STATE OF NEW YORK
THOMAS P. DiNAPOLI STEVEN J. HANCOX
OFFICE OF THE STATE COMPTROLLER DEPUTY COMPTROLLER
COMPTROLLER 110 STATE STREET DIVISION OF LOCAL GOVERNMENT
ALBANY, NEW YORK 12236 AND SCHOOL ACCOUNTABILITY
Tel: (518) 474-4037 Fax: (518) 486-6479
May 22, 2009
Joanne M. Mahoney, County Executive
Members of the County Legislature
County of Onondaga
John H. Mulroy Civic Center, 14th Floor
Syracuse, NY 13202
Report Number: P3-9-35
Dear Mrs. Mahoney and Members of the County Legislature:
A top priority of the Office of the State Comptroller is to help local government officials manage
government resources efficiently and effectively and, by so doing, provide accountability for tax
dollars spent to support government operations. The Comptroller is mandated to oversee the
fiscal affairs of local governments statewide, as well as compliance with relevant statutes and
observance of good business practices. This fiscal oversight is accomplished, in part, through our
audits, which identify opportunities for improving operations and county officials’ governance.
Audits also can identify strategies to reduce costs and to strengthen controls intended to
safeguard local government assets.
We conducted an audit of health insurance costs in five counties1 in central and northern New
York to determine whether these counties have explored options to reduce employee health
insurance costs through implementation of a cafeteria plan and an employee health insurance buy
out program. This audit was conducted pursuant to Article V, Section 1 of the State
Constitution, and the State Comptroller’s authority as set forth in Article 3 of the General
This report of examination letter contains our audit results specific to Onondaga County
(County) for the period January 1, 2006 through June 30, 2007. We discussed the findings with
County officials and considered their comments in preparing this report. The County’s response
is attached to this report in Appendix A. County officials generally agreed with our findings and
indicated they planned to initiate corrective action. At the completion of our audit of the five
counties, we prepared a global report that summarized the significant issues we identified at all
of the counties audited.
Herkimer, Jefferson, Oneida, Onondaga, and Oswego Counties were included in this audit.
Summary of Findings
The County does not currently offer its employees a cash payment to opt out of the County’s
health insurance plan. Based on our analysis, we estimate the County has an opportunity to
reduce its health insurance costs from $1.14 million to $1.87 million by offering a health
insurance buy out from $750 to $1,500 if 30 percent of family-plan eligible employees take
advantage of the buy out. However, there are risks associated with a buy out program. If
employee participation were only 10 percent, then the County could stand to lose as much as
$482,000 if it were to offer a family-plan buy out of $2,500.
The County has established a cafeteria plan that allows employees to make pre-tax contributions
toward health insurance, commonly known as a premium only plan (POP) and also toward
medical and dependent care flexible spending accounts (FSAs). Approximately 97 percent of
employee health insurance contributions were pre-tax in 2006, which saved the County and
participating employees about $368,000 each in Social Security and Medicare (FICA) taxes.
Medical and dependent care FSAs allow employees to pay for specific out-of-pocket medical
and dependent care expenses with pre-tax earnings. In 2006, 618 employees used medical FSAs
and 58 employees used dependent care FSAs. The County’s total savings from FSAs, less
administrative costs, was just over $37,000.
Background and Methodology
The County is located in the central region of New York State and has a population of 458,336
according to the 2000 Federal Census. Like many other local governments throughout the State,
the County faces significant fiscal constraints, which compel local officials to seek to achieve
cost savings by improving operations. Health insurance benefits are an integral part of an
employee’s compensation and represent a significant portion of a local government’s personal
service costs. The increasing cost of providing health insurance coverage to employees
contributes substantially to the financial challenges confronting local officials.
The County’s health plan is self-insured and its claims are administered through a third party
administrator (TPA). The TPA processes and pays claims on the County’s behalf and bills the
County for claims paid and administrative fees. In accordance with County practices and labor
agreements, the County provided health insurance coverage to approximately 6,600 employees
and retirees during 2006. The County paid about $53.9 million for health benefits during 2006,
over $9.3 million of which was contributed by active employees and retirees.
