A guide to buying employee health insurance for your municipality
A how-to for insurance procurement
The Office of the State Comptroller (OSC) is responsible for purchasing oversight of more than 1,900 state and local government entities. The Procurement Division reviews a constant stream of bids, requests for proposals and other contracts over $2.5 million. Since its creation in 2008, the Division has reviewed thousands of contracts and has found that among the most misunderstood and troublesome are those for health insurance benefits, including medical and pharmacy plans as well as insurance brokers.
The Purchase of Insurance is Subject to OSC Review
Like any other contract, health insurance coverage is subject to OSC review when the cost is more than $2.5 million. If the contract is likely to go over $12.5 million, OSC must be notified at least 30 days before the procurement starts.
Because of the complexity of medical insurance, many government entities rely upon the advice of an insurance broker. OSC recommends letting insurance brokers do what they do best: evaluate the quality and cost of insurance. Whichever procurement process is used – extraordinary unspecifiable services (EUS), competitive contracting or sealed bid - active involvement by the procurement professional is necessary to ensure that Local Public Contracts Law (LPCL) is followed.
The LPCL exempts the purchase of insurance coverage and insurance consulting services from public bidding. However, the LPCL requires the public entity to follow the EUS process if it is not using a competitive process such as a sealed bid or competitive contracting. Additional guidance can be found in the Local Finance Notice AU-2002-2.
EUS Applies to Both Insurance Coverage and Insurance Consulting Services
OSC sees two major errors when reviewing contracts for broker services and insurance coverage.
Many entities incorrectly award insurance brokerage contracts without public bidding under the professional services exception. Although insurance brokers are regulated by law, they don’t meet the second part of the LPCL definition of “professional services” which requires a prolonged formal course of specialized instruction and study. Broker contracts are “insurance consulting” contracts and fall under the same exception as insurance coverage, so they also require the EUS procedure.
Health Insurance Procurements Must Follow All Statutory Requirements
The other common problem we have noted is the solicitation of quotes from insurance carriers often fails to comply with the EUS requirements and other provisions of New Jersey law.
Like any other contract, required statutory disclosures and certifications must be obtained from the insurance carrier and broker. This includes the mandatory affirmative action language (Exhibit A), the ownership disclosure certification, disclosure of investment activities in Iran and a valid business registration certificate, and OSC's’ record retention language (see inset below).
When purchasing professionals don’t take an active role in conducting insurance procurements, the result can be an undesirable or even illegal contract. For example, many times, the Business Administrator will sign a form contract provided by the insurance company. We recently reviewed an insurance contract in which the public entity agreed to be governed by Missouri law if there was a contract dispute – clearly this is not in the municipality’s best interest. Form contracts may also have other undesirable conditions such as limited vendor liability or indemnification provisions. Public entities should not sign these form contracts without reviewing them very carefully, preferably with advice from counsel.
Contracts Should State a Definite Term
Under the LPCL, insurance contracts can be up to three years in duration and can be extended for an additional two years at the discretion of the contracting unit. However, the three-year term and any extension period must be stated in the initial contract. Although, it is uncommon for an insurance contract to have a long duration, be especially aware of insurance company form contracts that provide for automatic renewal from year to year. Such “evergreen contracts” are not compliant with the term limits of the LPCL. Ensure that these contracts are not renewed past the five-year limit in the LPCL. At a minimum, a new procurement process must be conducted every five years.
Insurance Broker Fees
Many insurance brokers representing public entities collect their fees in the form of commissions from the insurance carriers that they recommend to the public entity. As part of the OSC audit, Cost Analysis of Selected Local Government Units Joining the State Health Benefits Plan, February 28, 2012, (SHBP Report), OSC surveyed local government officials and found that more than 50% of public entities that responded did not know how much their brokers were paid in commissions from their insurance carrier. In reviewing health insurance procurements since 2012, we have not noticed a significant change in this industry practice.
Insurance brokers, however, are required by State insurance law (N.J.S.A. 17:22A-41.1(a)) to disclose the amount of any “commission, service fee, brokerage, or other valuable consideration that the producer will receive as a result of the sale, solicitation or negotiation of the health insurance policy or contract.” To comply with this law, we recommend that a written disclosure of the commission be included in every broker’s contract.
Brokers whose commissions are directly related to the cost of the premiums are presented with conflicting incentives because seeking lower cost alternatives for their client may reduce their commission. Recently, we have noticed that several municipalities have taken control of their insurance costs by prohibiting their brokers, by ordinance or otherwise, from being paid by their insurance carrier.
Brokers Should Include the SHBP in Their Cost Comparisons
As admitted by one broker in OSC’s SHBP Report, there is no incentive to quote the SHBP to public clients because they would not be paid a commission. In the SHBP Report, OSC auditors found that the local units they looked at could have saved money by joining the SHBP. Even if the SHBP is not always the least expensive option, we recommend including SHBP in any cost comparison.
An original version of this article appeared in NJLM in June 2018.
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