We did perform, however, a cursory review of this small
group in comparison to their statistical counterparts in HealthSelect.

For the A&M Care and SWHP members, we modeled their expected cost in
HealthSelect and GBP SWHP, respectively for FY05.  Even though TAMUS would
not participate in the GBP until FY06 if it chooses to merge into the GBP,
we believe that analysis under hypothetical participation in FY05 provides
a reliable basis for developing conclusions, since rates applicable to FY05
and state funding available for FY05 are already known.

Current A&M Care members would be expected to generate a per capita cost
under HealthSelect  that is about 8% less than the per capita cost
attributable to current GBP members participating in HealthSelect.  This
analysis is based on an actuarial review of the A&M Care experience through
May, 2004, adjusted to account for the benefit differential between A&M
Care and HealthSelect and projected to FY05 using the same assumptions
currently in use for projecting HealthSelect cost for the remainder of FY04
and FY05. The analysis is facilitated since Blue Cross Blue Shield of Texas
(BCBS) is the administrator and network manager under both A&M Care and
HealthSelect and since the pharmacy reimbursement arrangements under both
plans are quite similar, even though the plans use different pharmacy
benefit managers (PBMs).  This consistency eliminates any need to adjust
the experience in an attempt to account for differences in provider
reimbursement and health care management.

Our analysis of A&M Care enrollment and claims experience indicates that
the lower expected per capita cost is attributable to:

"	Demographic and geographic characteristics that would be expected to
produce lower cost for A&M Care members, specifically, (a) a slightly
younger average age which correlates with lower health care utilization
rates and (b) a lower concentration of members in higher cost locations.
"	A smaller incidence of members with annual claims in excess of $100,000,
which may be attributable to statistical fluctuation.
"	Utilization of health care that is below that which would be expected
based on the more favorable demographic and geographic characteristics of
the membership discussed above. This is not unexpected given the different
socio-economic mix of employees between TAMUS and the GBP, a population of
which only about 28% is employed by higher education institutions.  The
observed cost differential is consistent with cost differentials observed
when GBP higher education employees first joined the GBP in FY92.  The
lower utilization is probably also due in part to the A&M Care plan design
which includes higher employee out-of-pocket expenses at the time of service. 

Impact on HealthSelect - As result, we expect the merger of the A&M Care
members into HealthSelect would reduce the overall per capita cost of
HealthSelect by approximately 0.6%.  This should not be interpreted to
indicate that the cost of coverage for current HealthSelect members will be
reduced; instead it simply indicates that their cost would be averaged over
a different and larger group, the new members of which are expected to be
less expensive to cover than those currently in the plan.  In other words,
the merger would result in higher per capita cost for TAMUS than would
otherwise be required to provide a HealthSelect level of benefits in a
separate plan and slightly lower per capita cost for the GBP than would be
required in the absence of the merger.  In any arrangement that includes an
averaging of costs, there will be winners and losers.  In this case, the
merger which would produce a small reduction in per capita cost (0.6%) for
the relatively larger GBP (245,000 members), but it would produce a higher
per capita cost (about 8% more) than would otherwise be required to provide
HealthSelect benefits for the relatively smaller A&M Care (18,000 members)
through a separate plan.

Impact on GBP SWHP - In our analysis of the impact of combining the SWHP
members from each program, we assumed that the FY05 rates for SWHP for each
program are indicative of the actual cost of such coverage; i.e., the rates
are adequate, but not excessive.  We then adjusted the TAMUS SWHP rates to
the levels that would be expected if the GBP SWHP benefits were in place.
We found that under current GBP benefits, TAMUS SWHP members would be
expected to cost an average of about 8.7% less than current GBP SWHP
members.  This differential is almost entirely explained by the different
demographic composition of the two groups of employees; i.e., the TAMUS
SWHP members are, on average, younger than the GBP SWHP members.

If the programs were merged in FY05, the SWHP rates for the merged plan
would be 3.9% less than the current GBP SWHP rates and 5.3% more than would
be required to provide GBP-level SWHP benefits to TAMUS SWHP members.  As
with the A&M Care members, merger would reduce per capita SWHP cost for the
GBP members and increase it for TAMUS members.