Many employers have experienced significant savings from the implementation of health
insurance buy outs and an IRS Section 125 cafeteria plan. While not all municipalities’ health
plans are alike, there are specific trends that can be analyzed to determine whether a buy out or
cafeteria plan may be advantageous.
We examined payroll registers, health insurance billings, claim costs and administrative fee
invoices for the 2006 fiscal year. We also reviewed collective bargaining agreements and
interviewed appropriate County officials to gain an understanding of the County’s health benefits
and cafeteria plan. The specific assumptions we used to quantify the potential cost savings or
losses the County could realize by offering a health insurance buy out, and savings realized by
the County as a result of its cafeteria plan, are addressed in the Audit Results section of this
We conducted this performance audit in accordance with generally accepted government
auditing standards (GAGAS). Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.
Health Insurance Buy Out Plan
Employee health insurance buy outs are payments to employees in exchange for the employees
not participating in health care coverage within the organization’s health plans. Because
coverage can be obtained through alternate sources (usually under a spouse’s plan), offering a
cash payment in lieu of health insurance can be mutually beneficial to both the local government
and the employee. Currently, the County does not offer a buy out incentive to its employees for
declining participation in the County’s health insurance program.
When a municipality is fully insured, it can realize savings by paying employees a buy out
amount less than the annual cost of their health insurance premiums. However, when a
municipality is self-insured, it assumes financial responsibility for the enrollees’ medical claims
and all administrative costs rather than paying a fixed premium for each enrollee. Therefore,
determining whether a health insurance buy out will save the local government money is more
complex for self-insured municipalities than those that are fully insured.
Discussions about the costs of health care often focus on the average amount spent per person;
however, spending on health services varies greatly among different individuals. We obtained
the County’s claim costs for all employees covered under a family plan2 in 2006 and found that
20 percent of the employees accounted for about 64 percent of the claim costs. Because this top
tier of enrollees requires such a high level of coverage, they most likely would not opt out of
coverage, even for a cash buy out payment. These individuals with high claims costs
significantly skew the average claim cost and the premium equivalents3 for the pool of all
enrollees covered under a family plan; therefore, we excluded them from our cost benefit
analysis for the purpose of determining whether it would be beneficial to the County to offer a
buy out program. We calculated the average 2006 claim cost for the remaining 80 percent of the
family-plan enrollees to be $5,420.4 The average contribution family plan enrollees paid the
Married employees whose spouse has access to health coverage through their employer would be in the best
position to take advantage of a health insurance buy out. As a result, we primarily focused our analysis of buy out
costs and savings on those employees with family coverage.
The County’s health insurance consultant develops a premium equivalent each year for budgeting and cost
allocation purposes. The premium equivalent is based on the County’s assessment of expected costs per covered
employee. It is similar to what would be charged by an insurance carrier for insuring the plan.
The average claims cost includes fixed administrative fees of $258 per enrollee.
County toward the cost of their health coverage in 2006 was $1,641, resulting in a net average
cost of claims to the County of $3,779. This is the estimated amount the County would save for
each employee with family coverage who opts to take the buy out in lieu of health coverage if
the County had a buy out program in place.
If an employee has an alternative source of health insurance, it is sometimes advantageous for
them, even without a buy out program in place, to waive coverage at the municipality in order to
avoid paying the employee’s portion of the health insurance costs (employee contribution).
When analyzing the costs and benefits of a health insurance buy out, it is important for the
municipality to consider the number of employees who have voluntarily waived health coverage
without a buy out incentive. Although the number of employees who voluntarily waive health
coverage may vary from year to year, 214 employees eligible for health insurance opted not to
receive health coverage through the County as of December 2006. If the County were to offer a
buy out, it would likely have to pay these employees the buy out amount even though they have
already waived coverage.
