State audit refutes OGB privatization

A state audit of the Office of Group Benefits (OGB) released Monday by the Legislative Auditor’s Office would appear to validate fears expressed by opponents of privatization of the agency.

The 22-page audit report represents a substantial setback to the administration’s plan to sell off the agency and its $500 million surplus even though it’s not likely to change its position on selling off OGB, state prisons and Medicaid operations.

Among the findings of the audit:

• A private company may incur marketing costs that are higher than OGB;

• As a state agency, OGB is exempt from paying premium taxes while other (private) health insurance companies are required to pay premium taxes according to R.S. 22:838(B);

• OGB does not have a profit motivation because it is a state agency whose goals are to provide a service and pay claims. A private company will most likely build a profit margin into the premium structure;

• If the contractor assumes all risk (fully insured), the contractor will most likely purchase reinsurance. Currently, OGB does not have reinsurance. These cost considerations are dependent on the premium and/or benefit structure restrictions that are placed on the contract;

• If the state sells the business, the incurred liabilities, up to the date of the sale, must be paid by either the state or the new owner. If the state remains responsible for the incurred liabilities, there should be a provision in the contract to address payment of these liabilities. If not, there would be no revenue stream after the sale to pay the outstanding claims;

• The sale of the business would diminish the legislative and/or state administrative control over cost, benefits, or changes to the plans;

• Cost savings may result from the efficiencies gained by using an established health care provider with well-structured administrative processes. The contract would be the vehicle for establishing cost parameters.

The audit also mentioned the administration’s contract with Chaffe and Associates to establish the fair market value of the operations of OGB as of Jan. 31, 2011, apparently so that Gov. Jindal could include the proposed sale of the agency in his Executive Budget.

“According to the 2012 OGB Executive Budget initially submitted, OGB estimated a savings of $10,155,906 resulting from personnel reductions of 149 positions,” the audit report said. “It was explained to us that the reduction would be result of the PPO (Preferred Provider Organization) being privatized. Those positions were restored in the budget process.”

The audit also mentioned the administration’s contract with Chaffe and Associates to establish the fair market value of the operations of OGB as of Jan. 31, 2011, apparently so that Gov. Jindal could include the proposed sale of the agency in his Executive Budget.

That information, however, was not included in the Executive Budget, leading many to believe the report did not contain information the administration desired.

Fueling that speculation was the reluctance of the administration to release the Chaffe report, even in a faceoff between Commissioner of Administration Paul Rainwater, Assistant Commissioner Mark Brady and the legislature.

A report was eventually leaked to the media but that only prompted more skepticism because Rainwater on May 31 and Division of Administration (DOA) attorney Paul Holmes four days earlier, on May 27, each indicated the Chaffe report was received by DOA on May 25 but could not be release because it was still in the “deliberative process.”

Chaffe officials, however, did not sign off on the report’s signature page until June 3. Moreover, none of the leaked report’s pages were date stamped even though all documents received by DOA are routinely date stamped.

There was speculation that there may have been two reports, one that said the only advantage to selling OGB would be if the buyer retained the agency’s $500 million surplus (a clause that at least one person who saw the report prior to its being leaked said it contained) and the leaked report which did not contain such language.

Moreover, the report said, the Chaffe report, which was performed under a $49,999.99 contract-one cent below the amount requiring statutory review-placed a value of $217 million on OGB, assuming a five-year privatization term.

The report, however, failed to take several considerations into account, according to the audit report. “The valuation range:

• does not assume any increased costs as a result of the Patient Protection and Affordable Care Act;

• does not consider the impact, if any, of increased premium costs incurred by the state as a result of the privatization;

• does not consider the value of the existing fund balance, which was $499.2 million as of the valuation date of Jan. 31, 2011.

In effect, the audit report indicated the $49,999.99 paid Chaffe was money wasted.

The audit report did not address those discrepancies nor did it attempt to reconcile the significant difference in bids on two separate but virtually identical requests for proposals (RFPs) issued by DOA.