Although a detailed analysis was not conducted for the TAMUS plans with low
participation, a review of the relative enrollments and
demographic/geographic compositions of the TAMUS members in those plans
indicate that they would likely have little impact on the GBP plan,
although, they too are somewhat younger on average than the GBP members.

In conclusion, this analysis indicates that the GBP would benefit through
the merger of TAMUS into the program due to the generally lower per capita
cost that would be required to provide GBP-level benefits to the TAMUS
members.  This lower per capita cost results from the different
demographic, geographic and socio-economic characteristics of the TAMUS
members.  The benefit that would accrue to the GBP would result from the
advantage that would be gained by spreading the higher average cost of the
current GBP members over the expanded group which would include the lower
average cost TAMUS members.  This is a zero-sum situation in which any gain
to the GBP would be exactly offset by a loss to TAMUS.  Because the GBP is
much larger, the positive impact on the GBP would be smaller than the
negative impact on TAMUS.

Impact on TAMUS Heath Care Benefit Expenditures

The foregoing analysis indicates that TAMUS would be disadvantaged by the
merger if they wished to provide the same level of benefits; i.e., they
would be able to provide GBP-level benefits less expensively on their own
since they would not have to share in the cost of coverage for the
generally older, higher cost members who comprise the GBP membership.  But
TAMUS has already made the decision not to provide the GBP-level of
benefits.  They indicate that this decision was based on the limited level
of state funding available and a benefit plan design philosophy emphasizing
lower monthly contributions for all employees and higher employee
out-of-pocket expenses at the time of service for those employees who
utilize services.  As a result, merger would be an even more
disadvantageous proposition for TAMUS than indicated by the previous
discussion.

Our analysis indicates that the cost for FY05 coverage for A&M Care members
would be 16.8% greater or about $16.0 million more per year under
HealthSelect, based on the FY05 contribution rates for both programs.  This
is the collective additional cost to TAMUS and the members.  The additional
cost would break down as $12.1 million more for TAMUS (an increase of
15.7%) and $3.9 million more for the members (an increase of 21.9%) during
FY05.  Exhibit 2 provides detailed information on this projection.

Similar analysis for TAMUS's SWHP members indicates that although the cost
to both TAMUS and the members would be about 0.4% less, the GBP SWHP
benefits have an actuarial value that is about 10% less than the TAMUS SWHP
benefits.  Therefore, although less clearly quantifiable than for the A&M
Care members, the merger would also be costly to TAMUS and its SWHP
members.  Detailed calculations are presented in Exhibit 3.

In conclusion, the merger would increase cost to TAMUS, without the
prospect of additional state funding.

Impact on TAMUS Health Plan Management

A review of the TAMUS health plan indicates significant differences in the
plan management philosophies exercised by TAMUS as compared with those
exercised by ERS in its management of the GBP.  While the relative merits
of these strategies can be debated, that is beyond the scope of this study.
 Instead, the significance of these differences lies in the reality that a
merger would result in TAMUS compliance with GBP strategies and procedures
whether or not those were consistent with previous plan management
philosophy.  At a minimum, a merger into the GBP would result in
significant changes for TAMUS and its employees and retirees.  While these
changes might prove to be acceptable over the long term, in the short term,
they would likely be considered undesirable.

The following are the more significant of the differences we noted:

1.	TAMUS offers multiple health plans within A&M Care.  In order to avoid
adverse selection, ERS does not utilize multiple health plans within
HealthSelect. As a result, in the event of merger, all A&M Care members
would be required to enroll in HealthSelect in order to maintain
PPO/POS-type benefits.  Although benefits would be better for all members
currently enrolled in A&M Care, the cost would also be greater for both
TAMUS and the members, collectively.  The increase would be especially
significant for members currently enrolled in A&M Care 1250 and A&M Care 65+.