When a municipality considers offering a buy out, it must also determine an appropriate buy out
amount that employees would be willing to receive in exchange for waiving health care
coverage. Most importantly, in order to realize cost savings, the municipality must offer a buy
out payment that is less than the expected premium or claims cost and administrative fees it
would have to pay to cover the employee. However, the buy out amount must be large enough to
benefit the employee as well. If the municipality requires employees to provide only a minimal
contribution toward their health care coverage, employees would most likely have to receive an
opt-out amount close to or more than the health insurance costs incurred by their spouse in order
for them to forgo this benefit. Employees who have high contribution rates are more likely to
take advantage of a smaller buy out because they not only receive the amount of the buy out, but
they also save on their employee contributions.
Two of the five counties included in our regional audit had a health insurance buy out program in
place in 2006. Oneida County saved about $1.83 million by offering a $750 buy out to its family
plan eligible employees.5 About 30 percent of eligible employees took advantage of the family
plan buy out. Although Oneida County has since begun self-insuring several of its health plans,
its health plans were primarily fully insured in 2006, so the County was able to save the
difference between the monthly insurance premium and the buy out amount for the employees
who participated in the program. Herkimer County is self-insured and it lost about $288,000
while offering buy outs that generally ranged between $2,800 and $4,680 to its family plan
eligible employees covered under certain collective bargaining agreements. About 37 percent of
eligible employees took advantage of the family plan buy out in Herkimer County. Herkimer lost
money despite this high participation rate, because the buy out amounts were greater than the
average claims costs ($787) for those employees most likely to take advantage of the buy out
option. Herkimer began phasing out its buy out program in 2003 and most employees hired
since that time are no longer eligible to participate in the program. Additionally, we surveyed
eight other counties and cities in central and northern New York that have a health insurance buy
out program in place to determine the amount of the buy out they offer to employees eligible for
family plan coverage and the percentage of employees who took advantage of the family plan
Total cost savings from family, two-person and single plan buy outs was about $1.86 million in Oneida County.
buy out. Although the coverage at these municipalities varied from fully insured to self insured,
we found that the annual family plan buy outs offered in these other municipalities ranged from
$300 to about $6,000 and their participation rates ranged from five to 24 percent.
The actual savings Onondaga County might realize from a health insurance buy out program is
contingent on the level of participation, the annual cost of the health coverage, and the buy out
incentive amount ultimately offered. Below are some examples of the estimated cost savings (or
losses) that would result based on different buy out amounts and participation rates. The lowest
buy out incentive amount together with the highest level of participation equates to the highest
Amount Number of Estimated Annual Estimated Net
of Participation Employees Annual Savings Cost of Annual
Buy Out Rate Participating on Claims6 Buy Outs7 Savings (Loss)
$750 10% 301 $328,773 $243,020 $85,753
$750 20% 603 $1,470,031 $486,847 $983,184
$750 30% 904 $2,607,510 $729,867 $1,877,643
$1,500 10% 301 $328,773 $486,040 ($157,267)
$1,500 20% 603 $1,470,031 $973,694 $496,337
$1,500 30% 904 $2,607,510 $1,459,734 $1,147,776
$2,500 10% 301 $328,773 $810,066 ($481,293)
$2,500 20% 603 $1,470,031 $1,622,824 ($152,793)
$2,500 30% 904 $2,607,510 $2,432,890 $174,620
Although health insurance buy out plans often benefit municipalities, the County must perform
its own research and cost projections to determine whether it should offer a buy out plan and, if
so, how much of a buy out it should offer. A simple employee survey or discussion with labor
union representatives can help the County gauge employee interest in this type of benefit.
Although our audit focused primarily on buy outs for family coverage, the County should
consider offering buy outs for its single coverage plans as well.
Subsequent to our exit conference with County officials and the date of the County’s response
letter included in Appendix A, the County sent us another letter indicating that they have
completed an analysis of offering a health insurance buy out to County employees. Their
analysis disclosed that the current number of employees who have voluntarily waived health
insurance coverage has increased since the date of our analysis. After discussing the feasibility
of a buy out program with their healthcare consultant, County officials concluded that they
would probably not be able to get enough employees to participate in a buy out program in order
to make it a cost effective option at this time. County officials indicated that they plan to re-
examine the buy out option if the number of employees voluntarily waiving coverage decreases
in the future.