The first RFP was issued on Feb. 4that called for the services of a financial advisor to determine OGB’s assets and determine a fair market value and to actively recruit bidders to purchase the agency.

Prior to the date of that RFP, as early as October of 2010, Goldman Sachs was brought in to help draft the RFP. Goldman Sachs subsequently was the lone bidder on that RFP with a bid of $6 million. Negotiations broke down over Goldman Sachs’s insistence on the state’s indemnifying the Wall Street banking firm in any ensuing litigation.

A second RFP was then issued on May 6 and three firms submitted bids. They were Goldman Sachs, Barclays Capital and Morgan Keegan. On July 15, Rainwater announced that Morgan Keegan had been chosen for the contract on the basis of its bid of $900,000—$5.1 million lower than Goldman Sachs’s bid on the first RFP.

In the interim between the issuance of the first RFP and the acceptance of Morgan Keegan as the contractor on the second RFP, OGB lost two directors.

On April 15, Tommy Teague, who had taken the agency from a $60 million deficit to the $500 million surplus in a period of only six years, was terminated by Rainwater, who never gave any reason for Teague’s firing.

Teague was replaced on that same day by Scott Kipper, who was brought over from the Louisiana Department of Insurance. Kipper resigned on June 24, just over two months after his appointment.

The audit report says any plan to sale OGB must be approved by the Legislature under the provisions of R.S. 49:968(C). “Any substantial changes to the function and role of OGB in regard to the administration and management of group insurance policies would require legislative action to amend applicable substantive laws addressing the resulting reorganization of the Executive Branch,” the report said. “This reorganization is, by Constitution, with the exclusive authority of the Legislature.”

State Sen. Butch Gautreaux (D-Morgan City) said he had not fully reviewed the audit “but it appears that the auditor agrees that there are a lot of unanswered questions and that the buyer would have to agree to keeping the plan pretty much as it is. I seriously doubt that a for-profit (company) would agree to those terms,” he added.

Rainwater, in his response to the audit, fell back on the same argument the administration has used throughout the debate: the number of employees at OGB.

He also denied that the wholesale privatization of OGB is under consideration. even though he expressly listed that as an option in testimony before that that was indeed an option, even going so far as to say in April that that the OGB surplus would be “an attractive selling point” because the private company that ultimately purchases the agency would not have to dip into its own capital to pay claims initially.

Rainwater noted that the report said state auditors were unable to identify any states that had “fully” privatized their state employee health insurance agencies. “Given that this administration itself has never proposed the complete privatization of OGB, the relevance of this research point is not exactly clear,” Rainwater said.

In April, however, he expressly listed that as an option in testimony before the Senate Insurance Committee that full privatization was indeed an option, even going so far as to say that that the OGB surplus would be “an attractive selling point” because the private company that ultimately purchases the agency would not have to dip into its own capital to pay claims initially.

Rainwater took the same stance with auditors’ observation that the “wholesale privatization” of OGB would require approval by the full Legislature. “I wonder, again, about the practical usefulness of the point since it is based on a premise-the ‘full’ or ‘wholesale’ privatization of OGB-that is not even under consideration.

In his testimony before the Senate Insurance Committee, however, he said, “We’re taking OGB out of the day-to-day business of running an insurance company.”

He downplayed speculation in the audit that privatization might result in higher insurance premiums, saying such speculation cannot be supported based on the research contained in the report.

Despite a record of fast turnaround of claims payments, Rainwater said, “The possibility of providing quality service in a manner that’s also more efficient is precisely why we have begun this evaluation of OGB, and we owe it to the taxpayers to evaluate it fully.”

Even though he has stated publicly that OGB was being taken “out of the day-to-day business of running an insurance company,” he said in his letter, “OGB’s administrative oversight will continue, securing the continued success of all the plans.”

Administrative oversight has already resulted in DOA’s approval of a $7 million amendment to the $68 million paid F.A. Richard and Associates (FARA) by the state to take over the operations of another state agency, the Office of Risk Management. A week after that contract was amended, FARA was sold to an Ohio company.