2.	ERS does not require a contribution for member only coverage.  TAMUS
does for both A&M Care 350 and SWHP.  As a result, TAMUS would experience
an increase in its cost for member only coverage, while members purchasing
member only coverage would experience a commensurate reduction.

3.	ERS develops GBP contribution rates for the various coverage categories
based on rating relativities that reflect the expected cost of coverage for
each of three risk groups: member, spouse and children.  TAMUS establishes
contribution rates based on rating relativities that differ significantly
from those used by ERS.  Under the merger, application of the GBP rating
relativities to TAMUS would result in a number of changes in equities among
TAMUS members depending on whether they purchase dependent coverage.

The cost of coverage for those in A&M Care who currently have member only
coverage (approximately 9,400) would decrease or remain unchanged, while
the cost of coverage for all members who purchase dependent coverage
(approximately 8,600) would increase.  Increases would range from about $5
per month to over $200 per month.  About 7,300 current TAMUS SWHP members
would also experience a reduction in their contribution rate, while about
2,200 such members would experience an increase in their contribution rate.
 Exhibits 4 and 5 provide detail on this determination.

4.	In FY05, TAMUS will allow graduate students to enroll in a student
insurance plan with member contribution rates for member only and member
and children that are lower than those required under A&M Care 350.  ERS
does not maintain a separate plan for graduate students.  Consequently,
certain TAMUS graduate students who enroll in the student plan for FY05
would experience a sharp increase in their contributions or, more likely,
would drop coverage in the event of merger.

Statutory Differences

There are at least two key differences between the statutes governing the
TAMUS program and the GBP that would have a significant impact on TAMUS
members.

1.	TAMUS and UTS members are entitled to receive 50% of the state
contribution for member only health and basic life insurance if they waive
participation in those plans.  They are then able to use that contribution
to apply toward the cost of optional coverages.  There is no similar
provision under the GBP.  The some 500 TAMUS members who currently waive
basic coverage would lose access to the state contribution unless they
chose to participate in the basic coverage, which they would likely do if
the 50% state contribution were not available upon waiver.

2.	SB1370, adopted by the 78th Texas Legislature, Regular Session,
increased the qualifications for retiree health insurance under the statute
governing the GBP (Chapter 1551) to require (a) satisfaction of the Rule of
80 or (b) attainment of age 65 and completion of 10 years of service for
members retiring on or after September 1, 2003.  Although SB1370 also
applies to the statute governing the TAMUS and UTS programs (Chapter 1601),
SB1652, also adopted by the Texas Legislature in its 78th Regular Session,
includes a grandfathering provision that exempted those employed by TAMUS
and UTS on August 31, 2003, from the more stringent requirements.  A letter
from the Office of the Attorney General resolved the apparent conflict
between these two bills in favor of SB1652; i.e., the more stringent
provisions are not applicable to those employed by TAMUS and UTS as of
August 31, 2003.  Since TAMUS would be governed under the statute
applicable to the GBP in the event of termination, the more stringent
provision would presumably become applicable to employees not yet retired
as of September 1, 2005.  This could present important employment problems
for TAMUS.

Health Plan Benefit Differentials

>From a benefit perspective, all TAMUS members moving from A&M Care to
HealthSelect would be generally pleased due to the more generous benefits
included in HealthSelect. They would likely feel inconvenienced, however,
by the primary care physician (PCP) requirement in HealthSelect. This
provision requires that the participant obtain a referral from a PCP of
their choice before visiting a specialist.  Plan utilization data
demonstrates that this is an effective cost containment tool, but it is not
always popular with the members or their specialists.

As noted above, the GBP SWHP benefit level is less generous than the TAMUS
SWHP benefit level.  Although the GBP plan is less expensive, TAMUS members
moving between the two SWHP plans as a result of merger would likely be
disappointed and, perhaps confused.

Basic Life Coverage

GBP basic life insurance is priced less expensively than TAMUS basic life,
but the TAMUS plan includes coverage for dependent children and greater
coverage for retirees.  In any event, basic life is a relatively small
component of either program.  The basic life-related savings to TAMUS that
would result from merger is projected to be about $200,000 per year, a
small offset to the additional health cost discussed above.  

