Superior Court of Thurston County. Superior Court Docket No. 92-2-01294-1. Date Filed In Superior Court: July 8, 1994. Superior Court Judge Signing: Daniel Bershauer.
Written By: Armstrong, J., Concurred In By: Bridgewater, J., Turner, J.
ARMSTRONG, J. -- The Retired Public Employees Council of Washington ("Council") filed a class action lawsuit, on behalf of retired state employees over 65, challenging the State's method of calculating health insurance premiums. The Council alleged that the State improperly set the premiums of retired state employees over 65 based on the claims experience of only active employees over 65, rather than of all active employees, in violation of RCW 41.05.080. Because the plain language of the statute requires that the premiums of retired state employees be determined from the claims experience of all active employees, we reverse the trial court's summary judgment for the State.
The Council is a non-profit labor organization comprised of retired state and local employees. It filed a class action lawsuit on behalf of retired state employees over the age of 65 who participate in the State's Uniform Medical Plan ("Uniform Plan") for health insurance. The Washington State Health Care Authority ("HCA") is the state agency that administers state employees' health insurance benefits.
In the 1970s, state employees paid their own medical insurance premiums. Employees could participate in their health insurance plan after retirement. The law, however, required that retired employees be charged the same premium as active employees. Former RCW 41.05.080 (Laws of 1973, ch. 147, § 7).
In 1977, the State began underwriting the insurance premiums of its active employees. Because state employees were no longer being charged premiums, the Legislature amended the law to provide that the rate for retired employees "be developed from the same experience pool as active employees." Former RCW 41.05.080 (Laws of 1977, 1st Ex. Sess., ch. 136, § 6).
In 1988, the State began to self-insure the Uniform Plan, a traditional fee-for-service health plan. The present dispute concerns the process the HCA developed and used to set premiums for retired employees over 65 from 1988 to 1994.*fn1
The HCA first determined the projected total cost of the Uniform Plan for the upcoming fiscal year, based on the previous year's claims from all Uniform Plan subscribers, administrative costs, and any additional expenses because of benefit changes. The HCA allocated the total cost of the Uniform Plan to four employee groups based on each group's medical costs: active employees under 65, active employees over 65, retired employees under 65, and retired employees over 65. The HCA reported these medical costs as relative cost factors. The HCA then established premiums by allocating the Uniform Plan's total cost to the subscribers in proportion to the relative cost factors.
Because the State has paid the premiums of almost all active employees since 1988, the monthly premiums for active employees were calculated primarily for purposes of the budget. The relative cost factor for retired employees, however, established the base for calculating the premiums charged retired employees under the statute.
The HCA assigned active employees under 65 a relative cost factor of 100%. People over 65 have, in general, higher medical costs than those under 65; the HCA calculated the relative cost factor for active employees over 65 to be 229%. Retired employees over 65 received the same 229% relative cost factor.
After the full amount of the premium to be charged retired employees was calculated, it was "actuarially reduced" by the value of Medicare coverage.*fn2 The parties agree that Medicare pays, on average, 70.5% of Medicare-eligible retirees' claims covered under the Uniform Plan. The Uniform Plan pays the remaining 29.5% of the claims. Accordingly, the Uniform Plan premium charged retired employees over 65 was reduced by 70.5%.
A few active employees, however, pay their own health insurance premiums. The HCA charged a single premium rate to these self-paying, active employees, regardless of their age. Furthermore, the State provides insurance coverage to other governmental entities; the HCA charged these various political subdivisions a single premium rate that did not reflect an employee's age.*fn3
Although the State charged retired employees over 65 the same Premium rates as active employees over 65, retired employees actually have higher health care costs. This resulted in a subsidy ...