OSEEGIB 2009 Comprehensive annual financial report |
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Comprehensive Annual Financial Report Year Ended December 31, 2009 A Component Unit of the State of Oklahoma He lthChoice State and Education Employees Group Insurance Board Oklahoma Comprehensive Annual Financial Report A Component Unit of the State of Oklahoma Prepared by the Finance Division Year Ended December 31, 2009 This publication was printed by the Oklahoma State and Education Employees Group Insurance Board as authorized by 74 O.S. SUPP. 1989, Section 1301, et seq. 50 copies have been printed at a cost of $5.062 each. Copies have been deposited with the Publications Clearinghouse of the Oklahoma Department of Libraries. Table of Contents Introductory Section Letter of Transmittal – Includes exhibits 1–4. . . . . . . . . . . . . . 1-13 Executive Organizational Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 List of Principal Officials . . . . . . . . . . . . . . . . . . . . . . . . . 15-16 Financial Section Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . 17 Management’s Discussion and Analysis . . . . . . . . . . . . . . . 19-26 Basic Financial Statements Balance Sheets as of December 31, 2009 and 2008 . . . . . . . . . . . . . 27 Statements of Revenues, Expenses, and Changes in Fund Equity for the Years Ended December 31, 2009 and 2008 . . . . . 28 Statements of Cash Flows for the Years Ended December 31, 2009 and 2008 . . . . . . . . . . . . . 29 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . 30-51 Statistical Section Table No. Fund Equity . . . . . . . . . . . . . . . . . . . . . . . 1 . . . . . . . . 52 Change in Fund Equity . . . . . . . . . . . . . . . . . . 2 . . . . . . 53-54 Operating Revenues by Type of Entity . . . . . . . . . 3 . . . . . . . . 55 Top Ten Sources of Premium Revenue . . . . . . . . . 4 . . . . . . . . 56 Demographic Statistics for Health Coverage Number and Type of Participants. . . . . . . . 5A-5B . . . . .57-58 Monthly Premiums by Coverage Type and Billing Categories . . . . . 6A-6C . . . . .59-61 Outside Insurance Carriers . . . . . . . . . . . . . . . 7A-7C . . . . .62-64 Introductory Section Oklahoma State and Education Employees Group Insurance Board 3545 N.W. 58th Street, Suite 110 Oklahoma City, OK 73112 405-717-8701 1-800-543-6044 www.healthchoiceok.com l l l July 7, 2010 To the citizens of the State of Oklahoma: The comprehensive annual financial report for the Oklahoma State and Education Employees Group Insurance Board (OSEEGIB) for the fiscal year ended December 31, 2009, is hereby submitted. Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, including all disclosures, rests with the management of the Oklahoma State and Education Employees Group Insurance Board. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of OSEEGIB. All disclosures necessary to enable the reader to gain an understanding of OSEEGIB’s financial activities have been included. The comprehensive annual financial report is presented in three sections: introductory, financial, and statistical. The introductory section includes this transmittal letter, OSEEGIB’s executive organizational chart, and a list of principal officials. The financial section includes the independent auditors’ report, management’s discussion and analysis (MD&A), and the basic financial statements. The statistical section includes selected financial and demographic information, presented on a multiyear basis. OSEEGIB is a special-purpose government entity engaged solely in business-type activities. OSEEGIB is a legal trust which administers, manages and provides group health, dental, life and disability insurance for active employees and retirees of state agencies, school districts and other governmental units of the State of Oklahoma. OSEEGIB provides insurance solely to eligible employees, dependents and retirees. It is OSEEGIB’s mission to serve Oklahoma by providing, with the highest degree of efficiency, a wide range of quality insurance benefits that are competitively priced and uniquely designed to meet the needs of participants. OSEEGIB provides a self-insured health, dental, life and disability program (HealthChoice), which is actuarially rated to provide premiums adequate to meet the payment of all claims, administrative expenses, and any change in reserve estimates. OSEEGIB maintains reserves to provide for current claim liabilities as required. At the present time, OSEEGIB has not transferred any risk of loss through reinsurance contracts. Oklahoma State and Education Employees Group Insurance Board 2 Total Primary Participants HealthChoice and HMO Year Ended December 31, 2009 Exhibit 1 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 HealthChoice Participation HMO Participation Education Active State Active Education Medicare State Medicare Education Pre-Medicare Local Government State Pre-Medicare During the year ended December 31, 2009, participants could choose between HealthChoice and four federally qualified health maintenance organizations (HMO) during their initial enrollment. Each HMO requires participants to reside or work within a designated service area, which consists primarily of the Oklahoma City and Tulsa metro areas, but is expanding to rural parts of Oklahoma as provider networks are established. HealthChoice has no such restriction and is thus available to all eligible participants statewide. After enrollment, members have the opportunity to change health carriers during an annual option period. Coverage elections may be changed during the year if the member experiences a change in family status event as defined by Internal Revenue Service Code Section 125. The following chart illustrates total primary participation in coverage offered by HealthChoice and HMOs by type of entity as of December 31, 2009. Among the active primary members, approximately 24% were covered by the HMO plans at December 31, 2009. For the Medicare and pre-Medicare population, approximately 9% were covered by the HMO plans at December 31, 2009. Each year during the months of October and November, participants may change their coverage elections for the next year. All carrier changes and coverage elected during this period will be effective January 1 and remain in effect until December 31 of the same year. OSEEGIB, by statute, provides insurance coverage to all employees and dependents that meet eligibility requirements. An employee’s coverage begins the first day of the month following the month of employment. The employee has thirty days after beginning employment to acquire Oklahoma State and Education Employees Group Insurance Board 3 Available Coverage by Participant Group State Employees Education Employees Local Government Employees OK Public Employees Retirement System Teachers’ Retirement System Survivors COBRA Health 4 4 4 4 4 4 4 Dental 4 4 4 4 4 4 4 Life 4 4 4 4 4 4 Disability 4 4 Medicare Supplement 4 4 4 4 health, dental, and/or life insurance for his dependents. If the employee elects dependent coverage, the employee must cover all eligible dependents, unless the dependent is covered by other group insurance. The employee also has thirty days after acquiring a new dependent in which to add that dependent. After this period, an employee may still add dependents during the aforementioned annual option period. Coverage could be delayed, however, if the dependent has been dropped in the past twelve (12) months. An active employee who leaves employment may retain certain insurance coverage depending on his status at the end of his employment. The former employee may also continue dependent coverage that was in effect while he was an active employee. Retired employees may continue all health, dental, and life coverage. If the member has vested his retirement benefit but is not yet eligible to draw retirement benefits, he also retains the right to health, dental and life coverage. In the event an employee terminates employment or a dependent loses eligibility due to divorce or by exceeding age limitations, health and dental coverage may be continued if the member and/or his dependent meet the requirements set forth under COBRA. The following table illustrates the available coverage by participant group: ECONOMIC OUTLOOK During 2009 the economy of the nation as well as the state of Oklahoma was suffering. Governor Brad Henry, during his State of the State Address on February 1, 2010 said, “The economic storm that has seized our nation has also battered Oklahoma. We face a budget shortfall of more than 1 billion dollars. State programs and agencies have already experienced substantial cuts. The state’s lagging revenues reflect the fact that far too many Oklahomans and their families are struggling with lost jobs and lost wages.” He went on to say “Certainly, more cuts are unavoidable. Agencies and programs, already hit hard by fiscal reality, will be asked to absorb further reductions. There will be an impact, and it will be painful.” The economic issues facing the state, its agencies and school districts, other participating groups, and their employees are a key consideration when OSEEGIB sets premium rates. The Board is very aware that increases in premiums affect the already tight budgets of participating groups, as well as individual members. Alternatives to rate increases such as changes Oklahoma State and Education Employees Group Insurance Board 4 in co-payments or deductibles must be considered, especially when groups are facing budget cuts. OSEEGIB’s Board is faced with the daunting task of weighing the alternatives and making the difficult and sometimes unpopular decisions that are necessary to meet projected costs. OSEEGIB’s goal is to keep premiums as low as possible and continue to provide quality and affordable healthcare to employees and retirees of state, education, and local government entities. Healthcare reform The economy of healthcare is in a state of change, now more than ever in recent history. The Patient Protection and Affordable Care Act (PPACA) signed by President Obama on March 23, 2010 will have a significant economic effect on health insurers. PPACA contains wide-sweeping changes for individuals, employers, and insurers, some of which are expensive and will result in increases to health insurance premiums. OSEEGIB is closely monitoring all issues related to the PPACA. PPACA is discussed further in the Legislative section of this letter. Healthcare trends The insurance industry monitors healthcare costs by establishing a percentage of cost increases known as ‘trend’. The definition and factors affecting trend are discussed in Management’s Discussion and Analysis. Nationwide, while healthcare costs continue to increase, the rate at which they are increasing has slowed over the past few years. However, healthcare trends remain well over the rate of inflation. For the second consecutive year, prescription drug trends are projected to be lower than medical plan trends. According to the 2009 Segal Survey, projected trends for PPO plans for 2010 are as follows: • Medical (Actives & Retirees < Age 65) 10.5% • Medical (Retirees Age 65+) 9.5% • Prescription Drug 9.1% • Dental (Indemnity Plans) 6.2% Projected trends for 2010 for medical costs are slightly higher than those projected for 2009, while the prescription drug and dental trends for 2010 are slightly lower than those projected for 2009. OSEEGIB’s actuaries used the following trends for setting rates for 2010: • Medical (Actives & Retirees < Age 65) 10.0% • Medical (Retirees Age 65+) 7.0% • Prescription Drug 9.1% • Dental 6.0% The actual trends experienced by OSEEGIB for 2009 are discussed in Management’s Discussion and Analysis. Oklahoma State and Education Employees Group Insurance Board 5 According to the Segal Survey, price inflation for services and supplies continues to be the biggest element of overall medical plan trend. In 2010, trends in utilization rates are expected to increase compared to 2009 for both hospital and physician services. Investment outlook With the global economic downturn in 2008, OSEEGIB’s investment portfolio experienced losses that continued throughout the first quarter of 2009. By April 2010, OSEEGIB had recovered 72% of what was lost during the downturn. However, market volatility remains and the market value of investments continues to fluctuate widely from month to month. More information on how economic conditions affected OSEEGIB in 2009 as well as OSEEGIB’s 2009 trend experience is included in Management’s Discussion and Analysis. MAJOR INITIATIVES The Centers for Medicare and Medicaid Services (CMS) approved HealthChoice as a Medicare Part D Prescription Drug Plan pursuant to the Medicare Prescription Drug Benefit, Improvement and Modernization Act, effective January 1, 2006. As a result of the subsidy amount paid by CMS totaling approximately $25 million annually, HealthChoice was able to reduce premiums for Medicare-eligible individuals by over $50 per month from 2006 through 2009 and the savings is expected to continue in future years. OSEEGIB began offering a High Deductible Health Plan on January 1, 2008. OSEEGIB requires the participant to have a Health Savings Account (HSA) before enrolling in the high deductible plan. The high deductible plan has a $1,500 deductible for an individual and a $3,000 deductible per family. For several years the cost of outpatient care has risen at a significantly faster rate than inpatient care. To provide better control over the costs of outpatient care, OSEEGIB recontracted with nearly 500 network facilities, changing the reimbursement methodology for outpatient facilities. The types of facilities involved were hospitals, dialysis facilities, rehabilitation centers, sleep study centers and skilled nurse facilities. The new contracts went into effect April 1, 2008. OSEEGIB began enhancing benefits to encourage tobacco cessation in 2008 by allowing active and retired members and enrolled dependents to obtain all FDA-approved tobacco cessation drugs without prior authorization. OSEEGIB has taken this initiative much further in 2010, by reducing copays on tobacco cessation prescription drugs to $5.00. Effective January 1, 2011, this same copayment benefit will be extended to Medicare members. In addition, OSEEGIB entered into an agreement with the Tobacco Settlement Endowment Trust (TSET) to provide, at no cost to the member, counseling and up to two 12-week courses of over-the-counter nicotine replacement treatment (gum, patch, lozenge) to HealthChoice members who want to quit smoking. OSEEGIB intends to contract with a vendor to administer a Health Risk Assessment (HRA) for the benefit of HealthChoice members. The program will empower, educate and motivate members Oklahoma State and Education Employees Group Insurance Board 6 to take action and improve their health and safety. In addition, the HRA vendor will provide data that OSEEGIB can use to assess various risks of the group as a whole and act to reduce the risk. OSEEGIB is further evaluating coordinating a disease management program with the HRA. As a sponsor of an early retiree program (HealthChoice), OSEEGIB submitted on June 29, 2010 its application to participate in the Early Retiree Reinsurance Program of PPACA recently passed by Congress. PPACA mandates the application include a description for the cost-savings programs and procedures currently in place for chronic and high cost claimants, a projection of the reinsurance amount, and a description of the intended uses of the funds. The U.S. Department of Health and Human Services (HHS) must approve the application before a plan can participate in the program. If the application is approved, then 80% of the amount of an early retiree’s medical and pharmacy claims between $15,000 and $90,000 in an eligible plan year may be reimbursed to OSEEGIB. OSEEGIB projects a reinsurance amount of $36 million for two years and believes the $5 billion allocated for this program will suffice for at least two years, if not longer. If approved, it is OSEEGIB’s intent to use the proceeds to reduce premiums. OSEEGIB’s actuaries are providing data analytics to better enable OSEEGIB to evaluate utilization and costs at a detail level that has not been readily available in the past. The data compares utilization and costs from year to year and to national norms. OSEEGIB will be using this data to evaluate fee schedules and trends and to promote wellness for members. Members will receive reminders for certain screenings when a member’s demographics and utilization suggest the reminder is appropriate. OSEEGIB’s third party claims administrator will also be providing additional data in 2011 based on claims data that will further enhance identification of trends in healthcare on the member and provider levels. OSEEGIB is doing its part to encourage the preservation of the environment by eliminating paper wherever possible. Beginning June 2010, HealthChoice members can access their Explanation of Benefits (EOB) online and opt out of receiving paper EOBs. HealthChoice network providers also have online access to their Remittance Advices. Employer groups may access their bill online and may opt out of receiving a paper bill. Numerous reports are now being provided electronically. In addition, OSEEGIB’s third party administrators will be providing electronic information to the state’s flexible spending plan that will reduce the paper documentation required for filing a flexible spending account claim. LEGISLATION The following are recently passed laws that have an effect on OSEEGIB: Federal The American Recovery and Reinvestment Act (ARRA) was a wide-sweeping act with limited but significant effect on OSEEGIB. The Act was signed and effective February 17, 2009. The Act provided for a federal subsidy towards the COBRA premium for any individual who was involuntarily terminated from employment. This Act required employers to facilitate this subsidy by ensuring that the member was only billed 35% of the monthly premium. Employers were required Oklahoma State and Education Employees Group Insurance Board 7 to pay the other 65% and obtain reimbursement through a credit on the employer’s payroll tax return. Since OSEEGIB directly bills members electing the COBRA benefit, this Act required a great amount of communication and coordination between OSEEGIB and participating groups. As discussed in the Economic Outlook section of this letter, the Patient Protection and Affordable Care Act (PPACA) contains wide-sweeping healthcare reform that affects OSEEGIB, its participating groups, members, and healthcare providers. OSEEGIB has responded to the PPACA by designating a primary committee and several subcommittees who are very involved in evaluating the Act and ensuring that OSEEGIB will be in compliance with every requirement. Fortunately, OSEEGIB already complies with many of the mandates. PPACA contains language exempting existing insurance plans from some of the mandates as long as they maintain ‘grandfathered’ status. OSEEGIB anticipates maintaining grandfathered status for 2011 but may not keep that status in later years. Changes that will affect OSEEGIB are as follows: • Plans are required to provide dependent coverage until an adult child (married or unmarried) turns 26. OSEEGIB currently covers dependent children up to age 25, but beginning January 1, 2011 will cover dependent children up to age 26. • Plans are prohibited from applying annual and lifetime dollar limits. OSEEGIB currently does not have either type of limit for medical claims; however, the $2 million cap on pharmacy claims will be removed. • PPACA requires plans to provide a host of preventive services to members at no cost to the member. This requirement is estimated to cost $26 million annually. This will not apply to OSEEGIB until grandfathered status is lost. • Plans are required to provide members with a summary of benefits and coverage explanation that meets standards developed by HHS which have not yet been completely developed. • Plans are required to report loss ratios and make these reports available to HHS. Plans not meeting certain loss ratios must provide premium rebates to their members. • PPACA allocates $5 billion to be used nationwide to subsidize the cost of coverage for retirees who are not yet Medicare eligible. OSEEGIB applied for the subsidy on June 29, 2010, the first day plans were allowed to send the application. The funds are available on a first come first serve basis in order of filing claims. HHS has not yet provided guidance on when or how to file the claims. More information regarding this topic can be found in the Major Initiatives section. • PPACA states employers must disclose the aggregate cost of benefits provided by employers for each employee’s health insurance coverage on the employee’s annual Form W-2 which will require increased communication between OSEEGIB and participating groups. Oklahoma State and Education Employees Group Insurance Board 8 Oklahoma Senate Bill 0565 (2008) removed the requirement that a dependent between age 19 and age 25 be a full-time student. Senate Bill 1168 (2008) provides that health benefit plans, including OSEEGIB, shall not exclude otherwise allowable claims which occur in conjunction with the arrest or pretrial detention of the policyholder. Senate Bill 1766 (2008) allows directors of a conservation district to participate in the health and dental plans offered by OSEEGIB. House Bill 1055 (2009) formally creates the State Employee Health Insurance Review Working Group. House Bill 1170 (2009) creates the Oklahoma Information Services Act and creates a position of Chief Information Officer for the State who shall issue a plan to transfer, coordinate and modernize all information technology and communications systems for all state agencies. Senate Bill 757 (2009) creates the Health Infrastructure Advisory Board that will look at the use of electronic medical information records and health information technologies. The OSEEGIB Chief Information Officer will serve on that Board. Senate Bill 822 (2009) creates a legislative task force to review the state’s current health insurance mandates and determine if any of them should be recommended for further legislative changes. House Bill 2363 (2010) creates a statewide voluntary buyout program for retirement-eligible state workers. The bill requires agencies that receive reimbursements for voluntary buyouts to agree that its number of full-time-equivalent employees shall be reduced by that number of positions for a period of not less than 36 months. House Bill 2437 (2010) requires all health carriers to pay an access payment of 1 percent on all claims paid beginning from the effective date of the act until January 1, 2015. It requires monthly payments to the Oklahoma Insurance Department on all claims paid and incurred beginning July 1, 2010. House Bill 2698 (2010) creates the Oklahoma Government Website Information Act, requiring public bodies on or before January 1, 2011, to make available on Internet web sites or on a general web site any administrative rules adopted by the public body, proposed administrative rules, statutes affecting the body and its operations, and any statutes the public may find useful in interacting with the body. FINANCIAL INFORMATION OSEEGIB’s management is responsible for establishing and maintaining an internal control Oklahoma State and Education Employees Group Insurance Board 9 structure designed to ensure that assets are protected and to provide accurate accounting data. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived. The valuation of costs and benefits requires estimates and judgments by management. Change in Financial Statement Presentation. During 2006 and 2007, OSEEGIB applied the provisions of GASB Statement No. 43 (GASB 43), Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and presented the portion of its activity related to covered active employees of participating employers as a public entity risk pool and the portion of its activity related to covered retirees of participating employers as an agency fund in accordance with the guidance for multiple-employer OPEB (other post-employment benefits) plans that are not administered as trusts. During 2008, OSEEGIB determined its activity related to covered retirees of participating employers does not meet the definition of an OPEB plan, and therefore is not subject to GASB 43. Additionally, as OSEEGIB is not a cooperative group of governmental entities joining together to finance exposure to risk, OSEEGIB is not subject to GASB Statement No. 10, Accounting and Reporting for Risk Financing and Related Insurance Issues. OSEEGIB, as an instrumentality of the State of Oklahoma created to administer, manage, and provide group health, dental, life and disability insurance for active employees and retirees of state agencies, school districts and other governmental units, believes the preferred method of accounting and reporting presentation is a special-purpose government engaged solely in business-type activities, more specifically an insurance enterprise. Effective January 1, 2008, OSEEGIB changed its financial statement accounting and reporting presentation and reported results in a single enterprise fund presentation and no longer included an agency fund. Single Audit. OSEEGIB does not receive federal funding and, therefore, is not required to undergo an annual single audit in conformity with the provisions of the Single Audit Amendments of 1996 and U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Budgeting Controls. All administrative expenses are funded from premiums. Funds needed for administrative expenses are transferred to a Revolving Fund, which is not subject to fiscal year limitations and is under the control of OSEEGIB. OSEEGIB maintains budgetary controls to ensure compliance with provisions embodied in the annual budget approved by the Board of Directors. The level of budgetary control (that is, the level at which expenditures cannot exceed the budgeted amount) is established by function and activity. OSEEGIB maintains an encumbrance accounting system as its primary technique for accomplishing budgetary control. As demonstrated by the financial statements included in this report, OSEEGIB is meeting its responsibility for sound financial management. Proprietary Operations. OSEEGIB’s revenue from operations consists of health, dental, life, and disability premiums remitted by each participating entity for their employees, or directly by retirees or participants under COBRA. Also included in premium revenue are premium subsidies received from the Centers for Medicare and Medicaid (CMS) Medicare Part D program. Other operating revenues consist of pharmacy rebates and a risk adjustment fee collected from HMOs. Operational expenses are primarily paid and incurred claims. The following charts illustrate enrollment, premiums and claims broken down between active participants, pre-Medicare retirees, and Medicare retirees. Enrollment (Covered Lives) vs. Incurred Claims Health Program - Year Ended December 31, 2009 Exhibit 2 Enrollment Incurred Claims Active Pre-Medicare Medicare 35,183 10,958 135,888 $84,913,764 $134,851,348 $515,264,885 Active employees comprise 75% of OSEEGIB’s primary member population and 70% of 2009 paid claims. Pre-Medicare retirees make up only 6% of OSEEGIB’s primary member population but account for 12% of paid claims and retirees over age 65 make up 19% of OSEEGIB’s primary member population and 18% of paid claims. Oklahoma State and Education Employees Group Insurance Board 10 $600,000,000 $100,000,000 $200,000,000 $300,000,000 $400,000,000 $500,000,000 $0 Active Pre-Medicare Medicare 583,025,749 515,264,885 506,593,185 83,511,564 54,920,205 84,913,764 134,851,348 134,500,248 140,025,545 Premiums Paid Claims Incurred Claims Comparison of Premiums and Incurred Claims Health Program - Year Ended December 31, 2009 $700,000,000 Pharmacy claims are included in total health claims. For active employees, health premiums for 2009 were $67.8 million over incurred claims for the year, a difference of 13%. For pre-Medicare members health premiums fall short of covering incurred claims by $30.0 million or 35%, primarily because premiums for active employees and pre-Medicare retirees are priced at a fully blended rate. For Medicare retirees, health premiums were $5.2 million over incurred claims for a difference of 4%. Oklahoma State and Education Employees Group Insurance Board 11 Exhibit 3 The following exhibit illustrates medical and prescription drug claims for each participant category. Oklahoma State and Education Employees Group Insurance Board 12 Medical and Prescription Drug Paid Claims Year Ended December 31, 2009 Medical Claims 21% 79% 25% 75% 35% 65% Exhibit 4 Active Pre-Medicare Medicare Prescription Drug Claims For the active and pre-Medicare population less than one fourth of total paid claims are for prescription drugs. For the Medicare population the majority of paid claims are for prescription drugs. Administrative expenses make up approximately 4% of OSEEGIB’s total expenses and 4% of premium revenue. This compares favorably with industry averages. Cash