Optional Coverages

Although the health plan is the focus of this study and, we believe, the
primary reason the merger is under consideration, it is also important to
spend some time on the optional coverages. It appears from the wording of
the rider (which makes no distinction among the various "group plans") that
all coverage for TAMUS employees and retirees would be obtained through the
GBP in the event of merger.  This would have important ramifications,
primarily for TAMUS members.  As with the health plan, it is almost certain
that the plans available to TAMUS members would be those presently
available in the GBP.  Based on that premise, the following observations
are important.

1.	Optional Life Insurance - The member contribution rates for the GBP
optional life plan are higher than the corresponding rates for the TAMUS
optional life plan.  As a result, TAMUS members would experience an
increase in cost in order to maintain their life insurance coverage
following merger.  The increase would vary by age, but in total would be
about $3.0 million per year.

a.	The difference is primarily attributable to different cost
characteristics of the insured populations.  The GBP rates are determined
based on the actual experience of the plan; i.e., contribution rates are
determined so as to produce the amount of revenue required to provide for
the claims expected under the plan.  TAMUS indicates that its optional life
rates are similarly determined, so part of the rate differential is
attributable to a difference in mortality experience of the two
populations.  Such difference, which favors TAMUS, is not unexpected given
the significant employment differences that exist between the two
populations.  The GBP population includes a greater proportion of members
in high risk employment such as law enforcement, highways, and mental
institutions.  It should be noted that the GBP optional life plan includes
accidental death and dismemberment (AD&D) coverage equal to the amount of
the life insurance.  Under the TAMUS program, the optional life plan does
not include AD&D.
b.	It should also be noted that the GBP plan includes a coverage maximum of
the lesser of four times pay or $400,000, while the TAMUS plan includes a
coverage maximum of six times pay or $1 million.  As a result, 6,200 TAMUS
employees would experience a reduction in their optional life coverage in
the event of merger.

2.	Dental Insurance - Both programs offer PPO and DHMO dental plans.  There
are significant differences in plan design between the GBP PPO dental plan
and the TAMUS plan.  The GBP plan provides benefits that are somewhat more
generous than those provided under the TAMUS plan for those who have
participated in the plan for two or more years, but it has a phased in
approach whereby benefits for the first two years of enrollment are
significantly lower.  The GBP plan is less expensive to the member.  TAMUS
DHMO benefits are somewhat more generous, but the GBP DHMO plan is
significantly less expensive.  We estimate that TAMUS members would pay
approximately $3.0 million per year less for dental coverage under the GBP.

3.	Disability Insurance - Both programs offer long term disability
insurance (LTD).  The TAMUS plan provides slightly more generous benefits
(65% of pay as compared with 60% of pay under the GBP), a higher maximum
benefit ($8,000 vs. $6,000 under the GBP) and a substantially lower member
contribution rate.  In the event of merger, TAMUS members participating in
the LTD plan would experience a reduction in benefits and an increase in
contributions.  We estimate that TAMUS members would pay approximately $1.7
million per year more for LTD coverage under the GBP

The higher cost of the GBP LTD plan is attributable to differences in the
insured populations of the two programs.  The GBP LTD plan covers 41% of
the active employees, while the TAMUS LTD plan covers about 50 % of the
active employees.  The GBP's lower enrollment level indicates greater
adverse selection against the plan, thus driving the required contribution
rate higher.  The rate differential also reflects socio-economic
differences in the two populations as discussed above.

The GBP offers a short term disability plan not currently available to
TAMUS members.

4.	Long Term Care Insurance - Both programs offer long term care insurance
through the plan operated by TAMUS.  Presumably this could be continued
under the same terms and conditions in the event of merger, but it might be
necessary to transfer the operation of the plan to ERS.

5.	Vision Insurance - The GBP does not include a separate vision plan.  The
7,000 members who currently participate in the TAMUS vision plan would lose
their coverage in the event of a merger.

6.	Other Coverages - There are also differences in the more minor coverages
such as voluntary accident and dependent life insurance that would
certainly be noticed by many of the members, but that would not have
financial implications to TAMUS.

