A Review of Trust Options & other Recommendations April 26, 2011.

CHOICES Options

A Review of Trust Options & other RecommendationsApril 26, 2011

1. Evaluate a range of Trust Concepts for expenditure of remaining CHOICES funds that reduces services and extends the timeframe for expenditures up to the model that expends only interest.

2. Return with information on the drawdown of the fund balance (exit strategy).

BoCC Requests

3. Report recommendation for CHOICES future from Advisory Board.

4. Cease to expend funds on advertising.

5. Report recommendation from CHOICES Advisory Board on opinion of cessation of accepting new applications.

BoCC Requests (cont.)

Completed actions:

1. Advisory Board recommendations sent to BoCC on February 18, 2011.

2. Advertising cancelled February 2, 2011.

What We Did

Current recommendation from CHOICES Advisory Board:

1. Continue operations of CHOICES program with a targeted end date of December 31, 2013.

2. Continue accepting applications for new members.

Advisory Board Recommendation

3. Create adequate Claims Reserve Fund to cover run-out of claims.

4. Develop “exit strategy” to end program in an orderly, professional, and economical manner.

At the April 4 Advisory Board Meeting these recommendations were reaffirmed by the Advisory Board.

Advisory Board Recommendation

Trust Options

1. Reviewed earlier studies of Trust discussions.

2. Discussed development of Trust concepts with actuaries and public investment professionals.

3. Developed several Trust scenarios.4. Received return estimates from

investment professionals.

What We Did (cont.)

5. Developed assumptions for actuary analysis.

6. Reviewed analysis with CHOICES Advisory Board.

What We Did (cont.)

Current CHOICES Fund investments limited according to F.S. 218.415.

The portfolios are invested entirely in Federal Agency, U.S. Treasury, and Municipal Obligation securities. The securities are allocated among high quality issuers rated AAA and AA.

Could set up separate Trust Fund with different investment options.

Trust Options- Legal Considerations

This Trust could, by Ordinance, be allowed to invest in higher risk/higher return investments.

Could cause loss of principle.Would involve costs to set-up and

maintain.

Legal Considerations (cont.)

1. All Fund Balance in Trust; spend only earnings; assume benefits at 2008 levels with adjustments.

2. All Fund Balance in Trust; spend only earnings; assume benefits at 2011 level with adjustments.

3. Spend down principle; accumulate earnings to spend when principle fully expended.

Trust Options

End CHOICES benefits Dec. 31, 2011. Cease taking new applications June 1,

2011. Release six employees August 1, 2011. Release two employees Sept. 1, 2011. Cancel contracts by Dec. 31, 2011. End Dec. 2011 with two staff to handle

claims run-out, claims disputes, records, etc.

Option 1- Trust-Spend earnings only

During January-June 2012 monitor claims run-out, pay all bills, dispose of assets, close program.

Between April- June 2012 release all employees

If Option chosen continues CHOICES providing benefits release of employees changes.

Option 1: Spend Earnings Only

100% Fixed Income (returns as of 12/31/2010)

Category 1 YR 3 YR 5 YR 10 YR

Enhanced Cash 0.97% 2.25% 3.45% 3.32%

1-3 YR 2.31% 3.78% 4.53% 4.16%

1-5 YR 3.33% 4.68% 5.16% 4.46%

1-10 YR 4.40% 5.42% 5.70% 4.63%

Mean 3.52% 3.53% 3.53% 3.53%

Source: Public Financial Management

Trust Historic Returns

Multi-Asset Class (Equity: Fixed Income) Equity/Fixed Mix 1YR 3YR 5YR 10YR60%/40% 12.72% 3.67% 5.80%

3.53% 50%/50% 12.17% 4.77% 4.44%

3.99% 30%/70% 9.42% 3.71% 5.08%

4.82%

Mean 11.44% 4.05% 5.11% 4.11%

Source: Public Financial Management

Trust Historic Returns

1. Fixed Investment Only: Return 3.5%

2. Mixed Asset

Equity/Fixed Mix 30% Equity/70% Fixed Return 5.0%

Trust Assumptions

Fixed Income ModelFund Balance Invested

$38,896,375Rate of Return (Fixed Income)

3.5%Annual Earnings $1,357,138

Mixed Asset ModelFund Balance Invested

$38,896,375Rate of Return (70% Fixed/30%

Equity)5.0% Annual Earnings $1,938,769


Benefits at 2006 level.Eliminated dental benefits and all

external funding. Income identical each year.Program expense rate increase 10% per

year (primarily medical cost inflation).Admin expenses increase 4% per year.Solve for number of members to

breakeven.