and Investment Management. OSEEGIB maintains minimum cash balances as required by statute to fund released warrants. All excess cash is deposited with a custodial bank, which in turn credits OSEEGIB’s short-term cash money market account. In addition to the money market account, OSEEGIB has two fixed income money managers and three equity securities managers. All invested funds are regulated by OSEEGIB’s investment policy, set by the Board of Directors, and monitored by OSEEGIB administration. The policy speaks specifically to liquidity, asset quality, maturity and duration of fixed income terms, and specific asset mix by statutory fund. In addition, the policy sets benchmark expectations for each type of money manager. A more detailed summary of OSEEGIB’s financial position and result of operations is included in Management’s Discussion and Analysis. OTHER INFORMATION Independent Audit. The accounting firm of KPMG LLP has been retained to perform an annual audit. The independent auditors’ report on the basic financial statements is included in the financial section of this report. Retirement of Administrator. Mr. Bill Crain, Administrator of OSEEGIB for 8 years, retired January 1, 2010. Mr. Frank Wilson was appointed new Administrator. A list of principal officials at January 1, 2010, is included as well as a list of principal officials at December 31, 2009. Acknowledgments. The preparation of the comprehensive annual financial report was made possible by the dedicated service of the entire staff of the accounting/finance department. In addition, we wish to acknowledge the contribution made by Mr. Gary Beebe, Financial Accounting. In closing, without the leadership and support of the governing body of OSEEGIB, preparation of this report would not have been possible. Respectfully submitted, Lynne Bajema Diana O’Neal Deputy Administrator, Finance Director of Finance Oklahoma State and Education Employees Group Insurance Board 13 Oklahoma State and Education Employees Group Insurance Board 14 Executive Organizational Chart Legislature State of Oklahoma Oklahoma State and Education Employees Group Insurance Board Board Auditor Board Legal Counsel Agency Administrator General Counsel to the Administrator Regulatory Affairs Deputy Administrator Finance - Administration Human Resources Deputy Administrator Operations Information Technology Finance and Accounting Member Services Health Care Management Policy Research Public Information Provider Relations Oklahoma State and Education Employees Group Insurance Board 15 BOARD Administrator Bill Crain Deputy Administrators Finance Frank Wilson Operations Paul King Division Directors General Counsel, Board Paul Duncan Internal Audit Joe McCoy General Counsel, Administrator Kathy Pendarvis Finance and Accounting Lynne Bajema Government Liaison Dana Webb Human Resources Gene Krier Information Technology Bo Reese Health Care Management Yasmine Barve Provider Relations Teresa South Member Services Victoria Goodwin Public Information Teresa Robinson Richard N. Womack, Chairman Eugene P. Reding, Vice Chairman Kim Holland Cody Graves Michael Clingman Steven Mattachione W. R. Moon V. David Miller List of Principal Officials December 31, 2009 BOARD Oklahoma State and Education Employees Group Insurance Board 16 Richard N. Womack, Chairman Eugene P. Reding, Vice Chairman Kim Holland Cody Graves Michael Clingman Steven Mattachione W. R. Moon V. David Miller Administrator Frank Wilson Deputy Administrators Finance Lynne Bajema Operations Paul King Division Directors General Counsel, Board Paul Duncan Internal Audit Joe McCoy General Counsel, Administrator Kathy Pendarvis Finance and Accounting Diana O’Neal Government Liaison Dana Webb Human Resources Gene Krier Information Technology Bo Reese Health Care Management Yasmine Barve Provider Relations Teresa South Member Services Victoria Goodwin Public Information Teresa Robinson List of Principal Officials January 1, 2010 Section Financial KPMG LLP 210 Park Avenue, Suite 2850 Oklahoma City, OK 73102-5683 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. Independent Auditors’ Report Members of the Board Oklahoma State and Education Employees Group Insurance Board Oklahoma City, Oklahoma: We have audited the accompanying balance sheets of the Oklahoma State and Education Employees Group Insurance Board (OSEEGIB), a component unit of the State of Oklahoma, as of December 31, 2009 and 2008, and the related statements of revenues, expenses and changes in fund equity, and cash flows for the years then ended. These financial statements are the responsibility of OSEEGIB’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of OSEEGIB’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Oklahoma State and Education Employees Group Insurance Board as of December 31, 2009 and 2008, and the changes in its financial position and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. As discussed in note 2(n) to the financial statements, OSEEGIB changed its method of financial statement presentation during 2008. In accordance with Government Auditing Standards, we have also issued our report dated April 29, 2010, on our consideration of OSEEGIB’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. The accompanying management’s discussion and analysis on pages 19 through 26 is not a required part of the basic financial statements, but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. April 29, 2010 18 19 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Overview of the Financial Statements The Oklahoma State and Education Employees’ Group Insurance Board’s (OSEEGIB) basic financial statements are prepared on the basis of accounting principles generally accepted in the United States of America for governmental entities and insurance enterprises where applicable. The primary purpose of OSEEGIB is to provide group health, dental, life, and disability insurance for employees of state agencies, school districts, and other governmental units as set forth in Title 74 of the Oklahoma Statutes. OSEEGIB is a component unit of the State of Oklahoma. During 2006 and 2007, OSEEGIB applied the provisions of GASB Statement No. 43 (GASB 43), Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and presented the portion of its activity related to covered active employees of participating employers as a public entity risk pool and the portion of its activity related to covered retirees of participating employers as an agency fund in accordance with the guidance for multiple-employer OPEB (other post-employment benefits) plans that are not administered as trusts. During 2008, OSEEGIB determined its activity related to covered retirees of participating employers does not meet the definition of an OPEB plan and, therefore, is not subject to GASB 43. Additionally, as OSEEGIB is not a cooperative group of governmental entities joining together to finance exposure to risk, OSEEGIB determined it is not subject to the guidance for public entity risk pools in GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. OSEEGIB, as an instrumentality of the State of Oklahoma created to administer, manage, and provide group health, dental, life, and disability insurance for active employees and retirees of state agencies, school districts, and other governmental units, believes the preferred method of accounting and reporting presentation is a special-purpose government engaged solely in business-type activities, more specifically an insurance enterprise. Effective January 1, 2008, OSEEGIB changed its financial statement accounting and reporting presentation and reported results in a single enterprise fund presentation and no longer included an agency fund. Additionally, as a result of the change in accounting and reporting presentation, disability reserves of approximately $13,504,000 were required to be recognized and policy maintenance costs of approximately $2,897,000 were required to be included in the premium deficiency reserve decreasing beginning fund equity for 2008. The total effect of the change in accounting and reporting presentation on fund equity on January 1, 2008 is as follows: As originally Effect of reported As adjusted change Fund equity, January 1, 2008 $ 187,891,608 171,490,197 16,401,411 The 2007 financial statements included in the financial highlights section below have been adjusted to reflect the change in accounting and reporting presentation for comparability purposes. 20 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) The three financial statements presented within the basic financial statements are as follows: Balance Sheets – This statement presents information reflecting OSEEGIB’s assets, liabilities, and fund equity. Fund equity represents the amount of total assets less total liabilities. The balance sheet is classified as to current and noncurrent assets and liabilities. For purposes of the financial statements, current assets and liabilities are those assets and liabilities with immediate liquidity or which are collectible or becoming due within twelve months of the statement date. OSEEGIB’s investment balances are considered current assets, as OSEEGIB has historically experienced a high portfolio turnover rate. Statements of Revenues, Expenses, and Changes in Fund Equity – This statement reflects OSEEGIB’s operating revenues and expenses, as well as nonoperating revenues during the year. The major source of operating revenue is premium income and the major sources of operating expenses are health, dental, life, and disability benefits. The change in fund equity for an enterprise fund is similar to net profit or loss for a private sector insurance company. Statements of Cash Flows – The statements of cash flows are presented on the direct method of reporting which reflects cash flows from operating, capital and related financing, and investing activities. Cash collections and payments are reflected in this statement to arrive at the net increase or decrease in cash for the fiscal year. 21 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Financial Highlights The management of the Oklahoma State and Education Employees’ Group Insurance Board (OSEEGIB) offers readers of OSEEGIB’s financial statements this narrative overview and analysis of the financial activities of the entity for the years ended December 31, 2009, 2008, and 2007. December 31 2009 v. 2008 Change 2009 2008 2007 Amount Percentage Cash and investments $ 259,205,958 217,007,595 288,440,918 42,198,363 19.4% Premiums receivable, net 30,454,967 24,966,549 27,033,170 5,488,418 22.0 Other current assets 13,809,260 8,091,122 13,816,166 5,718,138 70.7 Total current assets 303,470,185 250,065,266 329,290,254 53,404,919 21.4 Office equipment, net 609,442 710,218 856,296 (100,776) (14.2) Total assets $ 304,079,627 250,775,484 330,146,550 53,304,143 21.3% Policy and contract claim reserves $ 107,617,000 98,479,000 88,584,000 9,138,000 9.3% Disability reserves (current only) 2,846,000 2,747,000 2,663,032 99,000 3.6 Premium deficiency reserves — 11,915,000 24,627,000 (11,915,000) (100.0) Other current liabilities 22,608,838 16,638,908 31,940,942 5,969,930 35.9 Total current liabilities 133,071,838 129,779,908 147,814,974 3,291,930 2.5 Total noncurrent liabilities 10,963,000 10,552,000 10,841,379 411,000 3.9 Total liabilities 144,034,838 140,331,908 158,656,353 3,702,930 2.6 Invested in capital assets 609,442 710,218 856,296 (100,776) (14.2) Unrestricted fund equity 159,435,347 109,733,358 170,633,901 49,701,989 45.3 Total fund equity 160,044,789 110,443,576 171,490,197 49,601,213 44.9 Total liabilities and fund equity $ 304,079,627 250,775,484 330,146,550 53,304,143 21.3% 22 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Year ended December 31, 2009 v. 2008 Change 2009 2008 2007 Amount Percentage Premium revenue $ 861,781,691 761,944,652 798,961,929 99,837,039 13.1% Other operating revenues 14,729,837 14,382,892 15,136,247 346,945 2.4 Total operating revenues 876,511,528 776,327,544 814,098,176 100,183,984 12.9 Benefits expense 810,727,132 779,338,684 749,970,728 31,388,448 4.0 Change in claim reserves 9,648,000 9,689,589 3,166,412 (41,589) (0.4) Change in premium deficiency reserves (11,915,000) (12,712,000) 24,627,000 797,000 (6.3) Administrative and claims processing expense 38,423,432 38,717,310 41,222,380 (293,878) (0.8) Total operating expenses 846,883,564 815,033,583 818,986,520 31,849,981 3.9 Operating income (loss) 29,627,964 (38,706,039) (4,888,344) 68,334,003 (176.5) Net investment income (loss) 19,973,249 (22,340,582) 13,590,378 42,313,831 (189.4) Change in fund equity 49,601,213 (61,046,621) 8,702,034 110,647,834 (181.3) Fund equity, beginning of year, as adjusted 110,443,576 171,490,197 162,788,163 (61,046,621) (35.6) Fund equity, end of year $ 160,044,789 110,443,576 171,490,197 49,601,213 44.9% OSEEGIB’s total assets for the year ended December 31, 2009 increased by approximately 21% from the previous year after a decrease of 24% during 2008. Cash and investments increased by $42.2 million or 19% during 2009 due to favorable claims experience and a rebounding investment market after decreasing by $71.4 million or 25% during 2008’s year of high claims experience combined with a drastic downturn in the investment market. During 2009, OSEEGIB earned approximately $6.2 million in interest and dividend income. OSEEGIB realized investment losses of $2.9 million and experienced $17.1 million in unrealized gains. Investment expenses were approximately $438,000, resulting in a total net gain on investments of $20.0 million. In 2008, OSEEGIB earned approximately $8.2 million in interest and dividend income, experienced $156,000 in realized losses and $29.8 million in unrealized losses, and paid $581,000 in investment expenses for a net investment loss of $22.3 million. OSEEGIB’s investment allocation at December 31, 2009 is comprised of approximately 53% fixed income securities, 24% equities, and 23% cash equivalents compared to approximately 59% fixed income securities, 23% equities, and 18% cash equivalents at December 31, 2008. During 2009, OSEEGIB did not convert any investments to operating cash. During 2008, OSEEGIB liquidated $36 million of fixed income securities and $9 million of equity investments to replenish operating cash. 23 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Premiums receivable at December 31, 2009 increased by $5.5 million over December 31, 2008, primarily due to an increase in the monthly premium for 2009. At December 31, 2008, premiums receivable had decreased by $2.1 million due to a decrease in the number of active members. The decrease was due primarily to the disenrollment of a major university. The increase in other current assets in 2009 of $5.7 million is primarily due to a $3.2 million increase in the receivable for pharmacy rebates as well as an almost $2.0 million increase in a receivable for pending investment sales. In contrast, the decrease in other current assets in 2008 of $5.7 million is primarily due to a $6.8 million decrease in the receivable for unsettled investment trades. Total liabilities as of December 31, 2009 increased $3.7 million from December 31, 2008. Four months after the end of the year, OSEEGIB’s actuaries project the results of the current fiscal year based upon updated trend information as compared to the assumptions used when the rates were set in August of the previous year. If, at that time, it appears that claims experience will exceed premiums received, accounting principles require a premium deficiency reserve liability to be booked on the previous year’s final Balance Sheet and the reserve is amortized as a contra-expense in the current year. There is no premium deficiency reserve liability at December 31, 2009. At December 31, 2008, the premium deficiency reserve liability was $11.9 million. Total claim reserves, including noncurrent disability reserves, at December 31, 2009, were $9.6 million more than reserves at December 31, 2008 due to an overall increase in incurred claims in 2009. At December 31, 2008, total claim reserves including noncurrent disability reserves were $9.7 million more than reserves at December 31, 2007. OSEEGIB contracted with a new Third Party Administrator (TPA) to pay health, dental, and life claims effective January 1, 2009. The TPA under contract for 2008 stopped paying claims on December 19, 2008, reducing paid claims for December and increasing claim reserves at December 31, 2008. Other current liabilities increased $6 million from December 31, 2008 due in part to a $1.1 million increase in the payable to a TPA as well as a $2 million increase in the payable for unsettled investment purchases. Other current liabilities at December 31, 2008 decreased $15.3 million from December 31, 2007 primarily due to a $10.4 million decrease in payables for unsettled investment purchases, as well as a $2.7 million decrease in a non-recurring settlement liability. OSEEGIB saw an increase in net premium revenue for 2009 of approximately $99.8 million, primarily due to the rate increases necessary for 2009. In addition, payments from the Centers for Medicare and Medicaid Services (CMS), which is included in premium revenue, increased by $1.4 million in 2009. In contrast, for 2008 OSEEGIB saw a decrease in premium revenue of approximately $37.0 million, primarily due to the reduction in participation as well as a decrease in the dependent rates in the active and pre-Medicare categories. Payments from CMS during 2008 decreased by $2.9 million from 2007 due to a change in CMS’ payment method. For the year ended December 31, 2009, OSEEGIB earned approximately $14.7 million in other operating income, which consisted of $1.7 million in risk adjustment fee income and $13 million in pharmacy rebates. For the year ended December 31, 2008, OSEEGIB earned approximately $14.4 million in other operating income, which consisted of $2.1 million in risk adjustment fee income and $12.1 million in pharmacy rebates. 24 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Benefits expense, including changes in claim reserves, comprised 96% of OSEEGIB’s total expenses for 2009 and 95% of total expenses in 2008. Changes in premium deficiency reserves are not considered in the calculation. Total benefits expense for 2009, including changes in reserves, increased by $31.3 million, or 4% over the prior year. For the year ended December 31, 2008, total benefits expense, including changes in reserves, increased by $35.9 million, or 5% over the year ended December 31, 2007. Health and dental claim costs increased by approximately $27.1 million, or 4%, over the prior year primarily due to increases in incurred claims for pharmacy benefits. The actual increase varied favorably from the 9% increase assumed by the actuaries when setting 2009 rates. For the year ended December 31, 2008, health and dental claim costs increased by approximately $34.1 million or 5% over the year ended December 31, 2007. The expense for life benefits increased by approximately $2.8 million or 13% during 2009. In 2008, life benefits expense increased by approximately $5.7 million or 37% over the expense reported for 2007. Disability benefits for 2009 increased by $1.6 million or 7% after decreasing by $3.9 million or 65% in 2008. The sharp decrease in 2008 was primarily because disability reserves increased by $3.2 million in 2007 and have remained relatively stable since. Administrative expenses decreased slightly by $300,000, or 0.8%, in 2009. In 2008, administrative expenses decreased by $2.5 million, or 6%, primarily due to a decrease in the administrative fee assessed by the Oklahoma State Employee Benefits Council. The fee was changed from 2% for 2007 to 1.25% for 2008, resulting in a savings to OSEEGIB of $2.0 million. Administrative expenses made up 4% of OSEEGIB’s total expenses in 2009 and 5% of total expenses in 2008. OSEEGIB experienced an increase in fund equity of approximately $49.6 million, or 45%, for the year ended December 31, 2009. For 2008, there was a decrease in fund equity of approximately $61.0 million, or 36%. The Health and Dental program experienced an increase in fund equity of approximately $49.0 million, or 71%, for the year ended December 31, 2009 due to the increase in premiums and improvement in the investment markets. The premium rates adopted for the Health and Dental Fund were based on assumptions that provided for no increase or decrease in fund equity. During 2008, the Health and Dental program experienced a decrease in fund equity of approximately $52.3 million, or 43%. OSEEGIB’s governing board made a decision to subsidize monthly health premiums for 2008 and experienced a drastic downturn in the investment market. The Life program experienced a decrease in fund equity of approximately $2.4 million or 12% in 2009 and $4.5 million or 18% in 2008. The premium rates adopted for the Life program were based on assumptions that provided for no increase or decrease in fund equity. The Disability program experienced an increase in fund equity of $3.0 million or 14% in 2009 while in 2008 the Disability program experienced a decrease in fund equity of $4.3 million or 16%. The premium rates adopted for the Disability program were based on assumptions that provided for no increase or decrease in fund equity. 25 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 Economic Conditions The insurance industry monitors healthcare costs by establishing a percentage of cost increases known as “trend”. According to the Segal Health Plan Cost Trend Survey, trend is the forecast change in health plans’ per-capita claims cost determined by insurance carriers, managed care organizations, and third-party administrators. Many factors influence trend, including: Price inflation, Deductibles and copayments, Cost-shifting, Utilization increases due to aging, product promotion and improved diagnostic services, The availability and use of more expensive drug therapies, Government mandated benefits and other legislative changes, and Technological changes. For 2009, the overall nationwide health trend for employer sponsored plans, according to AON Consulting, OSEEGIB’s actuarial firm, was 10.9% for PPO plans with pharmacy benefits. The national trend for Medicare supplement plans was 7.6% for 2009. Historically, OSEEGIB’s cost trends have tracked below national averages. As a large self-funded plan, OSEEGIB’s cost trends are cyclical in nature, and can vary during a given plan year. OSEEGIB experienced an average medical trend of 8-9% during 2008 and 2009 for active members and retirees under age 65. OSEEGIB’s trend for the Medicare supplement plan was a decrease of 1.0%. These figures measured OSEEGIB’s paid claims and did not adjust for plan design or provider contracting changes during the measurement period. Since premium rates are set in August, the rate setting process applies trends experienced through April. The medical trend applied by OSEEGIB’s actuaries for calculating 2009 rates was 9.5% for active employees and pre-Medicare retirees and 7.0% for Medicare retirees. The prescription drug trend used for setting 2009 rates was 7.5% for active employees and pre-Medicare retirees and 7.5% for Medicare retirees. The dental trend used for setting 2009 rates was 6.0%. The medical trend applied by OSEEGIB���s actuaries for calculating 2008 rates was 8.0% for active employees and pre-Medicare retirees and 7.0% for Medicare retirees. The prescription drug trend used for setting 2008 rates was 7.5% for active employees, pre-Medicare retirees, and Medicare retirees. The dental trend used for setting 2008 rates was 7.2%. OSEEGIB’s investment portfolio rebounded in 2009 after a dismal year in 2008. The return on investment (ROI) assumed by OSEEGIB’s actuaries in setting premium rates for 2009 was a combined return of 4.4% and the actual rate of return was 8.5%. In contrast, OSEEGIB’s investment holdings suffered in 2008 with the global economic downturn after experiencing five years of positive returns. Relative to the market decline overall, OSEEGIB’s investment losses were minimized due to OSEEGIB’s conservative investment policy. The ROI assumed by OSEEGIB’s actuaries in setting premium rates for 2008 was a combined return of 4% and the actual ROI for 2008, after large market losses in the final quarter, was a 10% loss. 26 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 The Patient Protection and Affordable Care Act was signed by President Obama on March 23, 2010. This Act includes wide-sweeping changes to many facets of the nation’s healthcare system. OSEEGIB is in the process of evaluating the effect this massive piece of legislation has on operations and benefits. 27 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Balance Sheets December 31, 2009 and 2008 Assets 2009 2008 Current assets: Cash and cash equivalents $ 83,857,770 63,240,471 Investments 175,348,188 153,767,124 Receivables: Interest and dividends receivable 383,621 388,354 Unsettled investment sales 3,833,553 887,140 Premiums, net of allowance of $800,000 and $310,000 at December 31, 2009 and 2008, respectively 30,454,967 24,966,549 Pharmacy rebate 8,594,904 5,279,700 Other, net 997,182 1,535,928 Total current assets 303,470,185 250,065,266 Noncurrent assets: Office equipment 4,163,900 4,438,752 Less accumulated depreciation (3,554,458) (3,728,534) Office equipment, net 609,442 710,218 Total assets $ 304,079,627 250,775,484 Liabilities Current liabilities: Health and dental reserves $ 102,804,000 93,771,000 Life reserves 4,813,000 4,708,000 Disability reserves 2,846,000 2,747,000 Premium deficiency reserve — 11,915,000 Premiums due to health maintenance organizations and other insurers 9,246,824 8,705,679 Payable for investment purchases 3,878,548 836,471 Other accrued liabilities 9,483,466 7,096,758 Total current liabilities 133,071,838 129,779,908 Noncurrent liabilities: Disability reserves 10,963,000 10,552,000 Total liabilities 144,034,838 140,331,908 Fund Equity Invested in capital assets 609,442 710,218 Unrestricted 159,435,347 109,733,358 Total fund equity 160,044,789 110,443,576 Total liabilities and fund equity $ 304,079,627 250,775,484 See accompanying notes to basic financial statements. 28 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Statements of Revenues, Expenses and Changes in Fund Equity Years ended December 31, 2009 and 2008 2009 2008 Operating revenues: Premium revenue $ 861,781,691 761,944,652 Other operating revenues 14,729,837 14,382,892 Total operating revenues 876,511,528 776,327,544 Operating expenses: Benefits expense 810,727,132 779,338,684 Change in health and dental reserves 9,033,000 8,974,000 Change in life reserves 105,000 921,000 Change in disability reserves 510,000 (205,411) Change in premium deficiency reserve (11,915,000) (12,712,000) Administrative and claim processing 38,423,432 38,717,310 Total operating expenses 846,883,564 815,033,583 Operating income (loss) 29,627,964 (38,706,039) Nonoperating revenues: Net investment income (loss) 19,973,249 (22,340,582) Change in fund equity 49,601,213 (61,046,621) Fund equity, beginning of year, as adjusted on January 1, 2008 (note 2(n)) 110,443,576 171,490,197 Fund equity, end of year $ 160,044,789 110,443,576 See accompanying notes to basic financial statements. 29 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Statements of Cash Flows Years ended December 31, 2009 and 2008 2009 2008 Cash flows from operating activities: Premiums collected $ 830,462,048 739,916,245 Premiums collected on behalf of health maintenance organizations and other insurers 120,025,897 113,263,794 Payments collected from CMS 25,172,614 22,860,814 Risk adjustment premium collected 1,708,628 2,150,474 Pharmacy rebates collected 9,979,237 11,226,526 Benefits paid (810,727,132) (779,338,684) Premiums paid to health maintenance organizations and other insurers (118,826,141) (113,273,374) Payments to employees for services (10,181,591) (10,168,964) Payments to suppliers for goods and services (25,622,234) (30,439,923) Other operating cash received (paid) 265,515 (296,940) Net cash provided by (used in) operating activities 22,256,841 (44,100,032) Cash flows from capital and related financing activities: Acquisition of office equipment (132,124) (169,559) Net cash used in capital and related financing activities (132,124) (169,559) Cash flows from investing activities: Purchases of investments (194,426,040) (129,574,575) Proceeds from sales and maturities of investments 187,166,476 167,634,080 Investment income received 5,752,146 7,810,264 Net cash (used in) provided by investing activities (1,507,418) 45,869,769 Net increase in cash and cash equivalents 20,617,299 1,600,178 Cash and cash equivalents, beginning of year 63,240,471 61,640,293 Cash and cash equivalents, end of year $ 83,857,770 63,240,471 Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) $ 29,627,964 (38,706,039) Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation 232,900 315,637 Change in operating assets and liabilities: Premium receivable (5,488,418) 2,066,621 Other receivables (2,776,458) (1,302,832) Claim reserves 9,138,000 9,895,000 Disability reserves 510,000 (205,411) Premium deficiency reserves (11,915,000) (12,712,000) Premiums due to health maintenance organizations and other insurers 541,145 (288,056) Other liabilities 2,386,708 (3,162,952) Total adjustments (7,371,123) (5,393,993) Net cash provided by (used in) operating activities $ 22,256,841 (44,100,032) See accompanying notes to basic financial statements. 