Impact on ERS Administrative Cost

ERS has well-established, effective and efficient administrative and
communication divisions which handle insurance plans for some 265,000 GBP
members.  It is expected that these divisions could accommodate the
additional 28,500 members that would result from the merger, although
commensurate increases in staffing, equipment, supplies, etc. would be
required.  Based on the expense associated with operation of the current
GBP, it is estimated that the merger would increase ERS operating expenses
by $39 per year for each new member, or by about $1.1 million per year.

Presently, ERS operating expenses for the GBP are covered by investment
income generated by the program.  Expansion of the program through the
merger would result in additional investment income that, over time, would
be expected to cover the additional cost of administration and
communication on an ongoing basis.  Nevertheless, there could be initial
shortfalls, especially considering that there would be start-up expenses
for which there is presently no source of supporting revenue.

Post-Merger GBP Benefit Design and Policy

The GBP has experienced 28 years of successful operations under the
leadership of the ERS Board of Trustees.  The Trustees have delegated to
the ERS Executive Director the authority to conduct the day-to-day
operations of the program under policies adopted by the Trustees based on
input provided by the Executive Director and her staff.  The Board of
Trustees (three members of which are elected by state agency employees and
retirees) and the staff consider input from the members, state agencies and
higher education institutions, but the various constituents have no
official role in GBP policy or operations.

The GBP has been designed to meet the needs of all state agencies and
higher education institutions currently participating in the program.  The
program has been designed to achieve a balance between cost and benefits.
A program as large as the GBP cannot address the specialized needs of any
single agency.  While the GBP works well for participating components, the
one-size fits all strategy would likely be a shock to an organization with
the size and diversity of TAMUS.  The difficulty of assimilating into a
program in which an individual component has little influence over policy
was evident in 1992 when higher education institutions other than TAMUS and
UTS joined the GBP.  While it would be possible that specific needs could
be addressed through modification of the GBP, it is unlikely that such
action would occur either quickly or frequently given the many components
that would be affected.

Impact on TAMUS Administration

TAMUS would experience a reduction in its administrative activity in
connection with the insurance program following the merger.  All of its
policymaking, contract procurement, contract management, and much of its
financial and legal responsibilities would be eliminated under the merger.
Its activities would be limited to those applicable to the Benefits
Coordinator role in state agencies and GBP higher education institutions.
This would likely result in a significant reduction in administrative
expense, executive time and operational complexity.  Although an
examination of those factors is beyond the scope of this study, we believe
that the savings in administrative expense would be small in comparison to
the additional cost discussed above.

Maintenance of Per Capita Reserve Balance 

The U. S. Department of Health and Human Services (DHHS) determined in
connection with the merger of certain higher education insurance programs
into the GBP in 1992 that it was necessary to maintain the GBP reserve
balance at the same per capita level post-merger as existed pre-merger.
Recent correspondence between ERS and DHHS has confirmed that this same
requirement would be applied to subsequent mergers as well, specifically to
the merger which is the subject of this study.  In order to satisfy this
requirement, it would be necessary for TAMUS to make a supplemental
contribution at the time of the merger in the amount required to maintain
the reserve balance at the same per capita level existing on August 31, 2005.

The amount of this supplemental contribution cannot be determined until ERS
completes its Comprehensive Annual Financial Report (CAFR) for FY05.  The
CAFR will be completed during the fall of 2005.  In connection with the
community supervisors and correction department employees that will join
the GBP beginning September 1, 2004, we have estimated that the required
supplemental contribution will be approximately $242 per employee.  Using
this amount as a basis, the required supplemental contribution for TAMUS
would be approximately $6.9 million, assuming 28,500 TAMUS members would
join the GBP in the event of merger.  Of course, this amount could be
either lower or higher depending on the actual GBP experience over the
remainder of the biennium.



Scott Downing, Interlibrary Loan/Distance Education Librarian
Texas A&M University-Commerce
ph  903 886-5741
fax 903 886-5723
scott_downing at tamu-commerce.edu