Option 1: Assumptions

Sample Income Statement- Fixed Income Model- Benefits at 2008 Level

Year 2012 2013 2014

Revenue 1.357M 1.357M 1.357MProgram Exp. .965M .950M .934MAdmin Exp. .391M .407M .423MTotal Exp. 1.356M 1.357M 1.357M

Members atbreakeven 641 590 532


Sample Income Statement- Mixed Asset Model- Benefits at 2008 Level

Year 2012 2013 2014

Revenue 1.939M 1.939M 1.939MProgram Exp. 1.548M 1.532M 1.516MAdmin Exp. .391M .407M .423MTotal Exp. 1.939M 1.939M 1.939M

Members atbreakeven 1,028 951 863


Mixed Asset model may show principle loss. How do we chose the 600-1,000 members? What happens to the 3,000 who are dropped? Do we develop new eligibility criteria? Do we redesign the benefit package? Will we maintain a waiting list? Will eligibility change during the year? How will we handle years when spending

exceeds revenue? Should we allow fewer in the program to

minimize potential overspending?

Issues to Consider

Dealing with a waiting list requires evaluating applications twice.

Should we consider a limit to how long an individual can be on CHOICES?

Removing up to 82% of membership will create incentive to use services as plan ends.

If Affordable Care Act goes into effect may have to reinvent CHOICES again.

Low membership puts Admin expense over 20%-25%.

Issues to Consider (cont.)

Medical & Rx Benefits at 2011 Level.Eliminated dental and external funding. Income same as Option 1.Program and Admin expenses

estimated as in Option 1.Solve for number of members to

breakeven.

Option 2: Assumptions

Sample Income Statement- Fixed Income ModelYear 2012 2013 2014

Revenue 1.357M 1.357M 1.357MProgram Exp. .965M .951M .932MAdmin Exp. .391M .407M .423MTotal Exp. 1.356M 1.357M 1.357M

Members atbreakeven 490 439 392


Sample Income Statement- Mixed Asset ModelYear 2012 2013 2014


Members at Breakeven 844 690 621


Mixed Asset model may show principle loss. How do we chose the 500-800 members? What happens to the 3,000 who are dropped? Do we develop new eligibility criteria? Do we redesign the benefit package? Will we maintain a waiting list? How will we handle years when spending

exceeds revenue? Will eligibility change during the year? Should we allow fewer in the program to

minimize potential overspending?

Issues to Consider

Dealing with a waiting list requires evaluating applications twice.

Should we consider a limit to how long an individual can be on CHOICES?

Removing up to 75% of membership will create incentive to use services as plan ends.

If Affordable Care Act goes into effect may have to reinvent CHOICES again.

Low membership puts Admin expense over 20%-25%.

Issues to Consider (cont.)

How it works:

BoCC determines length of Trust.Fund Balance is placed in Trust with

expenditure limited to annual fraction of principle.

Interest accumulated to be expended after principle exhausted.

Option 3: Spend Down Principle

Assumptions: Ten year life of Trust. Earnings rates as with Option 1. Benefits at 2008 levels; dental benefit and

External Funding eliminated Equal funds available until principle

exhausted. Expenses calculated as in Option 1. Interest earned over life of Trust: Fixed Only: $8,650,856 Mixed Asset: $13,545,208

Option 3: Spend Down Principle

Sample Income Statement: Mixed Assets 2008 BenefitsYear 2012 2013 2014


Members atBreakeven 2,249 2,090 1,904

Option 3: Principle Spend Down

Summary of members through 2021:

Accumulated interest as 2021: $8,650,856

Could continue program for 2.2 years at lower membership


Year 2015 2016 2017 2018 2019 2020 2021

Members 1,719 1,553 1,401 1,264 1,037 935 842

Mixed Asset ModelSince starting Fund Balance is the same in

both models, projected income statements are the same.




Sample Income Statement: Fixed Income 2011 BenefitsYear 2012 2013 2014Revenue 3.890M 3.890M

3.890MProgram Exp. 3.386M 3.365M 3.347MAdmin Exp. .503M .523M .544MTotal Exp. 3.890M 3.889M 3.890M

Members atBreakeven 1,719 1,553 1,404


Summary of members through 2021:




Year 2015 2016 2017 2018 2019 2020 2021

Members 1,268 1,145 1,033 932 841 758 683

Mixed Asset ModelSince starting Fund Balance is the same in

both models, projected income statements are the same.




About 1,800-2,000 CHOICES members will have to be dropped.

How do we select the 1,200-1,700 to remain in the program?

All the issues of eligibility and benefits remain from Option 1.

If Affordable Care Act begins in 2014, CHOICES may have to be restructured again.

Option 3- Issues

Mixed Asset model could result in principle losses.

Around 2016 admin expense will exceed 15%.

Continuing CHOICES for ten years will continue public criticisms of the program.

Option 3- Issues (cont.)

Developing a transition to a smaller CHOICES will be difficult.

We will essentially be running two operations at once: (1) Close down of a 3,600 member plan and (2) a start-up of a new plan.

Final Considerations

New eligibility rules may need to be put in place and applications will need to be evaluated.

If benefits are to be cut further we will need to work through adjudication issues with Blue Cross.

New benefit pricing will be needed from the actuary.

Public reaction is unknown

Final Considerations

A Review of Trust Options & other Recommendations April 26, 2011.

Documents

choices advisory board

separate trust fund

end choices benefits

advisory board recommendations

trust scenarios

choices future

review of trust options

operations of choices