30 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (1) Description of OSEEGIB The Oklahoma State and Education Employees Group Insurance Board (OSEEGIB) is a special purpose state and local government engaged solely in business-type activities. OSEEGIB is a legal trust which administers, manages and provides group health, dental, life, and disability insurance for active employees and retirees of state agencies, school districts, and other governmental units of the State of Oklahoma. OSEEGIB is self-insured and is financed through premiums collected from employers and employees. OSEEGIB provides insurance solely to eligible employees, dependents, and retirees. OSEEGIB is a component unit of State of Oklahoma (the State). The following brief description of OSEEGIB is provided for general information purposes only. Participants should refer to Title 74 of the Oklahoma Statutes, Sections 1301 et seq. as amended, for more complete information. In accordance with Title 74, OSEEGIB maintains three separate programs, the Health and Dental program, the Life program, and the Disability program. There is no statutory restriction that would prevent assets accumulated in one program from paying benefits due from another program. The eight-member board which administers OSEEGIB (the Board) is comprised of two members appointed by the governor, two members appointed by the speaker of the House of Representatives, two members appointed by the president pro tempore of the Senate, the commissioner of the Oklahoma Insurance Department and the director of the Office of State Finance. The Board has a fiduciary responsibility to manage the funds and invest the assets of OSEEGIB. This moral and legal obligation establishes a trustee relationship whereby OSEEGIB’s funds are held for the ultimate benefit of those who obtain insurance from OSEEGIB. (a) General In 1968, OSEEGIB was formed by the State Legislature to provide group health, dental, and life benefits to participants of the Oklahoma Public Employees Retirement System (OPERS) and active employees of the State. Subsequently, other groups became eligible for participation, including persons covered under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), survivors and certain local government employees. COBRA allows temporary continuance of insurance coverage under certain circumstances. Survivors are individuals who were covered eligible dependents of a participant in OSEEGIB at the time of the participant’s death. OSEEGIB was created by the State Legislature and could be terminated by the same body. In 1978, OSEEGIB became self-insured. Beginning in 1985, participants were given the option of electing health coverage from certain health maintenance organizations (HMOs). Plans similar to HMOs provide dental coverage for those participants who elect to participate in them (DMOs). In 1986, the State added a self-insured disability program to OSEEGIB. 31 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) In 1989, participants of the Teachers’ Retirement System of Oklahoma (TRS) and active employees of school districts became eligible to enroll in OSEEGIB (educational participants). House Bill No. 1731, which provided TRS participants the option to enroll in OSEEGIB, required the TRS to transfer $39,600,000 to OSEEGIB. The educational participants receive the same health and dental coverage options provided to state and local governmental participants. Life coverage was made available to active educational participants beginning July 1, 1991. Disability coverage is not available to educational participants. Effective July 1, 1993, the Oklahoma State Employee Benefit Council (EBC) began contracting with HMOs and DMOs on behalf of state employees to provide health and dental coverage for those participants who elect such coverage. Effective January 1, 2006, OSEEGIB became a Medicare Part D Prescription Drug Plan pursuant to the Medicare Prescription Drug Improvement and Modernization Act of 2003. (b) Premiums and Participants The health, dental, life, and disability benefits for governmental participants are funded by monthly premiums paid by the State, local governmental units, OPERS, and individuals. The health, dental, and life benefits for educational participants are funded by monthly premiums paid by school districts, the TRS, and individuals. A participant may extend coverage to dependents for an additional monthly premium based on the coverage requested. Premiums for active state employees and their dependents are collected by EBC and remitted to OSEEGIB or other insurer elected by the employee. Premiums remitted to OSEEGIB on behalf of active state employees and their dependents for the years ended December 31, 2009 and 2008 are reported gross of a fee retained by EBC, which is equal to 1.25% of premiums. This fee, which was approximately $3,062,000 and $2,429,000 for the years ended December 31, 2009 and 2008, respectively, is included in administrative expenses in the statements of revenues, expenses and changes in fund equity. For the years ended December 31, 2009 and 2008, premiums for local government, education, and inactive participants who have elected an HMO for health coverage or DMO for dental coverage are collected by OSEEGIB and remitted to the HMO or DMO carrier net of a fee retained by OSEEGIB of 1% of premiums. This fee, which was approximately $1,191,000 and $1,122,000 for the years ended December 31, 2009 and 2008, respectively, is included as an offset to administrative expenses in the statements of revenues, expenses and changes in fund equity. The premium related to HMOs, DMOs, and vision plans was approximately $119,367,000 and $112,985,000 for 2009 and 2008, respectively, and, as OSEEGIB only acts in an agency capacity, the premiums collected on behalf of HMOs, DMOs, and vision plans is not reflected in the statements of revenues, expenses and changes in fund equity. Pursuant to the authority granted by Oklahoma Statute, the Board has the authority to establish and change premium rates for the members, employers, and other contributing entities each year. An outside consultant advises the Board regarding changes in premium rates. If premium rates are changed, they generally become effective at the beginning of the next calendar year. Each HMO and DMO determines its own premium rates. 32 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) OSEEGIB participants are not subject to supplemental assessment in the event of a premium deficiency. At the time of premium payment, the risk of loss due to incurred benefit costs is transferred from the participant to OSEEGIB. If the assets of OSEEGIB were to be exhausted, participants would not be responsible for OSEEGIB’s liabilities. At December 31, 2009, OSEEGIB provided health coverage to 133 state agency divisions with approximately 24,000 primary participants (not including dependents), 616 school districts with approximately 54,000 primary participants, 303 local government entities with approximately 9,000 primary participants, and 33 other groups, which include the governmental and educational retirement systems, COBRA, and survivors, with approximately 39,000 primary participants. Approximately 57,000 dependents participated in OSEEGIB as well. In addition, OSEEGIB collected and remitted premiums for approximately 31,000 primary participants and 23,000 dependents who were covered by HMOs. These counts are provided for health coverage only. At December 31, 2008, OSEEGIB provided health coverage to 134 state agency divisions with approximately 24,000 primary participants (not including dependents), 614 school districts with approximately 52,000 primary participants, 315 local government entities with approximately 9,000 primary participants, and 32 other groups, which include the governmental and educational retirement systems, COBRA, and survivors, with approximately 39,000 primary participants. Approximately 57,000 dependents participated in OSEEGIB as well. In addition, OSEEGIB collected and remitted premiums for approximately 30,000 primary participants and 22,000 dependents who were covered by HMOs. These counts are provided for health coverage only. All state agencies in Oklahoma are required to offer to their active employees the coverage selections offered by EBC. All eligible education or local government entities may elect to participate in OSEEGIB. Any education entity or local government entity which elects to withdraw from offering OSEEGIB as an insurance option may do so with 30 days written notice and must withdraw both its active and inactive participants. (c) Benefits A provider network arrangement is available for health and dental benefits. According to this arrangement, network providers agree to accept amounts for covered services that do not exceed the charges allowed by OSEEGIB. Therefore, the network provider can only expect to receive payment from the participant for the charges allowed by the network agreement. HealthChoice offers a high option and a basic option health benefit plan for non-Medicare participants. A member who elects the high option plan is responsible for a $25 copayment and no deductible for office visits and preventive care services when using network providers. The same services when using nonnetwork providers are reimbursed at 50% after the member meets a $500 calendar year deductible. For other services, network provider and nonnetwork provider benefits are generally reimbursed at 80% and 50%, respectively, after the appropriate deductibles of $500 ($1,500 per family). OSEEGIB reimburses allowed charges at 100% once the member has reached $2,800 and $3,300 per member out-of-pocket maximum for network providers and nonnetwork providers, respectively. 33 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) The basic option plan pays 100% of the first $500 of allowed charges for covered medical services. The member pays 100% of the next $500 ($1,000 per family) of allowed charges. The member and OSEEGIB each pay 50% of the next $10,000 of allowed charges ($20,000 per family). OSEEGIB reimburses allowed charges at 100% once the member has reached the out-of-pocket maximum of $5,500 ($11,000 per family). In addition, for both plans, when using non-network providers, the member is responsible for the excess of billed charges over allowed charges. A HealthChoice USA option is offered to active participants who work outside Oklahoma and Arkansas for more than 90 consecutive days and to non-Medicare retired participants who live outside those two states. These members have the same benefits as the HealthChoice high option, but they access a nationwide provider network. Pharmacy benefits are the same for the high option and the basic option plans. Medications are categorized as either preferred or nonpreferred. When purchasing preferred medications from a network provider, the member is responsible for a copayment of up to $25 for medications costing $100 or less and up to $50 for medications costing more than $100. The maximum copay doubles for nonpreferred medications. In addition, there is a $2,500 per person annual out-of-pocket maximum for preferred medications. There is no out-of-pocket maximum for nonpreferred medications. For nonnetwork providers, the member is responsible for a copay of up to $75 for preferred medications and up to $125 for nonpreferred medications plus a dispensing fee. There is a lifetime maximum pharmacy benefit of $2,000,000 per covered person. Allowed expenses for dental benefits are reimbursed at a percentage ranging from 60% to 100%, based on the class of the allowed expense, when using network providers. The same services when using a nonnetwork provider are reimbursed at a percentage ranging from 50% to 100%. There is a $25 deductible ($75 per family) when using either network or nonnetwork providers. There is a calendar year maximum dental benefit of $2,000 per covered person. Basic life benefits of $20,000 are provided to active state, education, and local government employees. In addition to the basic life benefit of $20,000, participants may elect additional coverage in increments of $20,000 up to the lesser of $300,000 or five times the participant’s salary. Additional dependent life coverage is also available under three separate plans. The low option plan offers dependent life coverage of $6,000 for spouses, $3,000 for children, and $1,000 for children less than six months of age. The standard option plan offers dependent life coverage of $10,000 for spouses, $5,000 for children, and $1,000 for children less than six months of age. The premier option offers dependent life coverage of $20,000 for spouses, $10,000 for children, and $1,000 for children less than six months of age. 34 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Retirees may elect to retain the full coverage for basic life benefits held at the time of termination of employment. Coverage thereafter may be decreased in $5,000 increments to a minimum of $5,000 or totally terminated. Prior to July 1, 2002, no more than $15,000 of basic life insurance could be retained after termination of employment. The retiree may retain dependent life coverage in force on eligible dependents in $500 increments. Disability benefits are based on the length of employment, base salary limited by a maximum allowable salary and length of disability. There is a 30-day qualifying period for short-term disability. Long-term disability becomes effective 180 days after disablement. Income from other sources is used to reduce the benefit amount. The duration of the long-term benefit is determined based upon the age of the participant at disablement and length of employment. A high option and low option Medicare supplement benefit plan is available to those retired participants and their dependents who are eligible to enroll in Medicare, where Medicare is the primary payor. This coverage provides for reimbursement of Medicare-eligible expenses which may not be fully covered by or which exceed the amount allowed by Medicare. Medicare Part A expenses are generally reimbursed at 100% of eligible Medicare expenses not reimbursed by Medicare. The Medicare Part A deductible is also fully reimbursed by OSEEGIB. Medicare Part B expenses are generally reimbursed at 20% of eligible Medicare expenses not reimbursed by Medicare. OSEEGIB has adopted Plan “J” for medical benefits for both the high option and low option plans in accordance with the National Association of Insurance Commissioners’ schedule of Medicare supplement plans, with the addition of a pharmacy prescription program, preventive care benefits, out-of-country benefits and an at-home recovery benefit. Pharmacy benefits for the high option Medicare supplement plan are the same as for the HealthChoice high option plan, with a few minor differences in the formulary. The low option Medicare supplement plan is modeled after the Center for Medicare and Medicaid Services (CMS) standard Part D plan design. Once a participant reaches catastrophic coverage, OSEEGIB pays 100% of the pharmacy cost rather than 95% per CMS’ standard Part D plan design. Health benefits and dental benefits are provided directly by the HMOs and DMOs for all participants who elect such coverage. For each participant who elects HMO or DMO coverage, excluding active state employees, OSEEGIB collects and pays the premiums to each HMO or DMO carrier. For each active state employee who elects HMO or DMO coverage, EBC collects and pays the premiums to each HMO or DMO carrier. The amounts paid by OSEEGIB to each HMO or DMO are in accordance with their respective contracts. Benefits are the responsibility of each HMO or DMO carrier and are subject to the provisions defined in their insurance policies. OSEEGIB has no liability for health benefits or dental benefits of participants who elect HMO or DMO coverage; therefore, activity related to HMO, DMO, and vision benefits are not reflected in the basic financial statements of OSEEGIB. 35 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) All benefits for OSEEGIB are processed and paid by third-party administrators (TPAs). The fees incurred by OSEEGIB for services performed by the TPAs totaled approximately $16,400,000 and $18,900,000 for the years ended December 31, 2009 and 2008, respectively. The decrease in 2009 is a result of deductions from monthly invoices from the health and dental claims TPA for interest paid to providers and performance penalties. TPA fees are included in administrative expenses in the statements of revenues, expenses, and changes in fund equity. A summary of available coverage and eligible groups for the years ended December 31, 2009 and 2008 is as follows: Local State Education government employee employee employee OPERS TRS COBRA Health X X X X X X Dental X X X X X X Life X X X X X Disability X X Medicare supplement X X X (2) Summary of Significant Accounting Policies (a) Basis of Accounting OSEEGIB has prepared its financial statements in accordance with U.S. generally accepted accounting principles for state and local governments. The Governmental Accounting Standards Board (GASB) establishes the U.S. generally accepted accounting principles for state and local governments. GASB requires that proprietary activities apply all applicable GASB pronouncements and Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins issued on or before November 30, 1989, to the extent that they do not conflict with GASB pronouncements. The entity can elect, at its option, to apply all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. OSEEGIB has adopted this option. (b) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. OSEEGIB adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. 36 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (c) Investments and Investment Income Investments are stated at fair value based on quoted prices with changes in fair value included in the statements of revenues, expenses and changes in fund equity. If quoted prices are not available from active exchanges for identical instruments, then fair values are estimated using quoted prices from less active markets, quoted prices of securities with similar characteristics, or by pricing models utilizing other significant observable inputs. Investments in external investment pools, such as commingled funds, are stated at fair value based on actual transaction values. The fair value for one of the commingled funds is $12.49 at December 31, 2008 and the net asset value in the pool of shares is $12.17. There was no difference in the fair value and the net asset value in the pool of shares in the commingled fund at December 31, 2009. OSEEGIB records investment purchases and sales based upon the trade date. Therefore, OSEEGIB records either receivables or payables for unsettled sales or purchases, respectively. Such transactions are usually settled within a few days after the trade date. Realized gains and losses are determined on the average-cost method. The calculation of realized gains and losses is independent of the calculation of the change in net unrealized gains and losses. Realized gains and losses on investments that had been held in more than one year and sold in the current year may have been recognized as unrealized gains and losses in prior years. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. (d) Office Equipment Office equipment is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the equipment, which range from 5 to 10 years. Purchases of equipment costing less than $2,500 are considered to be immaterial and are expensed when purchased. (e) Reserves OSEEGIB establishes health and dental and life reserves based on the ultimate estimated cost of settling claims that have been reported but not settled, and of claims that have been incurred but not yet reported. Disability reserves are also established based on the estimated ultimate cost of settling claims of participants currently receiving benefits and for disability claims incurred but not yet reported to OSEEGIB. Long-term disability reserves are carried at the present value of expected future benefits. The reserves are determined using OSEEGIB’s historical benefit payment experience. These estimates are based on data available at the time of estimate and are reviewed by OSEEGIB’s independent consulting actuaries. The health, dental, and life reserves and the disability reserves include liabilities for claim processing expenses associated with paying claims which have been incurred, but not yet paid. The length of time for which costs must be estimated depends on the coverages involved. 37 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Although reserves reflect OSEEGIB’s best estimates of the incurred claims to be paid, due to the complex nature of the factors involved in the calculation, the actual results may be more or less than the estimate. The claim reserves are recomputed on a periodic basis using actuarial and statistical techniques which consider the effects of general economic conditions, such as inflation, and other factors of past experience, such as changes in participant counts. Adjustments to claim reserves are recorded in the periods in which they are made. Claims must be filed no later than the last day of the calendar year immediately following the calendar year in which the loss is sustained unless an extenuating circumstance can be shown to exist. Premium deficiency reserves are required to be recorded when the anticipated costs of settling claims plus policy maintenance costs for the following fiscal year are in excess of the anticipated premium receipts for the following fiscal year. Anticipated investment income is considered in determining whether a premium deficiency exists. (f) Fund Equity At December 31, 2009 and 2008, OSEEGIB has no legally required minimum fund equity. However, the Board has elected to set a benchmark for minimum fund equity based upon the National Association of Insurance Commissioners (NAIC), the Managed Care Organizations Risk Based Capital Formula for the Health and Dental program, and the NAIC Life/Health Risk Based Capital Formula for the Life and Disability programs. OSEEGIB utilizes the NAIC Risk Based Capital methodology to establish the fund equity benchmark. The minimum fund equity benchmark by the Board at December 31, 2009 and 2008 is approximately $154,276,000 and $139,925,000, respectively. The NAIC Risk Based Capital Formulas were selected as the basis for determining minimum fund equity primarily due to the following factors: Degree and nature of the risks undertaken Size of OSEEGIB Degree of conservatism inherent in the premium rates Degree of safety desired The primary risks that would threaten OSEEGIB’s solvency include the following: The risk that claims incurred will exceed premiums collected The risk of default or decline in value of OSEEGIB’s assets The risk of large monetary judgments stemming from possible lawsuits against OSEEGIB 38 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) A comparison of the minimum fund equity benchmark by the Board and unrestricted fund equity at December 31, 2009 as reported in the basic financial statements is as follows (in thousands): 2009 Health and Dental Disability Program Life Program Program Total Minimum fund equity $ 138,818 10,370 5,088 154,276 Unrestricted fund equity 116,886 17,892 24,657 159,435 A comparison of the minimum fund equity benchmark by the Board and unrestricted fund equity at December 31, 2008 as reported in the basic financial statements is as follows (in thousands): 2008 Health and Dental Disability Program Life Program Program Total Minimum fund equity $ 125,046 10,086 4,793 139,925 Unrestricted fund equity 67,832 20,282 21,619 109,733 Due to unfavorable claims experience in 2008 combined with the downturn in equity and credit markets during 2008, OSEEGIB’s fund equity was below the Board’s current benchmark at December 31, 2008. As part of the rate setting process, the Board considers OSEEGIB’s total fund equity in comparison with the minimum fund equity benchmark in setting rates towards achieving the minimum fund equity benchmark. Title 74 of the Oklahoma Statutes, Section 1321C allows that OSEEGIB may adjust rates mid-year if the need is substantiated by an actuarial determination. Consistent with prior years, OSEEGIB does not anticipate the need for a mid-year rate adjustment for 2010. (g) Premiums Premiums are recognized in the period when the insurance coverage is provided. Premiums are due monthly from the employers or participants based on the rates adopted by the Board. (h) Medicare Part D Subsidy As a Medicare Part D Prescription Drug Plan (PDP), OSEEGIB receives a monthly payment from Medicare. The effect of these payments is to subsidize premiums for the individuals enrolled in the PDP since they pay a reduced premium rate. This amount is approximately $25,173,000 and $23,817,000 for the years ended December 31, 2009 and 2008, respectively, and is included in premium revenue within the statements of revenues, expenses, and changes in fund equity. 39 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (i) Pharmacy Rebate Effective January 1, 1999, under OSEEGIB’s agreement with its pharmacy benefit manager, OSEEGIB receives a guaranteed rebate for each non-Medicare Part D prescription. Effective January 1, 2006, OSEEGIB also receives a specified percentage of manufacturers’ rebates received by the pharmacy benefit manager related to Medicare Part D prescriptions. This amount is approximately $13,060,000 and $12,145,000 for the years ended December 31, 2009 and 2008, respectively, and is included in other operating revenue within the statements of revenues, expenses and changes in fund equity. (j) Risk Adjustment Premiums Risk adjustment premiums are received from HMOs based on factors which are applied to premiums remitted to HMOs for all non-Medicare primary members during the plan year, the factors are intended to offset any adverse selection that may occur to OSEEGIB as a result of younger, healthier members electing HMO coverage. This amount is approximately $1,670,000 and $2,147,000 for the years ended December 31, 2009 and 2008, respectively, and is included in other operating revenue within the statements of revenues, expenses and changes in fund equity. (k) Administrative Expenses Administrative expenses are primarily related to employees of OSEEGIB and professional services, including fees paid to TPAs to process and pay benefits. OSEEGIB does not record deferred acquisition costs since administrative expenses are primarily maintenance expenses and not acquisition expenses. OSEEGIB maintains a budget approved by the Board; however, it is not a legally adopted annual budget. (l) Income Taxes OSEEGIB obtained its latest determination letter dated March 30, 2005, in which the Internal Revenue Service stated that income from the exercise of the essential governmental functions of OSEEGIB is exempt from federal income taxes under Section 115 of the Internal Revenue Code (the Code). (m) Operating Revenues and Expenses Balances classified as operating revenues and expenses are those which comprise the OSEEGIB’s principal ongoing operations. Since OSEEGIB’s operations are similar to those of any other insurance company, most revenues and expenses are considered operating. (n) Change in Financial Statement Presentation During 2006 and 2007, OSEEGIB applied the provisions of GASB Statement No. 43 (GASB 43), Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and presented the portion of its activity related to covered active employees of participating employers as a public entity risk pool and the portion of its activity related to covered retirees of participating employers as 40 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) an agency fund in accordance with the guidance for multiple-employer OPEB (other post-employment benefits) plans that are not administered as trusts. During 2008, OSEEGIB determined its activity related to covered retirees of participating employers does not meet the definition of an OPEB plan and, therefore, is not subject to GASB 43. Additionally, as OSEEGIB is not a cooperative group of governmental entities joining together to finance exposure to risk, OSEEGIB determined it is not subject to the guidance for public entity risk pools in GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. OSEEGIB, as an instrumentality of the State of Oklahoma created to administer, manage, and provide group health, dental, life, and disability insurance for active employees and retirees of state agencies, school districts, and other governmental units, believes the preferred method of accounting and reporting presentation is a special-purpose government engaged solely in business-type activities, more specifically an insurance enterprise. Effective January 1, 2008, OSEEGIB changed its financial statement accounting and reporting presentation and reported results in a single enterprise fund presentation and no longer included an agency fund. Additionally, as a result of the change in accounting and reporting presentation, disability reserves of approximately $13,504,000 were required to be recognized and policy maintenance costs of approximately $2,897,000 were required to be included in the premium deficiency reserve decreasing beginning fund equity. The total effect of the change in accounting and reporting presentation on fund equity on January 1, 2008 is as follows: As originally Effect of reported As adjusted change Fund equity, January 1, 2008 $ 187,891,608 171,490,197 16,401,411 (3) Fair Values of Financial Instruments Accounting Standards Codification Topic 820, Fair Value of Measurements and Disclosures, requires OSEEGIB to disclose estimated fair values for its financial instruments. Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the financial instruments. Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, credit and interest rate risk, and loss experience. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rate and estimates of future cash flows, could significantly affect these fair values. Fair value estimates, methods, and assumptions at December 31, 2009 and 2008 are described below for OSEEGIB’s financial instruments. The carrying value of all OSEEGIB’s financial instruments approximates fair value. 41 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) The carrying amounts reported in the balance sheets are at fair value for investment securities. Fair values for debt securities are based on quoted market prices, where available. If quoted prices are not available from active exchanges for identical instruments, the fair values are estimated using quoted prices from less active markets, quoted prices of securities with similar characteristics, or by pricing models utilizing other significant observable inputs. The fair values for equity securities are based on quoted market prices. The carrying values of the receivable for unsettled investment sales, premiums receivable, interest and dividends receivable, pharmacy rebate receivable, other receivables, premiums due to HMOs and other insurers, payable for investment purchases, and other accrued liabilities approximate fair value due to the short maturity of these financial instruments and the fact that they do not present undue credit concerns. (4) Cash and Cash Equivalents Cash includes amounts on deposit with the Office of State Treasurer (State Treasurer) in a pooled account, which is required by the Oklahoma Statutes to be insured or collateralized. The amount of collateral securities required to be pledged to secure public deposits is established by rules and regulations promulgated by the State Treasurer. In accordance with the State Treasurer’s policies, the market value of collateral securities to be pledged by financial institutions through the State Treasurer’s Office must be 110% of the carrying value of the amount on deposit, less any federal insurance coverage. At December 31, 2009 and 2008, cash totaling $27,219,862 and $23,382,597, respectively, was deposited with and collateralized by the official bond of the State Treasurer of Oklahoma. The carrying amount and bank balance of the cash equivalents totaled $56,637,908 and $39,857,874 at December 31, 2009 and 2008, respectively, and consists of an investment in a mutual fund composed of short-term investments with an original maturity date of three months or less, which are readily convertible into cash. The duration of the underlying investments in the money market mutual fund at December 31, 2009 and 2008 is approximately 50 and 55 days, respectively. Custodial Credit Risk Custodial credit risk for deposits is the risk that in the event of a bank failure, OSEEGIB’s deposits may not be returned or OSEEGIB may not be able to recover collateral securities in the possession of an outside party. OSEEGIB’s cash and cash equivalents include deposits that are insured, registered or for which the securities are held by a custodian in OSEEGIB’s name. 42 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (5) Investments OSEEGIB’s investment policy is predicated on a multiple manager structure to provide the benefits of more than one manager’s special skills and a diversity of investment styles. Upon approval of OSEEGIB’s Board, external managers are appointed to assume the investment management function. The managers, within guidelines determined by OSEEGIB’s Board, have full discretion to buy and sell investment assets of OSEEGIB. Authorized investments are defined in Title 36 of the Oklahoma Statutes, as amended, and OSEEGIB’s investment policy, and include U.S. government obligations, state and district obligations, corporate obligations, mortgage-backed and assets-backed debt securities, and preferred and common stock. All investments held by OSEEGIB are in compliance with statutes and the investment policy. As of December 31, 2009 and 2008, OSEEGIB had the following investments: 2009 2008 Types of investments Fair values Duration (1) Fair values Duration (1) Debt securities: Commingled fund $ 63,935,654 3.85 $ 60,684,844 3.82 Asset-backed securities(2) 2,081,509 1.89 2,260,531 3.55 Corporate 13,846,397 6.31 10,323,072 5.52 Mortgages 15,459,450 3.03 24,765,825 1.88 Collateralized mortgage obligations(2) 2,579,167 2.75 8,323,285 4.86 U.S. Treasuries 15,699,981 3.62 3,524,051 9.72 Municipals 1,189,688 13.51 — — Collateralized mortgage-backed securities (CMBS)(2) 4,486,015 2.52 — — Total debt securities 119,277,861 109,881,608 Equities: Domestic 56,070,327 43,885,516 Total investments $ 175,348,188 $ 153,767,124 (1) Interest rate risk is estimated using effective duration (in years). (2) These include investments highly sensitive to interest rate changes. 43 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Credit Risk The credit risk profile as listed by Moody’s or Standards & Poor’s for debt securities and money market mutual funds at December 31, 2009 and 2008 is as follows: 2009 Aaa Aa A Baa/Ba Not rated Total Debt Securities: Commingled fund (1) $ — — — — 63,935,654 63,935,654 Asset-backed securities 2,081,509 — — — — 2,081,509 Corporate 1,190,296 1,046,102 5,066,575 6,543,424 — 13,846,397 Mortgages 15,459,450 — — — — 15,459,450 Collateralized mortgage obligations 2,509,541 — 69,626 — — 2,579,167 U.S. Treasuries 15,699,981 — — — — 15,699,981 Municipals — 1,189,688 — — — 1,189,688 CMBS 3,843,098 — 574,175 68,742 — 4,486,015 Total debt securities $ 40,783,875 2,235,790 5,710,376 6,612,166 63,935,654 119,277,861 Money market mutual funds $ — — — — 56,637,908 56,637,908 2008 Aaa Aa A Baa Not rated Total Debt Securities: Commingled fund (1) $ — — — — 60,684,844 60,684,844 Asset-backed securities 1,616,669 643,862 — — — 2,260,531 Corporate 865,465 1,062,245 5,029,890 3,365,472 — 10,323,072 Mortgages 23,218,443 58,098 — — 1,489,284 24,765,825 Collateralized mortgage obligations 6,560,094 226,316 — — 1,536,875 8,323,285 U.S. Treasuries 3,524,051 — — — — 3,524,051 Total debt securities $ 35,784,722 1,990,521 5,029,890 3,365,472 63,711,003 109,881,608 Money market mutual funds $ — — — — 39,857,874 39,857,874 (1) There is no rating to the commingled fund; however, the average rating of the underlying investments in the commingled fund as provided by the fund manager is Aa at both December 31, 2009 and 2008. Credit Risk is the risk an issuer or other counterparty to an investment will not fulfill its obligations. The Board’s investment policy authorizes OSEEGIB to invest in obligations of the U.S. Treasury, agencies and instrumentalities, bankers’ acceptances rated AA or better, commercial paper rated A-1 or P-1 and A-2 or P-2, fixed income investments rated investment grade and stocks of companies with a minimum capitalization of $50,000,000, and other investments of similar risk. 44 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Investments in “restricted securities,” including fixed income securities, preferred stock, common stock, or any common stock acquired upon conversion thereof are prohibited. “Restricted securities” are securities which have not been registered under the Securities Act of 1933 and are subject to restrictions on sale. Engagements in short sales, purchases on margin, or investments in commodities or transactions of a similar or speculative nature are prohibited. Custodial Credit Risk Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, OSEEGIB will not be able to recover the value of its investments or collateral securities in the possession of an outside party. The current master custodian has been approved by OSEEGIB’s Board. OSEEGIB’s investments include investments that are insured or registered or for which the securities are held by a custodian in OSEEGIB’s name. They may also include investments held for the custodian by the Federal Reserve Bank or Depository Trust Corporation in OSEEGIB’s name. Concentration of Credit Risk An increased risk of loss occurs as more investments are acquired from one issuer. No issuer represents 5% or more of OSEEGIB’s total investments. OSEEGIB’s policy states investments in one issuer shall not exceed 2.5% of the fair value of each manager’s assets, except for obligations of the U.S. government or of any state of the U.S. The policy also restricts investments in the common stock of any U.S. corporation to no more than 5% of each manager’s assets valued at the lower of cost or market value, except where the manager’s benchmark holds more than 5% in a single issue or with prior consent of OSEEGIB’s Board. Interest Rate Risk Interest rate risk is the risk changes in interest rates will adversely affect the fair value of an investment. Fixed income investments held for longer periods are subject to increased risk of adverse interest rate changes. OSEEGIB’s policy requires that the total fixed income portfolio maintain an average effective maturity of 10 years or less and for average duration to be plus or minus 1 year from the benchmark, which has been identified by management to assess the performance of each manager. Investment Income Net investment income (loss) for the years ended December 31, 2009 and 2008, is comprised of the following: 2009 2008 Fixed income securities $ 5,094,578 6,800,564 Equity securities 1,091,041 1,398,710 Realized losses (2,876,954) (156,263) Unrealized gains (losses) 17,102,790 (29,802,916) Less investment expenses (438,206) (580,677) Net investment income (loss) $ 19,973,249 (22,340,582) 45 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (6) Office Equipment The changes in office equipment for the years ended December 31, 2009 and 2008 are as follows: 2009 2008 Office equipment, at cost: Balance, beginning of year $ 4,438,752 4,282,241 Additions 132,124 169,559 Retirements (406,976) (13,048) Balance, end of year 4,163,900 4,438,752 Accumulated depreciation: Balance, beginning of year 3,728,534 3,425,945 Depreciation expense 232,900 315,637 Retirements (406,976) (13,048) Balance, end of year 3,554,458 3,728,534 Office equipment, net $ 609,442 710,218 (7) Health and Dental and Life Reserves The following represents changes in the Health and Dental and Life Reserves during the year ended December 31, 2009 (in thousands): Health and Dental Life Total Reserves, beginning of year $ 93,771 4,708 98,479 Incurred claims expense provisions for insured events of the current year 782,521 22,474 804,995 Changes in provisions for insured events of prior years 10,425 1,300 11,725 792,946 23,774 816,720 Less payments: Claims expense insured events of the current year 684,927 19,476 704,403 Claims expense insured events of prior years 98,986 4,193 103,179 783,913 23,669 807,582 Reserves, end of year $ 102,804 4,813 107,617 46 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) As a result of changes in estimates of insured events in prior years, the provision for claims increased by approximately $11,725,000 in the year ended December 31, 2009, due primarily to less favorable than anticipated claims experience. The following represents changes in the Health and Dental and Life Reserves during the year ended December 31, 2008 (in thousands): Health and Dental Life Total Reserves, beginning of year $ 84,797 3,787 88,584 Incurred claims expense provisions for insured events of the current year 764,751 21,540 786,291 Changes in provisions for insured events of prior years 1,187 (536) 651 765,938 21,004 786,942 Less payments: Claims expense insured events of the current year 673,810 17,241 691,051 Claims expense insured events of prior years 83,154 2,842 85,996 756,964 20,083 777,047 Reserves, end of year $ 93,771 4,708 98,479 As a result of changes in estimates of insured events in prior years, the provision for claims increased by approximately $651,000 in the year ended December 31, 2008, due primarily to less favorable than anticipated claims experience. 47 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (8) Disability Reserves The following represents changes in the disability reserves during the years ended December 31, 2009 and 2008 (in thousands): 2009 2008 Reserves, beginning of year $ 13,299 13,504 Incurred claims: Provisions for insured events of the current year 4,782 4,756 Changes in provisions for insured events of prior years (1,127) (2,669) 3,655 2,087 Payments: Claims attributable to insured events of the current year 584 448 Claims attributable to insured events of prior years 2,561 1,844 3,145 2,292 Reserves, end of year $ 13,809 13,299 OSEEGIB estimates current and noncurrent reserves for disability reserves based on historical claim experience. As a result of changes in estimates of insured events in prior years, the provision for disability reserves decreased by approximately $1,127,000 and $2,669,000 in the years ended December 31, 2009 and 2008, respectively, due primarily to favorable claims development. The following is a brief description of the significant assumptions used for disability reserves: Actual claim experience for the group, based upon claim lag studies, was used for males and females for short-term disability. The 1987 Commissioner’s Group Disability Table was used. The discount rate was 3.5% for the years ended December 31, 2009 and 2008, respectively. (9) Premium Deficiency Reserve A premium deficiency reserve is recorded at the end of the year when the anticipated costs of settling claims plus policy maintenance costs for the following year are in excess of the anticipated premium receipts for the following year. Anticipated premium receipts are projected based on the premium rates adopted by the Board for the following plan year and current enrollment levels. Anticipated investment income is considered in determining whether a premium deficiency exists. Incurred claims for subsequent 48 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) years are projected based on current year incurred claims, increased for anticipated inflation rates. The Board does not have the intention to change the adopted premium rates after the fiscal year has begun. OSEEGIB determined that reserves for premium deficiency were necessary as of December 31, 2008 in the amount of $11,915,000, and no premium deficiency reserve was necessary as of December 31, 2009. (10) Employee Benefit Plans For the fiscal year ended December 31, 2008, OSEEGIB implemented GASB Statement No. 50, Pension Disclosures – an amendment of GASB Statements No. 25 and No. 27. GASB Statement No. 50 amends GASB Statement No. 27 to require employers participating in a cost-sharing plan to include the following in the note disclosure: the required contribution rates and the employer(s) in dollars and the percentage of that amount contributed for the current year and each of the two preceding years, and how the contractually required contribution rate is determined (for example, by statute or by contract, or on an actuarially determined basis) or that the cost-sharing plan is financed on a pay-as-you-go basis. GASB Statement No. 50 also amends GASB Statement No. 27 to require that if a cost-sharing plan does not issue a publicly available stand-alone plan financial report prepared in accordance with the requirements of GASB Statement No. 25, as amended, and the plan is not included in the financial report of another entity, each employer in that plan should present, as required supplementary information, the schedules of funding progress and employer contributions for the plan (and notes to their schedules). Also, each employer should disclose that the information presented relates to the cost-sharing plan as a whole, of which the employer is one participating employer, and should provide information helpful for understanding the scale of the information presented relative to the employer. OSEEGIB has made all required disclosures under GASB Statement No. 50. (a) Retirement Plan OSEEGIB contributes to the Oklahoma Public Employees Retirement Plan (the Retirement Plan), a cost-sharing multiple-employer public employee retirement system administered by the Oklahoma Public Employees Retirement System (OPERS). The Retirement Plan provides retirement, disability, and life benefits to Retirement Plan members and beneficiaries. The benefit provisions are established and may be amended by the legislature of the state of Oklahoma. Title 74 of the Oklahoma Statutes, Sections 901-943, as amended, assigns the authority for management and operation of the Retirement Plan to the Board of Trustees of OPERS. OPERS issues a publicly available annual financial report that includes financial statements and required supplementary information for the Retirement Plan. That annual report may be obtained by writing to OPERS, 6601 N. Broadway Extension, Suite 129, Oklahoma City, Oklahoma, 73116 or by calling 800.733.9008. Retirement Plan members, state employees and OSEEGIB are required to contribute at a rate set by statute. The contribution requirements of Retirement Plan members and OSEEGIB are established and may be amended by the legislature of the state of Oklahoma. Each member participates based on his or her gross salary earned (excluding overtime). 49 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) The contribution rate for OSEEGIB and employees for 2009, 2008, and 2007 is as follows: Employee rate Salaries Salaries greater than $25,000 or less 25,000 Employer rate July 1, 2009 – December 31, 2009 3.5% 3.5% 15.5% July 1, 2008 – June 30, 2009 3.5 3.5 14.5 July 1, 2007 – June 30, 2008 3.5 3.5 13.5 January 1, 2007 – June 30, 2007 3.5 3.5 12.5 OSEEGIB’s contributions to the Retirement Plan for the years ended December 31, 2009, 2008, and 2007 were approximately $1,224,000, $1,140,000, and $1,052,000, respectively, and were equal to OSEEGIB’s required contributions for the year. Contributions are included in administrative expenses in the statements of revenues, expenses and changes in fund equity. (b) Deferred Compensation Plan The State offers to its own employees, state agency employees, and other duly constituted authority or instrumentality employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457 and Chapter 45 of Title 74, Oklahoma Statutes. The Oklahoma State Employees Deferred Compensation Plan (SoonerSave) is a voluntary plan that allows participants to defer a portion of their salary into SoonerSave. Participation allows a person to shelter the portion of their salary that they defer from current federal and state income tax. Taxes on the interest or investment gains on this money, while in SoonerSave, are also deferred. The deferred compensation is not available to employees until termination, retirement, death, or approved unforeseeable emergency. Under SoonerSave, the untaxed deferred amounts are invested as directed by the participant among various investment options. Effective January 1, 1998, a Trust and Trust Fund covering SoonerSave assets was established pursuant to federal legislation enacted in 1996, requiring public employers to establish such trusts for plans meeting the requirements of Section 457 of the Internal Revenue Code. Under terms of the Trust, the corpus or income of the Trust Fund may be used only for the exclusive benefit of SoonerSave participants and their beneficiaries. Further information may be obtained from the Oklahoma State Employees Deferred Compensation Plan audited financial statements for the year ended June 30, 2009. OSEEGIB believes it has no liabilities with respect to SoonerSave. 50 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (11) Compensated Absences It is OSEEGIB’s policy to accrue compensated absences for annual leave, including the related employer’s share of social security and Medicare taxes, in accordance with state statute, not to exceed: 240 hours for employees with continuous service of less than five years, or 480 hours for employees with continuous service of five years or more. During 2009, OSEEGIB’s liability for compensated absences increased by approximately $94,000 for 99 employees, decreased by approximately $85,000 for 65 employees, and did not change for 14 employees. During 2008, OSEEGIB’s liability for compensated absences increased by approximately $100,000 for 101 employees, decreased by approximately $67,000 for 64 employees, and did not change for 13 employees. OSEEGIB’s liability for compensated absences at December 31, 2009 and 2008, amounted to approximately $924,000 and $915,000, respectively, and is included in other accrued liabilities in the balance sheets. (12) Operating Leases OSEEGIB has agreements for one-year commitments to lease office space and equipment with options to renew for additional periods. If the leases are renewed in accordance with the options in the agreements, the future minimum rentals for operating leases as of December 31, 2009, are as follows: 2010 $ 553,541 2011 226,857 2012 117,962 2013 112,548 $ 1,010,908 Rent expense for office space and equipment for the years ended December 31, 2009 and 2008 was approximately $616,000 and $723,000, respectively, and is included in administrative expenses in the statements of revenues, expenses and changes in fund equity. (13) Risks and Uncertainties OSEEGIB invests in various investment securities. As described in note 5, investment securities are exposed to various risks such as interest rate, market and credit risks. It is at least reasonably possible that changes in the values of investment securities will occur in the near term, and such changes could materially affect the amounts reported in the balance sheets. 51 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 As described in note 2, the estimates of reserves are determined based on actuarial and statistical techniques, which considers the effects of general economic conditions, such as inflation, and other factors of past experience, such as changes in participant counts, all of which are subject to change. Due to uncertainties inherent in the estimation and assumption process, it is at least reasonably possible that changes in these estimates and assumptions in the near term would be material to the financial statements. (14) Commitments and Contingencies OSEEGIB’s legal counsel has determined that the statute of limitations for claims denied or paid improperly is three years. Typically, all claims are reported within a 24-month period. Currently, OSEEGIB is not aware of any material claims that were denied or paid improperly that should be reserved for in the basic financial statements. To the extent such claims exist, OSEEGIB may be responsible for payment. During 2003, the Oklahoma Legislature created the Medical Expense Liability Revolving Fund (the Fund), which enacted a fee to cover inmate medical costs. By law, OSEEGIB is the administrator of the Fund. Any person convicted of certain offenses is required to pay a fine of $10, which goes into the Fund. The monies from the Fund are used when an inmate’s medical costs exceed $15,000 up to a maximum of $100,000. As of December 31, 2009 and 2008, the Fund has assets and liabilities of approximately $1,071,000 and $940,000, respectively, which are included in the balance sheets. During 1995, the Oklahoma Legislature created the Health Insurance High Risk Pool (the Pool), which was designed to provide health insurance for certain state residents who are unable to obtain coverage through other insurers. All insurers and reinsurers providing health insurance or reinsurance in the state of Oklahoma are required to participate in the Pool. With the exception of OSEEGIB, all self-insured plans are exempted from participation. Participating insurers are assessed periodically. OSEEGIB has recorded assessments totaling approximately $2,101,000 and $2,135,000 during the years ended December 31, 2009 and 2008, respectively, which is included in administrative expense in the statements of revenues, expenses and changes in fund equity. Participating insurers may also be assessed additional amounts if the Pool experiences adverse claim development. In the normal course of operations, there are various legal actions and proceedings pending against OSEEGIB. In management’s opinion, the ultimate liability, if any, resulting from these legal actions will not have a material adverse effect on OSEEGIB’s financial position, results of operations, or liquidity. Section Statistical 2009 2008 2007 (2) 2006 (2) 2005 2004 2003 2002 2001 Short (1) 2001 2000 Minimum fund equity Fixed assets net of accumulated depreciation Other fund equity Total fund equity Minimum fund equity Other fund equity Total fund equity Minimum fund equity Other fund equity Total fund equity Minimum fund equity Fixed assets net of accumulated depreciation Other fund equity Total fund equity $ 138,818 609 (21,931) 117,496 10,370 7,522 17,892 5,088 19,569 24,657 154,276 609 5,160 $ 160,045 125,046 710 (57,214) 68,542 10,086 10,196 20,282 4,793 16,826 21,619 139,925 710 (30,192) 110,443 120,344 856 (372) 120,828 10,106 14,670 24,776 5,083 20,803 25,886 135,533 856 35,101 171,490 116,936 1,340 (2,831) 115,445 9,399 11,060 20,459 4,485 22,399 26,884 130,820 1,340 30,628 162,788 106,302 1,838 12,231 120,371 8,293 11,530 19,823 4,061 21,698 25,759 118,656 1,838 45,459 165,953 93,482 2,344 20,738 116,564 6,271 13,565 19,836 4,421 21,332 25,753 104,174 2,344 55,635 162,153 84,064 2,777 (4,702) 82,139 6,111 12,552 18,663 3,971 21,397 25,368 94,146 2,777 29,247 126,170 72,050 2,253 (23,530) 50,773 5,375 12,933 18,308 2,944 19,896 22,840 80,369 2,253 9,299 91,921 67,070 1,791 (13,334) 55,527 5,728 15,791 21,519 3,128 24,008 27,136 75,926 1,791 26,465 104,182 59,022 813 39 59,874 5,177 15,200 20,377 3,434 25,222 28,656 67,633 813 40,461 108,907 53,424 760 7,235 61,419 5,519 17,628 23,147 3,641 24,529 28,170 62,584 760 49,392 112,736 Fund Equity Over the Last Ten Years (Accrual basis of accounting) l (Amounts expressed in thousands) (1) OSEEGIB moved to a calendar year on January 1, 2002 from a June 30 fiscal year. (2) The 2007 and 2006 financial information has been adjusted to reflect the change in accounting principle and reporting presentation for comparability purposes. Life Program Disability Program Combined Programs Health & Dental Program Table 1 52 2009 2008 2007 (4) 2006 (4) 2005 2004 (2) 2003 (2) 2002 2001 Short (3) 2001 2000 Expenses Health and Dental Program Benefits including claim reserves Change in premium deficiency reserves Administrative and claim processing expense $ 792,950 (11,915) 36,125 765,931 (12,712) 36,830 731,807 24,627 39,807 700,005 (9,065) 38,091 657,653 9,065 33,465 576,243 - 29,311 521,914 - 29,307 440,794 - 26,872 200,799 - 13,077 362,374 - 26,771 326,370 - 24,014 Total Health and Dental Program expense 817,160 790,049 796,241 729,031 700,183 605,554 551,221 467,666 213,876 389,145 350,384 Life Program Benefits including claim reserves Change in premium deficiency reserves Administrative and claim processing expense 23,774 - 897 21,005 - 726 15,278 - 811 17,305 - 757 16,097 - 693 14,433 - 719 14,042 - 774 13,215 (2,068) 786 4,497 (1,100) 358 10,917 800 719 10,460 (402) 738 Total Life Program expense 24,671 21,731 16,089 18,062 16,790 15,152 14,816 11,933 3,755 12,436 10,796 Disability Program Benefits including disability reserves Administrative and claim processing expense 3,652 1,401 2,093 1,161 6,052 604 3,702 956 3,234 831 3,962 687 2,555 636 2,947 696 1,549 297 953 721 606 683 Total Disability Program expense 5,053 3,254 6,656 4,658 4,065 4,649 3,191 3,643 1,846 1,674 1,289 Combined Programs Benefits including claim and disability reserves Change in premium deficiency reserves Administrative and claim processing expense 820,376 (11,915) 38,423 789,029 (12,712) 38,717 753,137 24,627 41,222 721,012 (9,065) 39,804 676,984 9,065 34,989 594,638 - 30,717 538,511 - 30,717 456,956 (2,068) 28,354
Object Description
Description
Title | OSEEGIB 2009 Comprehensive annual financial report |
OkDocs Class# | E3610.3 A615f 2009 |
Digital Format | PDF, Adobe Reader required |
ODL electronic copy | Downloaded from agency website: www.ok.gov/sib/documents/CAFR.pdf |
Rights and Permissions | This Oklahoma state government publication is provided for educational purposes under U.S. copyright law. Other usage requires permission of copyright holders. |
Language | English |
Full text | Comprehensive Annual Financial Report Year Ended December 31, 2009 A Component Unit of the State of Oklahoma He lthChoice State and Education Employees Group Insurance Board Oklahoma Comprehensive Annual Financial Report A Component Unit of the State of Oklahoma Prepared by the Finance Division Year Ended December 31, 2009 This publication was printed by the Oklahoma State and Education Employees Group Insurance Board as authorized by 74 O.S. SUPP. 1989, Section 1301, et seq. 50 copies have been printed at a cost of $5.062 each. Copies have been deposited with the Publications Clearinghouse of the Oklahoma Department of Libraries. Table of Contents Introductory Section Letter of Transmittal – Includes exhibits 1–4. . . . . . . . . . . . . . 1-13 Executive Organizational Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 List of Principal Officials . . . . . . . . . . . . . . . . . . . . . . . . . 15-16 Financial Section Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . 17 Management’s Discussion and Analysis . . . . . . . . . . . . . . . 19-26 Basic Financial Statements Balance Sheets as of December 31, 2009 and 2008 . . . . . . . . . . . . . 27 Statements of Revenues, Expenses, and Changes in Fund Equity for the Years Ended December 31, 2009 and 2008 . . . . . 28 Statements of Cash Flows for the Years Ended December 31, 2009 and 2008 . . . . . . . . . . . . . 29 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . 30-51 Statistical Section Table No. Fund Equity . . . . . . . . . . . . . . . . . . . . . . . 1 . . . . . . . . 52 Change in Fund Equity . . . . . . . . . . . . . . . . . . 2 . . . . . . 53-54 Operating Revenues by Type of Entity . . . . . . . . . 3 . . . . . . . . 55 Top Ten Sources of Premium Revenue . . . . . . . . . 4 . . . . . . . . 56 Demographic Statistics for Health Coverage Number and Type of Participants. . . . . . . . 5A-5B . . . . .57-58 Monthly Premiums by Coverage Type and Billing Categories . . . . . 6A-6C . . . . .59-61 Outside Insurance Carriers . . . . . . . . . . . . . . . 7A-7C . . . . .62-64 Introductory Section Oklahoma State and Education Employees Group Insurance Board 3545 N.W. 58th Street, Suite 110 Oklahoma City, OK 73112 405-717-8701 1-800-543-6044 www.healthchoiceok.com l l l July 7, 2010 To the citizens of the State of Oklahoma: The comprehensive annual financial report for the Oklahoma State and Education Employees Group Insurance Board (OSEEGIB) for the fiscal year ended December 31, 2009, is hereby submitted. Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, including all disclosures, rests with the management of the Oklahoma State and Education Employees Group Insurance Board. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of OSEEGIB. All disclosures necessary to enable the reader to gain an understanding of OSEEGIB’s financial activities have been included. The comprehensive annual financial report is presented in three sections: introductory, financial, and statistical. The introductory section includes this transmittal letter, OSEEGIB’s executive organizational chart, and a list of principal officials. The financial section includes the independent auditors’ report, management’s discussion and analysis (MD&A), and the basic financial statements. The statistical section includes selected financial and demographic information, presented on a multiyear basis. OSEEGIB is a special-purpose government entity engaged solely in business-type activities. OSEEGIB is a legal trust which administers, manages and provides group health, dental, life and disability insurance for active employees and retirees of state agencies, school districts and other governmental units of the State of Oklahoma. OSEEGIB provides insurance solely to eligible employees, dependents and retirees. It is OSEEGIB’s mission to serve Oklahoma by providing, with the highest degree of efficiency, a wide range of quality insurance benefits that are competitively priced and uniquely designed to meet the needs of participants. OSEEGIB provides a self-insured health, dental, life and disability program (HealthChoice), which is actuarially rated to provide premiums adequate to meet the payment of all claims, administrative expenses, and any change in reserve estimates. OSEEGIB maintains reserves to provide for current claim liabilities as required. At the present time, OSEEGIB has not transferred any risk of loss through reinsurance contracts. Oklahoma State and Education Employees Group Insurance Board 2 Total Primary Participants HealthChoice and HMO Year Ended December 31, 2009 Exhibit 1 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 HealthChoice Participation HMO Participation Education Active State Active Education Medicare State Medicare Education Pre-Medicare Local Government State Pre-Medicare During the year ended December 31, 2009, participants could choose between HealthChoice and four federally qualified health maintenance organizations (HMO) during their initial enrollment. Each HMO requires participants to reside or work within a designated service area, which consists primarily of the Oklahoma City and Tulsa metro areas, but is expanding to rural parts of Oklahoma as provider networks are established. HealthChoice has no such restriction and is thus available to all eligible participants statewide. After enrollment, members have the opportunity to change health carriers during an annual option period. Coverage elections may be changed during the year if the member experiences a change in family status event as defined by Internal Revenue Service Code Section 125. The following chart illustrates total primary participation in coverage offered by HealthChoice and HMOs by type of entity as of December 31, 2009. Among the active primary members, approximately 24% were covered by the HMO plans at December 31, 2009. For the Medicare and pre-Medicare population, approximately 9% were covered by the HMO plans at December 31, 2009. Each year during the months of October and November, participants may change their coverage elections for the next year. All carrier changes and coverage elected during this period will be effective January 1 and remain in effect until December 31 of the same year. OSEEGIB, by statute, provides insurance coverage to all employees and dependents that meet eligibility requirements. An employee’s coverage begins the first day of the month following the month of employment. The employee has thirty days after beginning employment to acquire Oklahoma State and Education Employees Group Insurance Board 3 Available Coverage by Participant Group State Employees Education Employees Local Government Employees OK Public Employees Retirement System Teachers’ Retirement System Survivors COBRA Health 4 4 4 4 4 4 4 Dental 4 4 4 4 4 4 4 Life 4 4 4 4 4 4 Disability 4 4 Medicare Supplement 4 4 4 4 health, dental, and/or life insurance for his dependents. If the employee elects dependent coverage, the employee must cover all eligible dependents, unless the dependent is covered by other group insurance. The employee also has thirty days after acquiring a new dependent in which to add that dependent. After this period, an employee may still add dependents during the aforementioned annual option period. Coverage could be delayed, however, if the dependent has been dropped in the past twelve (12) months. An active employee who leaves employment may retain certain insurance coverage depending on his status at the end of his employment. The former employee may also continue dependent coverage that was in effect while he was an active employee. Retired employees may continue all health, dental, and life coverage. If the member has vested his retirement benefit but is not yet eligible to draw retirement benefits, he also retains the right to health, dental and life coverage. In the event an employee terminates employment or a dependent loses eligibility due to divorce or by exceeding age limitations, health and dental coverage may be continued if the member and/or his dependent meet the requirements set forth under COBRA. The following table illustrates the available coverage by participant group: ECONOMIC OUTLOOK During 2009 the economy of the nation as well as the state of Oklahoma was suffering. Governor Brad Henry, during his State of the State Address on February 1, 2010 said, “The economic storm that has seized our nation has also battered Oklahoma. We face a budget shortfall of more than 1 billion dollars. State programs and agencies have already experienced substantial cuts. The state’s lagging revenues reflect the fact that far too many Oklahomans and their families are struggling with lost jobs and lost wages.” He went on to say “Certainly, more cuts are unavoidable. Agencies and programs, already hit hard by fiscal reality, will be asked to absorb further reductions. There will be an impact, and it will be painful.” The economic issues facing the state, its agencies and school districts, other participating groups, and their employees are a key consideration when OSEEGIB sets premium rates. The Board is very aware that increases in premiums affect the already tight budgets of participating groups, as well as individual members. Alternatives to rate increases such as changes Oklahoma State and Education Employees Group Insurance Board 4 in co-payments or deductibles must be considered, especially when groups are facing budget cuts. OSEEGIB’s Board is faced with the daunting task of weighing the alternatives and making the difficult and sometimes unpopular decisions that are necessary to meet projected costs. OSEEGIB’s goal is to keep premiums as low as possible and continue to provide quality and affordable healthcare to employees and retirees of state, education, and local government entities. Healthcare reform The economy of healthcare is in a state of change, now more than ever in recent history. The Patient Protection and Affordable Care Act (PPACA) signed by President Obama on March 23, 2010 will have a significant economic effect on health insurers. PPACA contains wide-sweeping changes for individuals, employers, and insurers, some of which are expensive and will result in increases to health insurance premiums. OSEEGIB is closely monitoring all issues related to the PPACA. PPACA is discussed further in the Legislative section of this letter. Healthcare trends The insurance industry monitors healthcare costs by establishing a percentage of cost increases known as ‘trend’. The definition and factors affecting trend are discussed in Management’s Discussion and Analysis. Nationwide, while healthcare costs continue to increase, the rate at which they are increasing has slowed over the past few years. However, healthcare trends remain well over the rate of inflation. For the second consecutive year, prescription drug trends are projected to be lower than medical plan trends. According to the 2009 Segal Survey, projected trends for PPO plans for 2010 are as follows: • Medical (Actives & Retirees < Age 65) 10.5% • Medical (Retirees Age 65+) 9.5% • Prescription Drug 9.1% • Dental (Indemnity Plans) 6.2% Projected trends for 2010 for medical costs are slightly higher than those projected for 2009, while the prescription drug and dental trends for 2010 are slightly lower than those projected for 2009. OSEEGIB’s actuaries used the following trends for setting rates for 2010: • Medical (Actives & Retirees < Age 65) 10.0% • Medical (Retirees Age 65+) 7.0% • Prescription Drug 9.1% • Dental 6.0% The actual trends experienced by OSEEGIB for 2009 are discussed in Management’s Discussion and Analysis. Oklahoma State and Education Employees Group Insurance Board 5 According to the Segal Survey, price inflation for services and supplies continues to be the biggest element of overall medical plan trend. In 2010, trends in utilization rates are expected to increase compared to 2009 for both hospital and physician services. Investment outlook With the global economic downturn in 2008, OSEEGIB’s investment portfolio experienced losses that continued throughout the first quarter of 2009. By April 2010, OSEEGIB had recovered 72% of what was lost during the downturn. However, market volatility remains and the market value of investments continues to fluctuate widely from month to month. More information on how economic conditions affected OSEEGIB in 2009 as well as OSEEGIB’s 2009 trend experience is included in Management’s Discussion and Analysis. MAJOR INITIATIVES The Centers for Medicare and Medicaid Services (CMS) approved HealthChoice as a Medicare Part D Prescription Drug Plan pursuant to the Medicare Prescription Drug Benefit, Improvement and Modernization Act, effective January 1, 2006. As a result of the subsidy amount paid by CMS totaling approximately $25 million annually, HealthChoice was able to reduce premiums for Medicare-eligible individuals by over $50 per month from 2006 through 2009 and the savings is expected to continue in future years. OSEEGIB began offering a High Deductible Health Plan on January 1, 2008. OSEEGIB requires the participant to have a Health Savings Account (HSA) before enrolling in the high deductible plan. The high deductible plan has a $1,500 deductible for an individual and a $3,000 deductible per family. For several years the cost of outpatient care has risen at a significantly faster rate than inpatient care. To provide better control over the costs of outpatient care, OSEEGIB recontracted with nearly 500 network facilities, changing the reimbursement methodology for outpatient facilities. The types of facilities involved were hospitals, dialysis facilities, rehabilitation centers, sleep study centers and skilled nurse facilities. The new contracts went into effect April 1, 2008. OSEEGIB began enhancing benefits to encourage tobacco cessation in 2008 by allowing active and retired members and enrolled dependents to obtain all FDA-approved tobacco cessation drugs without prior authorization. OSEEGIB has taken this initiative much further in 2010, by reducing copays on tobacco cessation prescription drugs to $5.00. Effective January 1, 2011, this same copayment benefit will be extended to Medicare members. In addition, OSEEGIB entered into an agreement with the Tobacco Settlement Endowment Trust (TSET) to provide, at no cost to the member, counseling and up to two 12-week courses of over-the-counter nicotine replacement treatment (gum, patch, lozenge) to HealthChoice members who want to quit smoking. OSEEGIB intends to contract with a vendor to administer a Health Risk Assessment (HRA) for the benefit of HealthChoice members. The program will empower, educate and motivate members Oklahoma State and Education Employees Group Insurance Board 6 to take action and improve their health and safety. In addition, the HRA vendor will provide data that OSEEGIB can use to assess various risks of the group as a whole and act to reduce the risk. OSEEGIB is further evaluating coordinating a disease management program with the HRA. As a sponsor of an early retiree program (HealthChoice), OSEEGIB submitted on June 29, 2010 its application to participate in the Early Retiree Reinsurance Program of PPACA recently passed by Congress. PPACA mandates the application include a description for the cost-savings programs and procedures currently in place for chronic and high cost claimants, a projection of the reinsurance amount, and a description of the intended uses of the funds. The U.S. Department of Health and Human Services (HHS) must approve the application before a plan can participate in the program. If the application is approved, then 80% of the amount of an early retiree’s medical and pharmacy claims between $15,000 and $90,000 in an eligible plan year may be reimbursed to OSEEGIB. OSEEGIB projects a reinsurance amount of $36 million for two years and believes the $5 billion allocated for this program will suffice for at least two years, if not longer. If approved, it is OSEEGIB’s intent to use the proceeds to reduce premiums. OSEEGIB’s actuaries are providing data analytics to better enable OSEEGIB to evaluate utilization and costs at a detail level that has not been readily available in the past. The data compares utilization and costs from year to year and to national norms. OSEEGIB will be using this data to evaluate fee schedules and trends and to promote wellness for members. Members will receive reminders for certain screenings when a member’s demographics and utilization suggest the reminder is appropriate. OSEEGIB’s third party claims administrator will also be providing additional data in 2011 based on claims data that will further enhance identification of trends in healthcare on the member and provider levels. OSEEGIB is doing its part to encourage the preservation of the environment by eliminating paper wherever possible. Beginning June 2010, HealthChoice members can access their Explanation of Benefits (EOB) online and opt out of receiving paper EOBs. HealthChoice network providers also have online access to their Remittance Advices. Employer groups may access their bill online and may opt out of receiving a paper bill. Numerous reports are now being provided electronically. In addition, OSEEGIB’s third party administrators will be providing electronic information to the state’s flexible spending plan that will reduce the paper documentation required for filing a flexible spending account claim. LEGISLATION The following are recently passed laws that have an effect on OSEEGIB: Federal The American Recovery and Reinvestment Act (ARRA) was a wide-sweeping act with limited but significant effect on OSEEGIB. The Act was signed and effective February 17, 2009. The Act provided for a federal subsidy towards the COBRA premium for any individual who was involuntarily terminated from employment. This Act required employers to facilitate this subsidy by ensuring that the member was only billed 35% of the monthly premium. Employers were required Oklahoma State and Education Employees Group Insurance Board 7 to pay the other 65% and obtain reimbursement through a credit on the employer’s payroll tax return. Since OSEEGIB directly bills members electing the COBRA benefit, this Act required a great amount of communication and coordination between OSEEGIB and participating groups. As discussed in the Economic Outlook section of this letter, the Patient Protection and Affordable Care Act (PPACA) contains wide-sweeping healthcare reform that affects OSEEGIB, its participating groups, members, and healthcare providers. OSEEGIB has responded to the PPACA by designating a primary committee and several subcommittees who are very involved in evaluating the Act and ensuring that OSEEGIB will be in compliance with every requirement. Fortunately, OSEEGIB already complies with many of the mandates. PPACA contains language exempting existing insurance plans from some of the mandates as long as they maintain ‘grandfathered’ status. OSEEGIB anticipates maintaining grandfathered status for 2011 but may not keep that status in later years. Changes that will affect OSEEGIB are as follows: • Plans are required to provide dependent coverage until an adult child (married or unmarried) turns 26. OSEEGIB currently covers dependent children up to age 25, but beginning January 1, 2011 will cover dependent children up to age 26. • Plans are prohibited from applying annual and lifetime dollar limits. OSEEGIB currently does not have either type of limit for medical claims; however, the $2 million cap on pharmacy claims will be removed. • PPACA requires plans to provide a host of preventive services to members at no cost to the member. This requirement is estimated to cost $26 million annually. This will not apply to OSEEGIB until grandfathered status is lost. • Plans are required to provide members with a summary of benefits and coverage explanation that meets standards developed by HHS which have not yet been completely developed. • Plans are required to report loss ratios and make these reports available to HHS. Plans not meeting certain loss ratios must provide premium rebates to their members. • PPACA allocates $5 billion to be used nationwide to subsidize the cost of coverage for retirees who are not yet Medicare eligible. OSEEGIB applied for the subsidy on June 29, 2010, the first day plans were allowed to send the application. The funds are available on a first come first serve basis in order of filing claims. HHS has not yet provided guidance on when or how to file the claims. More information regarding this topic can be found in the Major Initiatives section. • PPACA states employers must disclose the aggregate cost of benefits provided by employers for each employee’s health insurance coverage on the employee’s annual Form W-2 which will require increased communication between OSEEGIB and participating groups. Oklahoma State and Education Employees Group Insurance Board 8 Oklahoma Senate Bill 0565 (2008) removed the requirement that a dependent between age 19 and age 25 be a full-time student. Senate Bill 1168 (2008) provides that health benefit plans, including OSEEGIB, shall not exclude otherwise allowable claims which occur in conjunction with the arrest or pretrial detention of the policyholder. Senate Bill 1766 (2008) allows directors of a conservation district to participate in the health and dental plans offered by OSEEGIB. House Bill 1055 (2009) formally creates the State Employee Health Insurance Review Working Group. House Bill 1170 (2009) creates the Oklahoma Information Services Act and creates a position of Chief Information Officer for the State who shall issue a plan to transfer, coordinate and modernize all information technology and communications systems for all state agencies. Senate Bill 757 (2009) creates the Health Infrastructure Advisory Board that will look at the use of electronic medical information records and health information technologies. The OSEEGIB Chief Information Officer will serve on that Board. Senate Bill 822 (2009) creates a legislative task force to review the state’s current health insurance mandates and determine if any of them should be recommended for further legislative changes. House Bill 2363 (2010) creates a statewide voluntary buyout program for retirement-eligible state workers. The bill requires agencies that receive reimbursements for voluntary buyouts to agree that its number of full-time-equivalent employees shall be reduced by that number of positions for a period of not less than 36 months. House Bill 2437 (2010) requires all health carriers to pay an access payment of 1 percent on all claims paid beginning from the effective date of the act until January 1, 2015. It requires monthly payments to the Oklahoma Insurance Department on all claims paid and incurred beginning July 1, 2010. House Bill 2698 (2010) creates the Oklahoma Government Website Information Act, requiring public bodies on or before January 1, 2011, to make available on Internet web sites or on a general web site any administrative rules adopted by the public body, proposed administrative rules, statutes affecting the body and its operations, and any statutes the public may find useful in interacting with the body. FINANCIAL INFORMATION OSEEGIB’s management is responsible for establishing and maintaining an internal control Oklahoma State and Education Employees Group Insurance Board 9 structure designed to ensure that assets are protected and to provide accurate accounting data. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived. The valuation of costs and benefits requires estimates and judgments by management. Change in Financial Statement Presentation. During 2006 and 2007, OSEEGIB applied the provisions of GASB Statement No. 43 (GASB 43), Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and presented the portion of its activity related to covered active employees of participating employers as a public entity risk pool and the portion of its activity related to covered retirees of participating employers as an agency fund in accordance with the guidance for multiple-employer OPEB (other post-employment benefits) plans that are not administered as trusts. During 2008, OSEEGIB determined its activity related to covered retirees of participating employers does not meet the definition of an OPEB plan, and therefore is not subject to GASB 43. Additionally, as OSEEGIB is not a cooperative group of governmental entities joining together to finance exposure to risk, OSEEGIB is not subject to GASB Statement No. 10, Accounting and Reporting for Risk Financing and Related Insurance Issues. OSEEGIB, as an instrumentality of the State of Oklahoma created to administer, manage, and provide group health, dental, life and disability insurance for active employees and retirees of state agencies, school districts and other governmental units, believes the preferred method of accounting and reporting presentation is a special-purpose government engaged solely in business-type activities, more specifically an insurance enterprise. Effective January 1, 2008, OSEEGIB changed its financial statement accounting and reporting presentation and reported results in a single enterprise fund presentation and no longer included an agency fund. Single Audit. OSEEGIB does not receive federal funding and, therefore, is not required to undergo an annual single audit in conformity with the provisions of the Single Audit Amendments of 1996 and U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Budgeting Controls. All administrative expenses are funded from premiums. Funds needed for administrative expenses are transferred to a Revolving Fund, which is not subject to fiscal year limitations and is under the control of OSEEGIB. OSEEGIB maintains budgetary controls to ensure compliance with provisions embodied in the annual budget approved by the Board of Directors. The level of budgetary control (that is, the level at which expenditures cannot exceed the budgeted amount) is established by function and activity. OSEEGIB maintains an encumbrance accounting system as its primary technique for accomplishing budgetary control. As demonstrated by the financial statements included in this report, OSEEGIB is meeting its responsibility for sound financial management. Proprietary Operations. OSEEGIB’s revenue from operations consists of health, dental, life, and disability premiums remitted by each participating entity for their employees, or directly by retirees or participants under COBRA. Also included in premium revenue are premium subsidies received from the Centers for Medicare and Medicaid (CMS) Medicare Part D program. Other operating revenues consist of pharmacy rebates and a risk adjustment fee collected from HMOs. Operational expenses are primarily paid and incurred claims. The following charts illustrate enrollment, premiums and claims broken down between active participants, pre-Medicare retirees, and Medicare retirees. Enrollment (Covered Lives) vs. Incurred Claims Health Program - Year Ended December 31, 2009 Exhibit 2 Enrollment Incurred Claims Active Pre-Medicare Medicare 35,183 10,958 135,888 $84,913,764 $134,851,348 $515,264,885 Active employees comprise 75% of OSEEGIB’s primary member population and 70% of 2009 paid claims. Pre-Medicare retirees make up only 6% of OSEEGIB’s primary member population but account for 12% of paid claims and retirees over age 65 make up 19% of OSEEGIB’s primary member population and 18% of paid claims. Oklahoma State and Education Employees Group Insurance Board 10 $600,000,000 $100,000,000 $200,000,000 $300,000,000 $400,000,000 $500,000,000 $0 Active Pre-Medicare Medicare 583,025,749 515,264,885 506,593,185 83,511,564 54,920,205 84,913,764 134,851,348 134,500,248 140,025,545 Premiums Paid Claims Incurred Claims Comparison of Premiums and Incurred Claims Health Program - Year Ended December 31, 2009 $700,000,000 Pharmacy claims are included in total health claims. For active employees, health premiums for 2009 were $67.8 million over incurred claims for the year, a difference of 13%. For pre-Medicare members health premiums fall short of covering incurred claims by $30.0 million or 35%, primarily because premiums for active employees and pre-Medicare retirees are priced at a fully blended rate. For Medicare retirees, health premiums were $5.2 million over incurred claims for a difference of 4%. Oklahoma State and Education Employees Group Insurance Board 11 Exhibit 3 The following exhibit illustrates medical and prescription drug claims for each participant category. Oklahoma State and Education Employees Group Insurance Board 12 Medical and Prescription Drug Paid Claims Year Ended December 31, 2009 Medical Claims 21% 79% 25% 75% 35% 65% Exhibit 4 Active Pre-Medicare Medicare Prescription Drug Claims For the active and pre-Medicare population less than one fourth of total paid claims are for prescription drugs. For the Medicare population the majority of paid claims are for prescription drugs. Administrative expenses make up approximately 4% of OSEEGIB’s total expenses and 4% of premium revenue. This compares favorably with industry averages. Cash and Investment Management. OSEEGIB maintains minimum cash balances as required by statute to fund released warrants. All excess cash is deposited with a custodial bank, which in turn credits OSEEGIB’s short-term cash money market account. In addition to the money market account, OSEEGIB has two fixed income money managers and three equity securities managers. All invested funds are regulated by OSEEGIB’s investment policy, set by the Board of Directors, and monitored by OSEEGIB administration. The policy speaks specifically to liquidity, asset quality, maturity and duration of fixed income terms, and specific asset mix by statutory fund. In addition, the policy sets benchmark expectations for each type of money manager. A more detailed summary of OSEEGIB’s financial position and result of operations is included in Management’s Discussion and Analysis. OTHER INFORMATION Independent Audit. The accounting firm of KPMG LLP has been retained to perform an annual audit. The independent auditors’ report on the basic financial statements is included in the financial section of this report. Retirement of Administrator. Mr. Bill Crain, Administrator of OSEEGIB for 8 years, retired January 1, 2010. Mr. Frank Wilson was appointed new Administrator. A list of principal officials at January 1, 2010, is included as well as a list of principal officials at December 31, 2009. Acknowledgments. The preparation of the comprehensive annual financial report was made possible by the dedicated service of the entire staff of the accounting/finance department. In addition, we wish to acknowledge the contribution made by Mr. Gary Beebe, Financial Accounting. In closing, without the leadership and support of the governing body of OSEEGIB, preparation of this report would not have been possible. Respectfully submitted, Lynne Bajema Diana O’Neal Deputy Administrator, Finance Director of Finance Oklahoma State and Education Employees Group Insurance Board 13 Oklahoma State and Education Employees Group Insurance Board 14 Executive Organizational Chart Legislature State of Oklahoma Oklahoma State and Education Employees Group Insurance Board Board Auditor Board Legal Counsel Agency Administrator General Counsel to the Administrator Regulatory Affairs Deputy Administrator Finance - Administration Human Resources Deputy Administrator Operations Information Technology Finance and Accounting Member Services Health Care Management Policy Research Public Information Provider Relations Oklahoma State and Education Employees Group Insurance Board 15 BOARD Administrator Bill Crain Deputy Administrators Finance Frank Wilson Operations Paul King Division Directors General Counsel, Board Paul Duncan Internal Audit Joe McCoy General Counsel, Administrator Kathy Pendarvis Finance and Accounting Lynne Bajema Government Liaison Dana Webb Human Resources Gene Krier Information Technology Bo Reese Health Care Management Yasmine Barve Provider Relations Teresa South Member Services Victoria Goodwin Public Information Teresa Robinson Richard N. Womack, Chairman Eugene P. Reding, Vice Chairman Kim Holland Cody Graves Michael Clingman Steven Mattachione W. R. Moon V. David Miller List of Principal Officials December 31, 2009 BOARD Oklahoma State and Education Employees Group Insurance Board 16 Richard N. Womack, Chairman Eugene P. Reding, Vice Chairman Kim Holland Cody Graves Michael Clingman Steven Mattachione W. R. Moon V. David Miller Administrator Frank Wilson Deputy Administrators Finance Lynne Bajema Operations Paul King Division Directors General Counsel, Board Paul Duncan Internal Audit Joe McCoy General Counsel, Administrator Kathy Pendarvis Finance and Accounting Diana O’Neal Government Liaison Dana Webb Human Resources Gene Krier Information Technology Bo Reese Health Care Management Yasmine Barve Provider Relations Teresa South Member Services Victoria Goodwin Public Information Teresa Robinson List of Principal Officials January 1, 2010 Section Financial KPMG LLP 210 Park Avenue, Suite 2850 Oklahoma City, OK 73102-5683 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. Independent Auditors’ Report Members of the Board Oklahoma State and Education Employees Group Insurance Board Oklahoma City, Oklahoma: We have audited the accompanying balance sheets of the Oklahoma State and Education Employees Group Insurance Board (OSEEGIB), a component unit of the State of Oklahoma, as of December 31, 2009 and 2008, and the related statements of revenues, expenses and changes in fund equity, and cash flows for the years then ended. These financial statements are the responsibility of OSEEGIB’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of OSEEGIB’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Oklahoma State and Education Employees Group Insurance Board as of December 31, 2009 and 2008, and the changes in its financial position and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. As discussed in note 2(n) to the financial statements, OSEEGIB changed its method of financial statement presentation during 2008. In accordance with Government Auditing Standards, we have also issued our report dated April 29, 2010, on our consideration of OSEEGIB’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. The accompanying management’s discussion and analysis on pages 19 through 26 is not a required part of the basic financial statements, but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. April 29, 2010 18 19 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Overview of the Financial Statements The Oklahoma State and Education Employees’ Group Insurance Board’s (OSEEGIB) basic financial statements are prepared on the basis of accounting principles generally accepted in the United States of America for governmental entities and insurance enterprises where applicable. The primary purpose of OSEEGIB is to provide group health, dental, life, and disability insurance for employees of state agencies, school districts, and other governmental units as set forth in Title 74 of the Oklahoma Statutes. OSEEGIB is a component unit of the State of Oklahoma. During 2006 and 2007, OSEEGIB applied the provisions of GASB Statement No. 43 (GASB 43), Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and presented the portion of its activity related to covered active employees of participating employers as a public entity risk pool and the portion of its activity related to covered retirees of participating employers as an agency fund in accordance with the guidance for multiple-employer OPEB (other post-employment benefits) plans that are not administered as trusts. During 2008, OSEEGIB determined its activity related to covered retirees of participating employers does not meet the definition of an OPEB plan and, therefore, is not subject to GASB 43. Additionally, as OSEEGIB is not a cooperative group of governmental entities joining together to finance exposure to risk, OSEEGIB determined it is not subject to the guidance for public entity risk pools in GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. OSEEGIB, as an instrumentality of the State of Oklahoma created to administer, manage, and provide group health, dental, life, and disability insurance for active employees and retirees of state agencies, school districts, and other governmental units, believes the preferred method of accounting and reporting presentation is a special-purpose government engaged solely in business-type activities, more specifically an insurance enterprise. Effective January 1, 2008, OSEEGIB changed its financial statement accounting and reporting presentation and reported results in a single enterprise fund presentation and no longer included an agency fund. Additionally, as a result of the change in accounting and reporting presentation, disability reserves of approximately $13,504,000 were required to be recognized and policy maintenance costs of approximately $2,897,000 were required to be included in the premium deficiency reserve decreasing beginning fund equity for 2008. The total effect of the change in accounting and reporting presentation on fund equity on January 1, 2008 is as follows: As originally Effect of reported As adjusted change Fund equity, January 1, 2008 $ 187,891,608 171,490,197 16,401,411 The 2007 financial statements included in the financial highlights section below have been adjusted to reflect the change in accounting and reporting presentation for comparability purposes. 20 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) The three financial statements presented within the basic financial statements are as follows: Balance Sheets – This statement presents information reflecting OSEEGIB’s assets, liabilities, and fund equity. Fund equity represents the amount of total assets less total liabilities. The balance sheet is classified as to current and noncurrent assets and liabilities. For purposes of the financial statements, current assets and liabilities are those assets and liabilities with immediate liquidity or which are collectible or becoming due within twelve months of the statement date. OSEEGIB’s investment balances are considered current assets, as OSEEGIB has historically experienced a high portfolio turnover rate. Statements of Revenues, Expenses, and Changes in Fund Equity – This statement reflects OSEEGIB’s operating revenues and expenses, as well as nonoperating revenues during the year. The major source of operating revenue is premium income and the major sources of operating expenses are health, dental, life, and disability benefits. The change in fund equity for an enterprise fund is similar to net profit or loss for a private sector insurance company. Statements of Cash Flows – The statements of cash flows are presented on the direct method of reporting which reflects cash flows from operating, capital and related financing, and investing activities. Cash collections and payments are reflected in this statement to arrive at the net increase or decrease in cash for the fiscal year. 21 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Financial Highlights The management of the Oklahoma State and Education Employees’ Group Insurance Board (OSEEGIB) offers readers of OSEEGIB’s financial statements this narrative overview and analysis of the financial activities of the entity for the years ended December 31, 2009, 2008, and 2007. December 31 2009 v. 2008 Change 2009 2008 2007 Amount Percentage Cash and investments $ 259,205,958 217,007,595 288,440,918 42,198,363 19.4% Premiums receivable, net 30,454,967 24,966,549 27,033,170 5,488,418 22.0 Other current assets 13,809,260 8,091,122 13,816,166 5,718,138 70.7 Total current assets 303,470,185 250,065,266 329,290,254 53,404,919 21.4 Office equipment, net 609,442 710,218 856,296 (100,776) (14.2) Total assets $ 304,079,627 250,775,484 330,146,550 53,304,143 21.3% Policy and contract claim reserves $ 107,617,000 98,479,000 88,584,000 9,138,000 9.3% Disability reserves (current only) 2,846,000 2,747,000 2,663,032 99,000 3.6 Premium deficiency reserves — 11,915,000 24,627,000 (11,915,000) (100.0) Other current liabilities 22,608,838 16,638,908 31,940,942 5,969,930 35.9 Total current liabilities 133,071,838 129,779,908 147,814,974 3,291,930 2.5 Total noncurrent liabilities 10,963,000 10,552,000 10,841,379 411,000 3.9 Total liabilities 144,034,838 140,331,908 158,656,353 3,702,930 2.6 Invested in capital assets 609,442 710,218 856,296 (100,776) (14.2) Unrestricted fund equity 159,435,347 109,733,358 170,633,901 49,701,989 45.3 Total fund equity 160,044,789 110,443,576 171,490,197 49,601,213 44.9 Total liabilities and fund equity $ 304,079,627 250,775,484 330,146,550 53,304,143 21.3% 22 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Year ended December 31, 2009 v. 2008 Change 2009 2008 2007 Amount Percentage Premium revenue $ 861,781,691 761,944,652 798,961,929 99,837,039 13.1% Other operating revenues 14,729,837 14,382,892 15,136,247 346,945 2.4 Total operating revenues 876,511,528 776,327,544 814,098,176 100,183,984 12.9 Benefits expense 810,727,132 779,338,684 749,970,728 31,388,448 4.0 Change in claim reserves 9,648,000 9,689,589 3,166,412 (41,589) (0.4) Change in premium deficiency reserves (11,915,000) (12,712,000) 24,627,000 797,000 (6.3) Administrative and claims processing expense 38,423,432 38,717,310 41,222,380 (293,878) (0.8) Total operating expenses 846,883,564 815,033,583 818,986,520 31,849,981 3.9 Operating income (loss) 29,627,964 (38,706,039) (4,888,344) 68,334,003 (176.5) Net investment income (loss) 19,973,249 (22,340,582) 13,590,378 42,313,831 (189.4) Change in fund equity 49,601,213 (61,046,621) 8,702,034 110,647,834 (181.3) Fund equity, beginning of year, as adjusted 110,443,576 171,490,197 162,788,163 (61,046,621) (35.6) Fund equity, end of year $ 160,044,789 110,443,576 171,490,197 49,601,213 44.9% OSEEGIB’s total assets for the year ended December 31, 2009 increased by approximately 21% from the previous year after a decrease of 24% during 2008. Cash and investments increased by $42.2 million or 19% during 2009 due to favorable claims experience and a rebounding investment market after decreasing by $71.4 million or 25% during 2008’s year of high claims experience combined with a drastic downturn in the investment market. During 2009, OSEEGIB earned approximately $6.2 million in interest and dividend income. OSEEGIB realized investment losses of $2.9 million and experienced $17.1 million in unrealized gains. Investment expenses were approximately $438,000, resulting in a total net gain on investments of $20.0 million. In 2008, OSEEGIB earned approximately $8.2 million in interest and dividend income, experienced $156,000 in realized losses and $29.8 million in unrealized losses, and paid $581,000 in investment expenses for a net investment loss of $22.3 million. OSEEGIB’s investment allocation at December 31, 2009 is comprised of approximately 53% fixed income securities, 24% equities, and 23% cash equivalents compared to approximately 59% fixed income securities, 23% equities, and 18% cash equivalents at December 31, 2008. During 2009, OSEEGIB did not convert any investments to operating cash. During 2008, OSEEGIB liquidated $36 million of fixed income securities and $9 million of equity investments to replenish operating cash. 23 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Premiums receivable at December 31, 2009 increased by $5.5 million over December 31, 2008, primarily due to an increase in the monthly premium for 2009. At December 31, 2008, premiums receivable had decreased by $2.1 million due to a decrease in the number of active members. The decrease was due primarily to the disenrollment of a major university. The increase in other current assets in 2009 of $5.7 million is primarily due to a $3.2 million increase in the receivable for pharmacy rebates as well as an almost $2.0 million increase in a receivable for pending investment sales. In contrast, the decrease in other current assets in 2008 of $5.7 million is primarily due to a $6.8 million decrease in the receivable for unsettled investment trades. Total liabilities as of December 31, 2009 increased $3.7 million from December 31, 2008. Four months after the end of the year, OSEEGIB’s actuaries project the results of the current fiscal year based upon updated trend information as compared to the assumptions used when the rates were set in August of the previous year. If, at that time, it appears that claims experience will exceed premiums received, accounting principles require a premium deficiency reserve liability to be booked on the previous year’s final Balance Sheet and the reserve is amortized as a contra-expense in the current year. There is no premium deficiency reserve liability at December 31, 2009. At December 31, 2008, the premium deficiency reserve liability was $11.9 million. Total claim reserves, including noncurrent disability reserves, at December 31, 2009, were $9.6 million more than reserves at December 31, 2008 due to an overall increase in incurred claims in 2009. At December 31, 2008, total claim reserves including noncurrent disability reserves were $9.7 million more than reserves at December 31, 2007. OSEEGIB contracted with a new Third Party Administrator (TPA) to pay health, dental, and life claims effective January 1, 2009. The TPA under contract for 2008 stopped paying claims on December 19, 2008, reducing paid claims for December and increasing claim reserves at December 31, 2008. Other current liabilities increased $6 million from December 31, 2008 due in part to a $1.1 million increase in the payable to a TPA as well as a $2 million increase in the payable for unsettled investment purchases. Other current liabilities at December 31, 2008 decreased $15.3 million from December 31, 2007 primarily due to a $10.4 million decrease in payables for unsettled investment purchases, as well as a $2.7 million decrease in a non-recurring settlement liability. OSEEGIB saw an increase in net premium revenue for 2009 of approximately $99.8 million, primarily due to the rate increases necessary for 2009. In addition, payments from the Centers for Medicare and Medicaid Services (CMS), which is included in premium revenue, increased by $1.4 million in 2009. In contrast, for 2008 OSEEGIB saw a decrease in premium revenue of approximately $37.0 million, primarily due to the reduction in participation as well as a decrease in the dependent rates in the active and pre-Medicare categories. Payments from CMS during 2008 decreased by $2.9 million from 2007 due to a change in CMS’ payment method. For the year ended December 31, 2009, OSEEGIB earned approximately $14.7 million in other operating income, which consisted of $1.7 million in risk adjustment fee income and $13 million in pharmacy rebates. For the year ended December 31, 2008, OSEEGIB earned approximately $14.4 million in other operating income, which consisted of $2.1 million in risk adjustment fee income and $12.1 million in pharmacy rebates. 24 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 (Continued) Benefits expense, including changes in claim reserves, comprised 96% of OSEEGIB’s total expenses for 2009 and 95% of total expenses in 2008. Changes in premium deficiency reserves are not considered in the calculation. Total benefits expense for 2009, including changes in reserves, increased by $31.3 million, or 4% over the prior year. For the year ended December 31, 2008, total benefits expense, including changes in reserves, increased by $35.9 million, or 5% over the year ended December 31, 2007. Health and dental claim costs increased by approximately $27.1 million, or 4%, over the prior year primarily due to increases in incurred claims for pharmacy benefits. The actual increase varied favorably from the 9% increase assumed by the actuaries when setting 2009 rates. For the year ended December 31, 2008, health and dental claim costs increased by approximately $34.1 million or 5% over the year ended December 31, 2007. The expense for life benefits increased by approximately $2.8 million or 13% during 2009. In 2008, life benefits expense increased by approximately $5.7 million or 37% over the expense reported for 2007. Disability benefits for 2009 increased by $1.6 million or 7% after decreasing by $3.9 million or 65% in 2008. The sharp decrease in 2008 was primarily because disability reserves increased by $3.2 million in 2007 and have remained relatively stable since. Administrative expenses decreased slightly by $300,000, or 0.8%, in 2009. In 2008, administrative expenses decreased by $2.5 million, or 6%, primarily due to a decrease in the administrative fee assessed by the Oklahoma State Employee Benefits Council. The fee was changed from 2% for 2007 to 1.25% for 2008, resulting in a savings to OSEEGIB of $2.0 million. Administrative expenses made up 4% of OSEEGIB’s total expenses in 2009 and 5% of total expenses in 2008. OSEEGIB experienced an increase in fund equity of approximately $49.6 million, or 45%, for the year ended December 31, 2009. For 2008, there was a decrease in fund equity of approximately $61.0 million, or 36%. The Health and Dental program experienced an increase in fund equity of approximately $49.0 million, or 71%, for the year ended December 31, 2009 due to the increase in premiums and improvement in the investment markets. The premium rates adopted for the Health and Dental Fund were based on assumptions that provided for no increase or decrease in fund equity. During 2008, the Health and Dental program experienced a decrease in fund equity of approximately $52.3 million, or 43%. OSEEGIB’s governing board made a decision to subsidize monthly health premiums for 2008 and experienced a drastic downturn in the investment market. The Life program experienced a decrease in fund equity of approximately $2.4 million or 12% in 2009 and $4.5 million or 18% in 2008. The premium rates adopted for the Life program were based on assumptions that provided for no increase or decrease in fund equity. The Disability program experienced an increase in fund equity of $3.0 million or 14% in 2009 while in 2008 the Disability program experienced a decrease in fund equity of $4.3 million or 16%. The premium rates adopted for the Disability program were based on assumptions that provided for no increase or decrease in fund equity. 25 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 Economic Conditions The insurance industry monitors healthcare costs by establishing a percentage of cost increases known as “trend”. According to the Segal Health Plan Cost Trend Survey, trend is the forecast change in health plans’ per-capita claims cost determined by insurance carriers, managed care organizations, and third-party administrators. Many factors influence trend, including: Price inflation, Deductibles and copayments, Cost-shifting, Utilization increases due to aging, product promotion and improved diagnostic services, The availability and use of more expensive drug therapies, Government mandated benefits and other legislative changes, and Technological changes. For 2009, the overall nationwide health trend for employer sponsored plans, according to AON Consulting, OSEEGIB’s actuarial firm, was 10.9% for PPO plans with pharmacy benefits. The national trend for Medicare supplement plans was 7.6% for 2009. Historically, OSEEGIB’s cost trends have tracked below national averages. As a large self-funded plan, OSEEGIB’s cost trends are cyclical in nature, and can vary during a given plan year. OSEEGIB experienced an average medical trend of 8-9% during 2008 and 2009 for active members and retirees under age 65. OSEEGIB’s trend for the Medicare supplement plan was a decrease of 1.0%. These figures measured OSEEGIB’s paid claims and did not adjust for plan design or provider contracting changes during the measurement period. Since premium rates are set in August, the rate setting process applies trends experienced through April. The medical trend applied by OSEEGIB’s actuaries for calculating 2009 rates was 9.5% for active employees and pre-Medicare retirees and 7.0% for Medicare retirees. The prescription drug trend used for setting 2009 rates was 7.5% for active employees and pre-Medicare retirees and 7.5% for Medicare retirees. The dental trend used for setting 2009 rates was 6.0%. The medical trend applied by OSEEGIB���s actuaries for calculating 2008 rates was 8.0% for active employees and pre-Medicare retirees and 7.0% for Medicare retirees. The prescription drug trend used for setting 2008 rates was 7.5% for active employees, pre-Medicare retirees, and Medicare retirees. The dental trend used for setting 2008 rates was 7.2%. OSEEGIB’s investment portfolio rebounded in 2009 after a dismal year in 2008. The return on investment (ROI) assumed by OSEEGIB’s actuaries in setting premium rates for 2009 was a combined return of 4.4% and the actual rate of return was 8.5%. In contrast, OSEEGIB’s investment holdings suffered in 2008 with the global economic downturn after experiencing five years of positive returns. Relative to the market decline overall, OSEEGIB’s investment losses were minimized due to OSEEGIB’s conservative investment policy. The ROI assumed by OSEEGIB’s actuaries in setting premium rates for 2008 was a combined return of 4% and the actual ROI for 2008, after large market losses in the final quarter, was a 10% loss. 26 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Management’s Discussion and Analysis December 31, 2009 and 2008 The Patient Protection and Affordable Care Act was signed by President Obama on March 23, 2010. This Act includes wide-sweeping changes to many facets of the nation’s healthcare system. OSEEGIB is in the process of evaluating the effect this massive piece of legislation has on operations and benefits. 27 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Balance Sheets December 31, 2009 and 2008 Assets 2009 2008 Current assets: Cash and cash equivalents $ 83,857,770 63,240,471 Investments 175,348,188 153,767,124 Receivables: Interest and dividends receivable 383,621 388,354 Unsettled investment sales 3,833,553 887,140 Premiums, net of allowance of $800,000 and $310,000 at December 31, 2009 and 2008, respectively 30,454,967 24,966,549 Pharmacy rebate 8,594,904 5,279,700 Other, net 997,182 1,535,928 Total current assets 303,470,185 250,065,266 Noncurrent assets: Office equipment 4,163,900 4,438,752 Less accumulated depreciation (3,554,458) (3,728,534) Office equipment, net 609,442 710,218 Total assets $ 304,079,627 250,775,484 Liabilities Current liabilities: Health and dental reserves $ 102,804,000 93,771,000 Life reserves 4,813,000 4,708,000 Disability reserves 2,846,000 2,747,000 Premium deficiency reserve — 11,915,000 Premiums due to health maintenance organizations and other insurers 9,246,824 8,705,679 Payable for investment purchases 3,878,548 836,471 Other accrued liabilities 9,483,466 7,096,758 Total current liabilities 133,071,838 129,779,908 Noncurrent liabilities: Disability reserves 10,963,000 10,552,000 Total liabilities 144,034,838 140,331,908 Fund Equity Invested in capital assets 609,442 710,218 Unrestricted 159,435,347 109,733,358 Total fund equity 160,044,789 110,443,576 Total liabilities and fund equity $ 304,079,627 250,775,484 See accompanying notes to basic financial statements. 28 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Statements of Revenues, Expenses and Changes in Fund Equity Years ended December 31, 2009 and 2008 2009 2008 Operating revenues: Premium revenue $ 861,781,691 761,944,652 Other operating revenues 14,729,837 14,382,892 Total operating revenues 876,511,528 776,327,544 Operating expenses: Benefits expense 810,727,132 779,338,684 Change in health and dental reserves 9,033,000 8,974,000 Change in life reserves 105,000 921,000 Change in disability reserves 510,000 (205,411) Change in premium deficiency reserve (11,915,000) (12,712,000) Administrative and claim processing 38,423,432 38,717,310 Total operating expenses 846,883,564 815,033,583 Operating income (loss) 29,627,964 (38,706,039) Nonoperating revenues: Net investment income (loss) 19,973,249 (22,340,582) Change in fund equity 49,601,213 (61,046,621) Fund equity, beginning of year, as adjusted on January 1, 2008 (note 2(n)) 110,443,576 171,490,197 Fund equity, end of year $ 160,044,789 110,443,576 See accompanying notes to basic financial statements. 29 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Statements of Cash Flows Years ended December 31, 2009 and 2008 2009 2008 Cash flows from operating activities: Premiums collected $ 830,462,048 739,916,245 Premiums collected on behalf of health maintenance organizations and other insurers 120,025,897 113,263,794 Payments collected from CMS 25,172,614 22,860,814 Risk adjustment premium collected 1,708,628 2,150,474 Pharmacy rebates collected 9,979,237 11,226,526 Benefits paid (810,727,132) (779,338,684) Premiums paid to health maintenance organizations and other insurers (118,826,141) (113,273,374) Payments to employees for services (10,181,591) (10,168,964) Payments to suppliers for goods and services (25,622,234) (30,439,923) Other operating cash received (paid) 265,515 (296,940) Net cash provided by (used in) operating activities 22,256,841 (44,100,032) Cash flows from capital and related financing activities: Acquisition of office equipment (132,124) (169,559) Net cash used in capital and related financing activities (132,124) (169,559) Cash flows from investing activities: Purchases of investments (194,426,040) (129,574,575) Proceeds from sales and maturities of investments 187,166,476 167,634,080 Investment income received 5,752,146 7,810,264 Net cash (used in) provided by investing activities (1,507,418) 45,869,769 Net increase in cash and cash equivalents 20,617,299 1,600,178 Cash and cash equivalents, beginning of year 63,240,471 61,640,293 Cash and cash equivalents, end of year $ 83,857,770 63,240,471 Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) $ 29,627,964 (38,706,039) Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation 232,900 315,637 Change in operating assets and liabilities: Premium receivable (5,488,418) 2,066,621 Other receivables (2,776,458) (1,302,832) Claim reserves 9,138,000 9,895,000 Disability reserves 510,000 (205,411) Premium deficiency reserves (11,915,000) (12,712,000) Premiums due to health maintenance organizations and other insurers 541,145 (288,056) Other liabilities 2,386,708 (3,162,952) Total adjustments (7,371,123) (5,393,993) Net cash provided by (used in) operating activities $ 22,256,841 (44,100,032) See accompanying notes to basic financial statements. 30 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (1) Description of OSEEGIB The Oklahoma State and Education Employees Group Insurance Board (OSEEGIB) is a special purpose state and local government engaged solely in business-type activities. OSEEGIB is a legal trust which administers, manages and provides group health, dental, life, and disability insurance for active employees and retirees of state agencies, school districts, and other governmental units of the State of Oklahoma. OSEEGIB is self-insured and is financed through premiums collected from employers and employees. OSEEGIB provides insurance solely to eligible employees, dependents, and retirees. OSEEGIB is a component unit of State of Oklahoma (the State). The following brief description of OSEEGIB is provided for general information purposes only. Participants should refer to Title 74 of the Oklahoma Statutes, Sections 1301 et seq. as amended, for more complete information. In accordance with Title 74, OSEEGIB maintains three separate programs, the Health and Dental program, the Life program, and the Disability program. There is no statutory restriction that would prevent assets accumulated in one program from paying benefits due from another program. The eight-member board which administers OSEEGIB (the Board) is comprised of two members appointed by the governor, two members appointed by the speaker of the House of Representatives, two members appointed by the president pro tempore of the Senate, the commissioner of the Oklahoma Insurance Department and the director of the Office of State Finance. The Board has a fiduciary responsibility to manage the funds and invest the assets of OSEEGIB. This moral and legal obligation establishes a trustee relationship whereby OSEEGIB’s funds are held for the ultimate benefit of those who obtain insurance from OSEEGIB. (a) General In 1968, OSEEGIB was formed by the State Legislature to provide group health, dental, and life benefits to participants of the Oklahoma Public Employees Retirement System (OPERS) and active employees of the State. Subsequently, other groups became eligible for participation, including persons covered under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), survivors and certain local government employees. COBRA allows temporary continuance of insurance coverage under certain circumstances. Survivors are individuals who were covered eligible dependents of a participant in OSEEGIB at the time of the participant’s death. OSEEGIB was created by the State Legislature and could be terminated by the same body. In 1978, OSEEGIB became self-insured. Beginning in 1985, participants were given the option of electing health coverage from certain health maintenance organizations (HMOs). Plans similar to HMOs provide dental coverage for those participants who elect to participate in them (DMOs). In 1986, the State added a self-insured disability program to OSEEGIB. 31 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) In 1989, participants of the Teachers’ Retirement System of Oklahoma (TRS) and active employees of school districts became eligible to enroll in OSEEGIB (educational participants). House Bill No. 1731, which provided TRS participants the option to enroll in OSEEGIB, required the TRS to transfer $39,600,000 to OSEEGIB. The educational participants receive the same health and dental coverage options provided to state and local governmental participants. Life coverage was made available to active educational participants beginning July 1, 1991. Disability coverage is not available to educational participants. Effective July 1, 1993, the Oklahoma State Employee Benefit Council (EBC) began contracting with HMOs and DMOs on behalf of state employees to provide health and dental coverage for those participants who elect such coverage. Effective January 1, 2006, OSEEGIB became a Medicare Part D Prescription Drug Plan pursuant to the Medicare Prescription Drug Improvement and Modernization Act of 2003. (b) Premiums and Participants The health, dental, life, and disability benefits for governmental participants are funded by monthly premiums paid by the State, local governmental units, OPERS, and individuals. The health, dental, and life benefits for educational participants are funded by monthly premiums paid by school districts, the TRS, and individuals. A participant may extend coverage to dependents for an additional monthly premium based on the coverage requested. Premiums for active state employees and their dependents are collected by EBC and remitted to OSEEGIB or other insurer elected by the employee. Premiums remitted to OSEEGIB on behalf of active state employees and their dependents for the years ended December 31, 2009 and 2008 are reported gross of a fee retained by EBC, which is equal to 1.25% of premiums. This fee, which was approximately $3,062,000 and $2,429,000 for the years ended December 31, 2009 and 2008, respectively, is included in administrative expenses in the statements of revenues, expenses and changes in fund equity. For the years ended December 31, 2009 and 2008, premiums for local government, education, and inactive participants who have elected an HMO for health coverage or DMO for dental coverage are collected by OSEEGIB and remitted to the HMO or DMO carrier net of a fee retained by OSEEGIB of 1% of premiums. This fee, which was approximately $1,191,000 and $1,122,000 for the years ended December 31, 2009 and 2008, respectively, is included as an offset to administrative expenses in the statements of revenues, expenses and changes in fund equity. The premium related to HMOs, DMOs, and vision plans was approximately $119,367,000 and $112,985,000 for 2009 and 2008, respectively, and, as OSEEGIB only acts in an agency capacity, the premiums collected on behalf of HMOs, DMOs, and vision plans is not reflected in the statements of revenues, expenses and changes in fund equity. Pursuant to the authority granted by Oklahoma Statute, the Board has the authority to establish and change premium rates for the members, employers, and other contributing entities each year. An outside consultant advises the Board regarding changes in premium rates. If premium rates are changed, they generally become effective at the beginning of the next calendar year. Each HMO and DMO determines its own premium rates. 32 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) OSEEGIB participants are not subject to supplemental assessment in the event of a premium deficiency. At the time of premium payment, the risk of loss due to incurred benefit costs is transferred from the participant to OSEEGIB. If the assets of OSEEGIB were to be exhausted, participants would not be responsible for OSEEGIB’s liabilities. At December 31, 2009, OSEEGIB provided health coverage to 133 state agency divisions with approximately 24,000 primary participants (not including dependents), 616 school districts with approximately 54,000 primary participants, 303 local government entities with approximately 9,000 primary participants, and 33 other groups, which include the governmental and educational retirement systems, COBRA, and survivors, with approximately 39,000 primary participants. Approximately 57,000 dependents participated in OSEEGIB as well. In addition, OSEEGIB collected and remitted premiums for approximately 31,000 primary participants and 23,000 dependents who were covered by HMOs. These counts are provided for health coverage only. At December 31, 2008, OSEEGIB provided health coverage to 134 state agency divisions with approximately 24,000 primary participants (not including dependents), 614 school districts with approximately 52,000 primary participants, 315 local government entities with approximately 9,000 primary participants, and 32 other groups, which include the governmental and educational retirement systems, COBRA, and survivors, with approximately 39,000 primary participants. Approximately 57,000 dependents participated in OSEEGIB as well. In addition, OSEEGIB collected and remitted premiums for approximately 30,000 primary participants and 22,000 dependents who were covered by HMOs. These counts are provided for health coverage only. All state agencies in Oklahoma are required to offer to their active employees the coverage selections offered by EBC. All eligible education or local government entities may elect to participate in OSEEGIB. Any education entity or local government entity which elects to withdraw from offering OSEEGIB as an insurance option may do so with 30 days written notice and must withdraw both its active and inactive participants. (c) Benefits A provider network arrangement is available for health and dental benefits. According to this arrangement, network providers agree to accept amounts for covered services that do not exceed the charges allowed by OSEEGIB. Therefore, the network provider can only expect to receive payment from the participant for the charges allowed by the network agreement. HealthChoice offers a high option and a basic option health benefit plan for non-Medicare participants. A member who elects the high option plan is responsible for a $25 copayment and no deductible for office visits and preventive care services when using network providers. The same services when using nonnetwork providers are reimbursed at 50% after the member meets a $500 calendar year deductible. For other services, network provider and nonnetwork provider benefits are generally reimbursed at 80% and 50%, respectively, after the appropriate deductibles of $500 ($1,500 per family). OSEEGIB reimburses allowed charges at 100% once the member has reached $2,800 and $3,300 per member out-of-pocket maximum for network providers and nonnetwork providers, respectively. 33 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) The basic option plan pays 100% of the first $500 of allowed charges for covered medical services. The member pays 100% of the next $500 ($1,000 per family) of allowed charges. The member and OSEEGIB each pay 50% of the next $10,000 of allowed charges ($20,000 per family). OSEEGIB reimburses allowed charges at 100% once the member has reached the out-of-pocket maximum of $5,500 ($11,000 per family). In addition, for both plans, when using non-network providers, the member is responsible for the excess of billed charges over allowed charges. A HealthChoice USA option is offered to active participants who work outside Oklahoma and Arkansas for more than 90 consecutive days and to non-Medicare retired participants who live outside those two states. These members have the same benefits as the HealthChoice high option, but they access a nationwide provider network. Pharmacy benefits are the same for the high option and the basic option plans. Medications are categorized as either preferred or nonpreferred. When purchasing preferred medications from a network provider, the member is responsible for a copayment of up to $25 for medications costing $100 or less and up to $50 for medications costing more than $100. The maximum copay doubles for nonpreferred medications. In addition, there is a $2,500 per person annual out-of-pocket maximum for preferred medications. There is no out-of-pocket maximum for nonpreferred medications. For nonnetwork providers, the member is responsible for a copay of up to $75 for preferred medications and up to $125 for nonpreferred medications plus a dispensing fee. There is a lifetime maximum pharmacy benefit of $2,000,000 per covered person. Allowed expenses for dental benefits are reimbursed at a percentage ranging from 60% to 100%, based on the class of the allowed expense, when using network providers. The same services when using a nonnetwork provider are reimbursed at a percentage ranging from 50% to 100%. There is a $25 deductible ($75 per family) when using either network or nonnetwork providers. There is a calendar year maximum dental benefit of $2,000 per covered person. Basic life benefits of $20,000 are provided to active state, education, and local government employees. In addition to the basic life benefit of $20,000, participants may elect additional coverage in increments of $20,000 up to the lesser of $300,000 or five times the participant’s salary. Additional dependent life coverage is also available under three separate plans. The low option plan offers dependent life coverage of $6,000 for spouses, $3,000 for children, and $1,000 for children less than six months of age. The standard option plan offers dependent life coverage of $10,000 for spouses, $5,000 for children, and $1,000 for children less than six months of age. The premier option offers dependent life coverage of $20,000 for spouses, $10,000 for children, and $1,000 for children less than six months of age. 34 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Retirees may elect to retain the full coverage for basic life benefits held at the time of termination of employment. Coverage thereafter may be decreased in $5,000 increments to a minimum of $5,000 or totally terminated. Prior to July 1, 2002, no more than $15,000 of basic life insurance could be retained after termination of employment. The retiree may retain dependent life coverage in force on eligible dependents in $500 increments. Disability benefits are based on the length of employment, base salary limited by a maximum allowable salary and length of disability. There is a 30-day qualifying period for short-term disability. Long-term disability becomes effective 180 days after disablement. Income from other sources is used to reduce the benefit amount. The duration of the long-term benefit is determined based upon the age of the participant at disablement and length of employment. A high option and low option Medicare supplement benefit plan is available to those retired participants and their dependents who are eligible to enroll in Medicare, where Medicare is the primary payor. This coverage provides for reimbursement of Medicare-eligible expenses which may not be fully covered by or which exceed the amount allowed by Medicare. Medicare Part A expenses are generally reimbursed at 100% of eligible Medicare expenses not reimbursed by Medicare. The Medicare Part A deductible is also fully reimbursed by OSEEGIB. Medicare Part B expenses are generally reimbursed at 20% of eligible Medicare expenses not reimbursed by Medicare. OSEEGIB has adopted Plan “J” for medical benefits for both the high option and low option plans in accordance with the National Association of Insurance Commissioners’ schedule of Medicare supplement plans, with the addition of a pharmacy prescription program, preventive care benefits, out-of-country benefits and an at-home recovery benefit. Pharmacy benefits for the high option Medicare supplement plan are the same as for the HealthChoice high option plan, with a few minor differences in the formulary. The low option Medicare supplement plan is modeled after the Center for Medicare and Medicaid Services (CMS) standard Part D plan design. Once a participant reaches catastrophic coverage, OSEEGIB pays 100% of the pharmacy cost rather than 95% per CMS’ standard Part D plan design. Health benefits and dental benefits are provided directly by the HMOs and DMOs for all participants who elect such coverage. For each participant who elects HMO or DMO coverage, excluding active state employees, OSEEGIB collects and pays the premiums to each HMO or DMO carrier. For each active state employee who elects HMO or DMO coverage, EBC collects and pays the premiums to each HMO or DMO carrier. The amounts paid by OSEEGIB to each HMO or DMO are in accordance with their respective contracts. Benefits are the responsibility of each HMO or DMO carrier and are subject to the provisions defined in their insurance policies. OSEEGIB has no liability for health benefits or dental benefits of participants who elect HMO or DMO coverage; therefore, activity related to HMO, DMO, and vision benefits are not reflected in the basic financial statements of OSEEGIB. 35 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) All benefits for OSEEGIB are processed and paid by third-party administrators (TPAs). The fees incurred by OSEEGIB for services performed by the TPAs totaled approximately $16,400,000 and $18,900,000 for the years ended December 31, 2009 and 2008, respectively. The decrease in 2009 is a result of deductions from monthly invoices from the health and dental claims TPA for interest paid to providers and performance penalties. TPA fees are included in administrative expenses in the statements of revenues, expenses, and changes in fund equity. A summary of available coverage and eligible groups for the years ended December 31, 2009 and 2008 is as follows: Local State Education government employee employee employee OPERS TRS COBRA Health X X X X X X Dental X X X X X X Life X X X X X Disability X X Medicare supplement X X X (2) Summary of Significant Accounting Policies (a) Basis of Accounting OSEEGIB has prepared its financial statements in accordance with U.S. generally accepted accounting principles for state and local governments. The Governmental Accounting Standards Board (GASB) establishes the U.S. generally accepted accounting principles for state and local governments. GASB requires that proprietary activities apply all applicable GASB pronouncements and Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins issued on or before November 30, 1989, to the extent that they do not conflict with GASB pronouncements. The entity can elect, at its option, to apply all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. OSEEGIB has adopted this option. (b) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. OSEEGIB adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. 36 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (c) Investments and Investment Income Investments are stated at fair value based on quoted prices with changes in fair value included in the statements of revenues, expenses and changes in fund equity. If quoted prices are not available from active exchanges for identical instruments, then fair values are estimated using quoted prices from less active markets, quoted prices of securities with similar characteristics, or by pricing models utilizing other significant observable inputs. Investments in external investment pools, such as commingled funds, are stated at fair value based on actual transaction values. The fair value for one of the commingled funds is $12.49 at December 31, 2008 and the net asset value in the pool of shares is $12.17. There was no difference in the fair value and the net asset value in the pool of shares in the commingled fund at December 31, 2009. OSEEGIB records investment purchases and sales based upon the trade date. Therefore, OSEEGIB records either receivables or payables for unsettled sales or purchases, respectively. Such transactions are usually settled within a few days after the trade date. Realized gains and losses are determined on the average-cost method. The calculation of realized gains and losses is independent of the calculation of the change in net unrealized gains and losses. Realized gains and losses on investments that had been held in more than one year and sold in the current year may have been recognized as unrealized gains and losses in prior years. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. (d) Office Equipment Office equipment is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the equipment, which range from 5 to 10 years. Purchases of equipment costing less than $2,500 are considered to be immaterial and are expensed when purchased. (e) Reserves OSEEGIB establishes health and dental and life reserves based on the ultimate estimated cost of settling claims that have been reported but not settled, and of claims that have been incurred but not yet reported. Disability reserves are also established based on the estimated ultimate cost of settling claims of participants currently receiving benefits and for disability claims incurred but not yet reported to OSEEGIB. Long-term disability reserves are carried at the present value of expected future benefits. The reserves are determined using OSEEGIB’s historical benefit payment experience. These estimates are based on data available at the time of estimate and are reviewed by OSEEGIB’s independent consulting actuaries. The health, dental, and life reserves and the disability reserves include liabilities for claim processing expenses associated with paying claims which have been incurred, but not yet paid. The length of time for which costs must be estimated depends on the coverages involved. 37 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Although reserves reflect OSEEGIB’s best estimates of the incurred claims to be paid, due to the complex nature of the factors involved in the calculation, the actual results may be more or less than the estimate. The claim reserves are recomputed on a periodic basis using actuarial and statistical techniques which consider the effects of general economic conditions, such as inflation, and other factors of past experience, such as changes in participant counts. Adjustments to claim reserves are recorded in the periods in which they are made. Claims must be filed no later than the last day of the calendar year immediately following the calendar year in which the loss is sustained unless an extenuating circumstance can be shown to exist. Premium deficiency reserves are required to be recorded when the anticipated costs of settling claims plus policy maintenance costs for the following fiscal year are in excess of the anticipated premium receipts for the following fiscal year. Anticipated investment income is considered in determining whether a premium deficiency exists. (f) Fund Equity At December 31, 2009 and 2008, OSEEGIB has no legally required minimum fund equity. However, the Board has elected to set a benchmark for minimum fund equity based upon the National Association of Insurance Commissioners (NAIC), the Managed Care Organizations Risk Based Capital Formula for the Health and Dental program, and the NAIC Life/Health Risk Based Capital Formula for the Life and Disability programs. OSEEGIB utilizes the NAIC Risk Based Capital methodology to establish the fund equity benchmark. The minimum fund equity benchmark by the Board at December 31, 2009 and 2008 is approximately $154,276,000 and $139,925,000, respectively. The NAIC Risk Based Capital Formulas were selected as the basis for determining minimum fund equity primarily due to the following factors: Degree and nature of the risks undertaken Size of OSEEGIB Degree of conservatism inherent in the premium rates Degree of safety desired The primary risks that would threaten OSEEGIB’s solvency include the following: The risk that claims incurred will exceed premiums collected The risk of default or decline in value of OSEEGIB’s assets The risk of large monetary judgments stemming from possible lawsuits against OSEEGIB 38 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) A comparison of the minimum fund equity benchmark by the Board and unrestricted fund equity at December 31, 2009 as reported in the basic financial statements is as follows (in thousands): 2009 Health and Dental Disability Program Life Program Program Total Minimum fund equity $ 138,818 10,370 5,088 154,276 Unrestricted fund equity 116,886 17,892 24,657 159,435 A comparison of the minimum fund equity benchmark by the Board and unrestricted fund equity at December 31, 2008 as reported in the basic financial statements is as follows (in thousands): 2008 Health and Dental Disability Program Life Program Program Total Minimum fund equity $ 125,046 10,086 4,793 139,925 Unrestricted fund equity 67,832 20,282 21,619 109,733 Due to unfavorable claims experience in 2008 combined with the downturn in equity and credit markets during 2008, OSEEGIB’s fund equity was below the Board’s current benchmark at December 31, 2008. As part of the rate setting process, the Board considers OSEEGIB’s total fund equity in comparison with the minimum fund equity benchmark in setting rates towards achieving the minimum fund equity benchmark. Title 74 of the Oklahoma Statutes, Section 1321C allows that OSEEGIB may adjust rates mid-year if the need is substantiated by an actuarial determination. Consistent with prior years, OSEEGIB does not anticipate the need for a mid-year rate adjustment for 2010. (g) Premiums Premiums are recognized in the period when the insurance coverage is provided. Premiums are due monthly from the employers or participants based on the rates adopted by the Board. (h) Medicare Part D Subsidy As a Medicare Part D Prescription Drug Plan (PDP), OSEEGIB receives a monthly payment from Medicare. The effect of these payments is to subsidize premiums for the individuals enrolled in the PDP since they pay a reduced premium rate. This amount is approximately $25,173,000 and $23,817,000 for the years ended December 31, 2009 and 2008, respectively, and is included in premium revenue within the statements of revenues, expenses, and changes in fund equity. 39 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (i) Pharmacy Rebate Effective January 1, 1999, under OSEEGIB’s agreement with its pharmacy benefit manager, OSEEGIB receives a guaranteed rebate for each non-Medicare Part D prescription. Effective January 1, 2006, OSEEGIB also receives a specified percentage of manufacturers’ rebates received by the pharmacy benefit manager related to Medicare Part D prescriptions. This amount is approximately $13,060,000 and $12,145,000 for the years ended December 31, 2009 and 2008, respectively, and is included in other operating revenue within the statements of revenues, expenses and changes in fund equity. (j) Risk Adjustment Premiums Risk adjustment premiums are received from HMOs based on factors which are applied to premiums remitted to HMOs for all non-Medicare primary members during the plan year, the factors are intended to offset any adverse selection that may occur to OSEEGIB as a result of younger, healthier members electing HMO coverage. This amount is approximately $1,670,000 and $2,147,000 for the years ended December 31, 2009 and 2008, respectively, and is included in other operating revenue within the statements of revenues, expenses and changes in fund equity. (k) Administrative Expenses Administrative expenses are primarily related to employees of OSEEGIB and professional services, including fees paid to TPAs to process and pay benefits. OSEEGIB does not record deferred acquisition costs since administrative expenses are primarily maintenance expenses and not acquisition expenses. OSEEGIB maintains a budget approved by the Board; however, it is not a legally adopted annual budget. (l) Income Taxes OSEEGIB obtained its latest determination letter dated March 30, 2005, in which the Internal Revenue Service stated that income from the exercise of the essential governmental functions of OSEEGIB is exempt from federal income taxes under Section 115 of the Internal Revenue Code (the Code). (m) Operating Revenues and Expenses Balances classified as operating revenues and expenses are those which comprise the OSEEGIB’s principal ongoing operations. Since OSEEGIB’s operations are similar to those of any other insurance company, most revenues and expenses are considered operating. (n) Change in Financial Statement Presentation During 2006 and 2007, OSEEGIB applied the provisions of GASB Statement No. 43 (GASB 43), Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and presented the portion of its activity related to covered active employees of participating employers as a public entity risk pool and the portion of its activity related to covered retirees of participating employers as 40 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) an agency fund in accordance with the guidance for multiple-employer OPEB (other post-employment benefits) plans that are not administered as trusts. During 2008, OSEEGIB determined its activity related to covered retirees of participating employers does not meet the definition of an OPEB plan and, therefore, is not subject to GASB 43. Additionally, as OSEEGIB is not a cooperative group of governmental entities joining together to finance exposure to risk, OSEEGIB determined it is not subject to the guidance for public entity risk pools in GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. OSEEGIB, as an instrumentality of the State of Oklahoma created to administer, manage, and provide group health, dental, life, and disability insurance for active employees and retirees of state agencies, school districts, and other governmental units, believes the preferred method of accounting and reporting presentation is a special-purpose government engaged solely in business-type activities, more specifically an insurance enterprise. Effective January 1, 2008, OSEEGIB changed its financial statement accounting and reporting presentation and reported results in a single enterprise fund presentation and no longer included an agency fund. Additionally, as a result of the change in accounting and reporting presentation, disability reserves of approximately $13,504,000 were required to be recognized and policy maintenance costs of approximately $2,897,000 were required to be included in the premium deficiency reserve decreasing beginning fund equity. The total effect of the change in accounting and reporting presentation on fund equity on January 1, 2008 is as follows: As originally Effect of reported As adjusted change Fund equity, January 1, 2008 $ 187,891,608 171,490,197 16,401,411 (3) Fair Values of Financial Instruments Accounting Standards Codification Topic 820, Fair Value of Measurements and Disclosures, requires OSEEGIB to disclose estimated fair values for its financial instruments. Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the financial instruments. Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, credit and interest rate risk, and loss experience. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rate and estimates of future cash flows, could significantly affect these fair values. Fair value estimates, methods, and assumptions at December 31, 2009 and 2008 are described below for OSEEGIB’s financial instruments. The carrying value of all OSEEGIB’s financial instruments approximates fair value. 41 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) The carrying amounts reported in the balance sheets are at fair value for investment securities. Fair values for debt securities are based on quoted market prices, where available. If quoted prices are not available from active exchanges for identical instruments, the fair values are estimated using quoted prices from less active markets, quoted prices of securities with similar characteristics, or by pricing models utilizing other significant observable inputs. The fair values for equity securities are based on quoted market prices. The carrying values of the receivable for unsettled investment sales, premiums receivable, interest and dividends receivable, pharmacy rebate receivable, other receivables, premiums due to HMOs and other insurers, payable for investment purchases, and other accrued liabilities approximate fair value due to the short maturity of these financial instruments and the fact that they do not present undue credit concerns. (4) Cash and Cash Equivalents Cash includes amounts on deposit with the Office of State Treasurer (State Treasurer) in a pooled account, which is required by the Oklahoma Statutes to be insured or collateralized. The amount of collateral securities required to be pledged to secure public deposits is established by rules and regulations promulgated by the State Treasurer. In accordance with the State Treasurer’s policies, the market value of collateral securities to be pledged by financial institutions through the State Treasurer’s Office must be 110% of the carrying value of the amount on deposit, less any federal insurance coverage. At December 31, 2009 and 2008, cash totaling $27,219,862 and $23,382,597, respectively, was deposited with and collateralized by the official bond of the State Treasurer of Oklahoma. The carrying amount and bank balance of the cash equivalents totaled $56,637,908 and $39,857,874 at December 31, 2009 and 2008, respectively, and consists of an investment in a mutual fund composed of short-term investments with an original maturity date of three months or less, which are readily convertible into cash. The duration of the underlying investments in the money market mutual fund at December 31, 2009 and 2008 is approximately 50 and 55 days, respectively. Custodial Credit Risk Custodial credit risk for deposits is the risk that in the event of a bank failure, OSEEGIB’s deposits may not be returned or OSEEGIB may not be able to recover collateral securities in the possession of an outside party. OSEEGIB’s cash and cash equivalents include deposits that are insured, registered or for which the securities are held by a custodian in OSEEGIB’s name. 42 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (5) Investments OSEEGIB’s investment policy is predicated on a multiple manager structure to provide the benefits of more than one manager’s special skills and a diversity of investment styles. Upon approval of OSEEGIB’s Board, external managers are appointed to assume the investment management function. The managers, within guidelines determined by OSEEGIB’s Board, have full discretion to buy and sell investment assets of OSEEGIB. Authorized investments are defined in Title 36 of the Oklahoma Statutes, as amended, and OSEEGIB’s investment policy, and include U.S. government obligations, state and district obligations, corporate obligations, mortgage-backed and assets-backed debt securities, and preferred and common stock. All investments held by OSEEGIB are in compliance with statutes and the investment policy. As of December 31, 2009 and 2008, OSEEGIB had the following investments: 2009 2008 Types of investments Fair values Duration (1) Fair values Duration (1) Debt securities: Commingled fund $ 63,935,654 3.85 $ 60,684,844 3.82 Asset-backed securities(2) 2,081,509 1.89 2,260,531 3.55 Corporate 13,846,397 6.31 10,323,072 5.52 Mortgages 15,459,450 3.03 24,765,825 1.88 Collateralized mortgage obligations(2) 2,579,167 2.75 8,323,285 4.86 U.S. Treasuries 15,699,981 3.62 3,524,051 9.72 Municipals 1,189,688 13.51 — — Collateralized mortgage-backed securities (CMBS)(2) 4,486,015 2.52 — — Total debt securities 119,277,861 109,881,608 Equities: Domestic 56,070,327 43,885,516 Total investments $ 175,348,188 $ 153,767,124 (1) Interest rate risk is estimated using effective duration (in years). (2) These include investments highly sensitive to interest rate changes. 43 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Credit Risk The credit risk profile as listed by Moody’s or Standards & Poor’s for debt securities and money market mutual funds at December 31, 2009 and 2008 is as follows: 2009 Aaa Aa A Baa/Ba Not rated Total Debt Securities: Commingled fund (1) $ — — — — 63,935,654 63,935,654 Asset-backed securities 2,081,509 — — — — 2,081,509 Corporate 1,190,296 1,046,102 5,066,575 6,543,424 — 13,846,397 Mortgages 15,459,450 — — — — 15,459,450 Collateralized mortgage obligations 2,509,541 — 69,626 — — 2,579,167 U.S. Treasuries 15,699,981 — — — — 15,699,981 Municipals — 1,189,688 — — — 1,189,688 CMBS 3,843,098 — 574,175 68,742 — 4,486,015 Total debt securities $ 40,783,875 2,235,790 5,710,376 6,612,166 63,935,654 119,277,861 Money market mutual funds $ — — — — 56,637,908 56,637,908 2008 Aaa Aa A Baa Not rated Total Debt Securities: Commingled fund (1) $ — — — — 60,684,844 60,684,844 Asset-backed securities 1,616,669 643,862 — — — 2,260,531 Corporate 865,465 1,062,245 5,029,890 3,365,472 — 10,323,072 Mortgages 23,218,443 58,098 — — 1,489,284 24,765,825 Collateralized mortgage obligations 6,560,094 226,316 — — 1,536,875 8,323,285 U.S. Treasuries 3,524,051 — — — — 3,524,051 Total debt securities $ 35,784,722 1,990,521 5,029,890 3,365,472 63,711,003 109,881,608 Money market mutual funds $ — — — — 39,857,874 39,857,874 (1) There is no rating to the commingled fund; however, the average rating of the underlying investments in the commingled fund as provided by the fund manager is Aa at both December 31, 2009 and 2008. Credit Risk is the risk an issuer or other counterparty to an investment will not fulfill its obligations. The Board’s investment policy authorizes OSEEGIB to invest in obligations of the U.S. Treasury, agencies and instrumentalities, bankers’ acceptances rated AA or better, commercial paper rated A-1 or P-1 and A-2 or P-2, fixed income investments rated investment grade and stocks of companies with a minimum capitalization of $50,000,000, and other investments of similar risk. 44 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) Investments in “restricted securities,” including fixed income securities, preferred stock, common stock, or any common stock acquired upon conversion thereof are prohibited. “Restricted securities” are securities which have not been registered under the Securities Act of 1933 and are subject to restrictions on sale. Engagements in short sales, purchases on margin, or investments in commodities or transactions of a similar or speculative nature are prohibited. Custodial Credit Risk Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, OSEEGIB will not be able to recover the value of its investments or collateral securities in the possession of an outside party. The current master custodian has been approved by OSEEGIB’s Board. OSEEGIB’s investments include investments that are insured or registered or for which the securities are held by a custodian in OSEEGIB’s name. They may also include investments held for the custodian by the Federal Reserve Bank or Depository Trust Corporation in OSEEGIB’s name. Concentration of Credit Risk An increased risk of loss occurs as more investments are acquired from one issuer. No issuer represents 5% or more of OSEEGIB’s total investments. OSEEGIB’s policy states investments in one issuer shall not exceed 2.5% of the fair value of each manager’s assets, except for obligations of the U.S. government or of any state of the U.S. The policy also restricts investments in the common stock of any U.S. corporation to no more than 5% of each manager’s assets valued at the lower of cost or market value, except where the manager’s benchmark holds more than 5% in a single issue or with prior consent of OSEEGIB’s Board. Interest Rate Risk Interest rate risk is the risk changes in interest rates will adversely affect the fair value of an investment. Fixed income investments held for longer periods are subject to increased risk of adverse interest rate changes. OSEEGIB’s policy requires that the total fixed income portfolio maintain an average effective maturity of 10 years or less and for average duration to be plus or minus 1 year from the benchmark, which has been identified by management to assess the performance of each manager. Investment Income Net investment income (loss) for the years ended December 31, 2009 and 2008, is comprised of the following: 2009 2008 Fixed income securities $ 5,094,578 6,800,564 Equity securities 1,091,041 1,398,710 Realized losses (2,876,954) (156,263) Unrealized gains (losses) 17,102,790 (29,802,916) Less investment expenses (438,206) (580,677) Net investment income (loss) $ 19,973,249 (22,340,582) 45 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (6) Office Equipment The changes in office equipment for the years ended December 31, 2009 and 2008 are as follows: 2009 2008 Office equipment, at cost: Balance, beginning of year $ 4,438,752 4,282,241 Additions 132,124 169,559 Retirements (406,976) (13,048) Balance, end of year 4,163,900 4,438,752 Accumulated depreciation: Balance, beginning of year 3,728,534 3,425,945 Depreciation expense 232,900 315,637 Retirements (406,976) (13,048) Balance, end of year 3,554,458 3,728,534 Office equipment, net $ 609,442 710,218 (7) Health and Dental and Life Reserves The following represents changes in the Health and Dental and Life Reserves during the year ended December 31, 2009 (in thousands): Health and Dental Life Total Reserves, beginning of year $ 93,771 4,708 98,479 Incurred claims expense provisions for insured events of the current year 782,521 22,474 804,995 Changes in provisions for insured events of prior years 10,425 1,300 11,725 792,946 23,774 816,720 Less payments: Claims expense insured events of the current year 684,927 19,476 704,403 Claims expense insured events of prior years 98,986 4,193 103,179 783,913 23,669 807,582 Reserves, end of year $ 102,804 4,813 107,617 46 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) As a result of changes in estimates of insured events in prior years, the provision for claims increased by approximately $11,725,000 in the year ended December 31, 2009, due primarily to less favorable than anticipated claims experience. The following represents changes in the Health and Dental and Life Reserves during the year ended December 31, 2008 (in thousands): Health and Dental Life Total Reserves, beginning of year $ 84,797 3,787 88,584 Incurred claims expense provisions for insured events of the current year 764,751 21,540 786,291 Changes in provisions for insured events of prior years 1,187 (536) 651 765,938 21,004 786,942 Less payments: Claims expense insured events of the current year 673,810 17,241 691,051 Claims expense insured events of prior years 83,154 2,842 85,996 756,964 20,083 777,047 Reserves, end of year $ 93,771 4,708 98,479 As a result of changes in estimates of insured events in prior years, the provision for claims increased by approximately $651,000 in the year ended December 31, 2008, due primarily to less favorable than anticipated claims experience. 47 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (8) Disability Reserves The following represents changes in the disability reserves during the years ended December 31, 2009 and 2008 (in thousands): 2009 2008 Reserves, beginning of year $ 13,299 13,504 Incurred claims: Provisions for insured events of the current year 4,782 4,756 Changes in provisions for insured events of prior years (1,127) (2,669) 3,655 2,087 Payments: Claims attributable to insured events of the current year 584 448 Claims attributable to insured events of prior years 2,561 1,844 3,145 2,292 Reserves, end of year $ 13,809 13,299 OSEEGIB estimates current and noncurrent reserves for disability reserves based on historical claim experience. As a result of changes in estimates of insured events in prior years, the provision for disability reserves decreased by approximately $1,127,000 and $2,669,000 in the years ended December 31, 2009 and 2008, respectively, due primarily to favorable claims development. The following is a brief description of the significant assumptions used for disability reserves: Actual claim experience for the group, based upon claim lag studies, was used for males and females for short-term disability. The 1987 Commissioner’s Group Disability Table was used. The discount rate was 3.5% for the years ended December 31, 2009 and 2008, respectively. (9) Premium Deficiency Reserve A premium deficiency reserve is recorded at the end of the year when the anticipated costs of settling claims plus policy maintenance costs for the following year are in excess of the anticipated premium receipts for the following year. Anticipated premium receipts are projected based on the premium rates adopted by the Board for the following plan year and current enrollment levels. Anticipated investment income is considered in determining whether a premium deficiency exists. Incurred claims for subsequent 48 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) years are projected based on current year incurred claims, increased for anticipated inflation rates. The Board does not have the intention to change the adopted premium rates after the fiscal year has begun. OSEEGIB determined that reserves for premium deficiency were necessary as of December 31, 2008 in the amount of $11,915,000, and no premium deficiency reserve was necessary as of December 31, 2009. (10) Employee Benefit Plans For the fiscal year ended December 31, 2008, OSEEGIB implemented GASB Statement No. 50, Pension Disclosures – an amendment of GASB Statements No. 25 and No. 27. GASB Statement No. 50 amends GASB Statement No. 27 to require employers participating in a cost-sharing plan to include the following in the note disclosure: the required contribution rates and the employer(s) in dollars and the percentage of that amount contributed for the current year and each of the two preceding years, and how the contractually required contribution rate is determined (for example, by statute or by contract, or on an actuarially determined basis) or that the cost-sharing plan is financed on a pay-as-you-go basis. GASB Statement No. 50 also amends GASB Statement No. 27 to require that if a cost-sharing plan does not issue a publicly available stand-alone plan financial report prepared in accordance with the requirements of GASB Statement No. 25, as amended, and the plan is not included in the financial report of another entity, each employer in that plan should present, as required supplementary information, the schedules of funding progress and employer contributions for the plan (and notes to their schedules). Also, each employer should disclose that the information presented relates to the cost-sharing plan as a whole, of which the employer is one participating employer, and should provide information helpful for understanding the scale of the information presented relative to the employer. OSEEGIB has made all required disclosures under GASB Statement No. 50. (a) Retirement Plan OSEEGIB contributes to the Oklahoma Public Employees Retirement Plan (the Retirement Plan), a cost-sharing multiple-employer public employee retirement system administered by the Oklahoma Public Employees Retirement System (OPERS). The Retirement Plan provides retirement, disability, and life benefits to Retirement Plan members and beneficiaries. The benefit provisions are established and may be amended by the legislature of the state of Oklahoma. Title 74 of the Oklahoma Statutes, Sections 901-943, as amended, assigns the authority for management and operation of the Retirement Plan to the Board of Trustees of OPERS. OPERS issues a publicly available annual financial report that includes financial statements and required supplementary information for the Retirement Plan. That annual report may be obtained by writing to OPERS, 6601 N. Broadway Extension, Suite 129, Oklahoma City, Oklahoma, 73116 or by calling 800.733.9008. Retirement Plan members, state employees and OSEEGIB are required to contribute at a rate set by statute. The contribution requirements of Retirement Plan members and OSEEGIB are established and may be amended by the legislature of the state of Oklahoma. Each member participates based on his or her gross salary earned (excluding overtime). 49 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) The contribution rate for OSEEGIB and employees for 2009, 2008, and 2007 is as follows: Employee rate Salaries Salaries greater than $25,000 or less 25,000 Employer rate July 1, 2009 – December 31, 2009 3.5% 3.5% 15.5% July 1, 2008 – June 30, 2009 3.5 3.5 14.5 July 1, 2007 – June 30, 2008 3.5 3.5 13.5 January 1, 2007 – June 30, 2007 3.5 3.5 12.5 OSEEGIB’s contributions to the Retirement Plan for the years ended December 31, 2009, 2008, and 2007 were approximately $1,224,000, $1,140,000, and $1,052,000, respectively, and were equal to OSEEGIB’s required contributions for the year. Contributions are included in administrative expenses in the statements of revenues, expenses and changes in fund equity. (b) Deferred Compensation Plan The State offers to its own employees, state agency employees, and other duly constituted authority or instrumentality employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457 and Chapter 45 of Title 74, Oklahoma Statutes. The Oklahoma State Employees Deferred Compensation Plan (SoonerSave) is a voluntary plan that allows participants to defer a portion of their salary into SoonerSave. Participation allows a person to shelter the portion of their salary that they defer from current federal and state income tax. Taxes on the interest or investment gains on this money, while in SoonerSave, are also deferred. The deferred compensation is not available to employees until termination, retirement, death, or approved unforeseeable emergency. Under SoonerSave, the untaxed deferred amounts are invested as directed by the participant among various investment options. Effective January 1, 1998, a Trust and Trust Fund covering SoonerSave assets was established pursuant to federal legislation enacted in 1996, requiring public employers to establish such trusts for plans meeting the requirements of Section 457 of the Internal Revenue Code. Under terms of the Trust, the corpus or income of the Trust Fund may be used only for the exclusive benefit of SoonerSave participants and their beneficiaries. Further information may be obtained from the Oklahoma State Employees Deferred Compensation Plan audited financial statements for the year ended June 30, 2009. OSEEGIB believes it has no liabilities with respect to SoonerSave. 50 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 (Continued) (11) Compensated Absences It is OSEEGIB’s policy to accrue compensated absences for annual leave, including the related employer’s share of social security and Medicare taxes, in accordance with state statute, not to exceed: 240 hours for employees with continuous service of less than five years, or 480 hours for employees with continuous service of five years or more. During 2009, OSEEGIB’s liability for compensated absences increased by approximately $94,000 for 99 employees, decreased by approximately $85,000 for 65 employees, and did not change for 14 employees. During 2008, OSEEGIB’s liability for compensated absences increased by approximately $100,000 for 101 employees, decreased by approximately $67,000 for 64 employees, and did not change for 13 employees. OSEEGIB’s liability for compensated absences at December 31, 2009 and 2008, amounted to approximately $924,000 and $915,000, respectively, and is included in other accrued liabilities in the balance sheets. (12) Operating Leases OSEEGIB has agreements for one-year commitments to lease office space and equipment with options to renew for additional periods. If the leases are renewed in accordance with the options in the agreements, the future minimum rentals for operating leases as of December 31, 2009, are as follows: 2010 $ 553,541 2011 226,857 2012 117,962 2013 112,548 $ 1,010,908 Rent expense for office space and equipment for the years ended December 31, 2009 and 2008 was approximately $616,000 and $723,000, respectively, and is included in administrative expenses in the statements of revenues, expenses and changes in fund equity. (13) Risks and Uncertainties OSEEGIB invests in various investment securities. As described in note 5, investment securities are exposed to various risks such as interest rate, market and credit risks. It is at least reasonably possible that changes in the values of investment securities will occur in the near term, and such changes could materially affect the amounts reported in the balance sheets. 51 OKLAHOMA STATE AND EDUCATION EMPLOYEES GROUP INSURANCE BOARD (A Component Unit of the State of Oklahoma) Notes to Basic Financial Statements December 31, 2009 and 2008 As described in note 2, the estimates of reserves are determined based on actuarial and statistical techniques, which considers the effects of general economic conditions, such as inflation, and other factors of past experience, such as changes in participant counts, all of which are subject to change. Due to uncertainties inherent in the estimation and assumption process, it is at least reasonably possible that changes in these estimates and assumptions in the near term would be material to the financial statements. (14) Commitments and Contingencies OSEEGIB’s legal counsel has determined that the statute of limitations for claims denied or paid improperly is three years. Typically, all claims are reported within a 24-month period. Currently, OSEEGIB is not aware of any material claims that were denied or paid improperly that should be reserved for in the basic financial statements. To the extent such claims exist, OSEEGIB may be responsible for payment. During 2003, the Oklahoma Legislature created the Medical Expense Liability Revolving Fund (the Fund), which enacted a fee to cover inmate medical costs. By law, OSEEGIB is the administrator of the Fund. Any person convicted of certain offenses is required to pay a fine of $10, which goes into the Fund. The monies from the Fund are used when an inmate’s medical costs exceed $15,000 up to a maximum of $100,000. As of December 31, 2009 and 2008, the Fund has assets and liabilities of approximately $1,071,000 and $940,000, respectively, which are included in the balance sheets. During 1995, the Oklahoma Legislature created the Health Insurance High Risk Pool (the Pool), which was designed to provide health insurance for certain state residents who are unable to obtain coverage through other insurers. All insurers and reinsurers providing health insurance or reinsurance in the state of Oklahoma are required to participate in the Pool. With the exception of OSEEGIB, all self-insured plans are exempted from participation. Participating insurers are assessed periodically. OSEEGIB has recorded assessments totaling approximately $2,101,000 and $2,135,000 during the years ended December 31, 2009 and 2008, respectively, which is included in administrative expense in the statements of revenues, expenses and changes in fund equity. Participating insurers may also be assessed additional amounts if the Pool experiences adverse claim development. In the normal course of operations, there are various legal actions and proceedings pending against OSEEGIB. In management’s opinion, the ultimate liability, if any, resulting from these legal actions will not have a material adverse effect on OSEEGIB’s financial position, results of operations, or liquidity. Section Statistical 2009 2008 2007 (2) 2006 (2) 2005 2004 2003 2002 2001 Short (1) 2001 2000 Minimum fund equity Fixed assets net of accumulated depreciation Other fund equity Total fund equity Minimum fund equity Other fund equity Total fund equity Minimum fund equity Other fund equity Total fund equity Minimum fund equity Fixed assets net of accumulated depreciation Other fund equity Total fund equity $ 138,818 609 (21,931) 117,496 10,370 7,522 17,892 5,088 19,569 24,657 154,276 609 5,160 $ 160,045 125,046 710 (57,214) 68,542 10,086 10,196 20,282 4,793 16,826 21,619 139,925 710 (30,192) 110,443 120,344 856 (372) 120,828 10,106 14,670 24,776 5,083 20,803 25,886 135,533 856 35,101 171,490 116,936 1,340 (2,831) 115,445 9,399 11,060 20,459 4,485 22,399 26,884 130,820 1,340 30,628 162,788 106,302 1,838 12,231 120,371 8,293 11,530 19,823 4,061 21,698 25,759 118,656 1,838 45,459 165,953 93,482 2,344 20,738 116,564 6,271 13,565 19,836 4,421 21,332 25,753 104,174 2,344 55,635 162,153 84,064 2,777 (4,702) 82,139 6,111 12,552 18,663 3,971 21,397 25,368 94,146 2,777 29,247 126,170 72,050 2,253 (23,530) 50,773 5,375 12,933 18,308 2,944 19,896 22,840 80,369 2,253 9,299 91,921 67,070 1,791 (13,334) 55,527 5,728 15,791 21,519 3,128 24,008 27,136 75,926 1,791 26,465 104,182 59,022 813 39 59,874 5,177 15,200 20,377 3,434 25,222 28,656 67,633 813 40,461 108,907 53,424 760 7,235 61,419 5,519 17,628 23,147 3,641 24,529 28,170 62,584 760 49,392 112,736 Fund Equity Over the Last Ten Years (Accrual basis of accounting) l (Amounts expressed in thousands) (1) OSEEGIB moved to a calendar year on January 1, 2002 from a June 30 fiscal year. (2) The 2007 and 2006 financial information has been adjusted to reflect the change in accounting principle and reporting presentation for comparability purposes. Life Program Disability Program Combined Programs Health & Dental Program Table 1 52 2009 2008 2007 (4) 2006 (4) 2005 2004 (2) 2003 (2) 2002 2001 Short (3) 2001 2000 Expenses Health and Dental Program Benefits including claim reserves Change in premium deficiency reserves Administrative and claim processing expense $ 792,950 (11,915) 36,125 765,931 (12,712) 36,830 731,807 24,627 39,807 700,005 (9,065) 38,091 657,653 9,065 33,465 576,243 - 29,311 521,914 - 29,307 440,794 - 26,872 200,799 - 13,077 362,374 - 26,771 326,370 - 24,014 Total Health and Dental Program expense 817,160 790,049 796,241 729,031 700,183 605,554 551,221 467,666 213,876 389,145 350,384 Life Program Benefits including claim reserves Change in premium deficiency reserves Administrative and claim processing expense 23,774 - 897 21,005 - 726 15,278 - 811 17,305 - 757 16,097 - 693 14,433 - 719 14,042 - 774 13,215 (2,068) 786 4,497 (1,100) 358 10,917 800 719 10,460 (402) 738 Total Life Program expense 24,671 21,731 16,089 18,062 16,790 15,152 14,816 11,933 3,755 12,436 10,796 Disability Program Benefits including disability reserves Administrative and claim processing expense 3,652 1,401 2,093 1,161 6,052 604 3,702 956 3,234 831 3,962 687 2,555 636 2,947 696 1,549 297 953 721 606 683 Total Disability Program expense 5,053 3,254 6,656 4,658 4,065 4,649 3,191 3,643 1,846 1,674 1,289 Combined Programs Benefits including claim and disability reserves Change in premium deficiency reserves Administrative and claim processing expense 820,376 (11,915) 38,423 789,029 (12,712) 38,717 753,137 24,627 41,222 721,012 (9,065) 39,804 676,984 9,065 34,989 594,638 - 30,717 538,511 - 30,717 456,956 (2,068) 28,354 |
Date created | 2011-09-07 |
Date modified | 2011-10-27 |
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