Two hundred fourteen employees voluntarily waived coverage as of December 2006. We did not include these
employees in the estimated annual savings on claims because the County does not currently incur any claim costs
for these employees.
The annual cost includes cash buy outs for the 214 employees who have already voluntarily waived coverage. It
also includes the County’s share of FICA tax (7.65 percent) for the buy out payments.
Health insurance plans differ greatly, so if the County chooses to start a buy out program in the
future, employees should be encouraged to study the potential effects of changing plans before
they elect to receive a cash payment in lieu of coverage. Additionally, employees should realize
that payments in lieu of health insurance coverage would represent taxable income, but such
payments would not be reportable to the New York State and Local Retirement System. The
County should contact the Internal Revenue Service or its tax advisor to determine the tax
implications of this opportunity. It also is important to note that this incentive is subject to
negotiation and approval by the various collective bargaining groups.
Section 125 Cafeteria Plan
Section 125 of the Internal Revenue Code authorizes cafeteria plans that are a way of providing
employees with valuable benefits while both the employer and the employee save on taxes.
Generally, employees may redirect a portion of their salaries to the plan and use the redirected
money to “purchase” non-taxable benefits. Importantly, moneys redirected by the employees to
the plan are not subject to FICA or income taxes. Employers may include many employee
benefits in a cafeteria benefit plan, including employee medical expense reimbursements and
employee contributions for health, life and disability insurance as well as payments for
dependent care assistance programs.
Premium Only Plan – Under a Premium Only Plan (POP), employers typically deduct the
employees’ share of health insurance premiums (and other qualifying insurance premiums) from
the employees’ gross wages before calculating FICA and payroll withholding taxes. The County
automatically enrolls new employees into the plan, but it allows them to opt out of the plan if
they choose to. Approximately 97 percent of employee health insurance contributions were pre-
tax in 2006, which saved the County about $368,000 in FICA taxes. Employees not only saved
the same amount of FICA taxes, but they were also able to reduce their Federal and State income
taxes because the pre-tax benefit reduced their taxable income.
Flexible Spending Accounts (FSA) – Medical and dependent care FSAs allow an employee to
fund certain eligible medical and dependent care expenses on a pre-taxed basis through salary
reduction to pay for out-of-pocket expenses that are not covered by insurance. For example, a
medical FSA can be used for annual deductibles, co-payments, prescriptions, and orthodontia,
and a dependent care FSA can be used to pay daycare expenses and nursery school fees.
The County offers both the medical and dependent care FSAs to employees through its cafeteria
plan. In 2006, 618 employees contributed an average of $1,001 into medical FSAs, saving the
County about $47,300 in FICA taxes. Additionally, 58 employees contributed an average of
$3,134 into dependent care FSAs, saving the County about $13,900 in FICA taxes. Employees
not only saved an equal amount on their payroll taxes, they were also able to reduce their
personal Federal and State income taxes. Total savings from FSAs, less administrative costs to
the County ($31,740), were just over $37,000.8
Total net savings on FSAs includes about $7,670 in unused employee contributions that were forfeited to the
As with health insurance buy outs, employees should be encouraged to study the potential effects
of FSAs before they elect to use these accounts. If employees do not use the full balance in their
FSA for expenses incurred during the allotted claim period, they lose the unused portion.
If you have any further questions, please contact the Syracuse Regional Office at (315) 428-
Steven J. Hancox
Division of Local Government
and School Accountability
RESPONSE FROM COUNTY OFFICIALS
The County’s response to this audit can be found in the following page.
JOANNE M. MAHONEY COUNTY OF ONONDAGA JAMES J. ROWLEY
County Executive Chief Fiscal Officer
MARK R. STASKO
DEPARTMENT OF FINANCE
DIVISION OF RISK MANAGEMENT LINDA ACHIMORE
John H. Mulroy Civic Center, 15th Floor Director of
42 1 Montgomery Street Loss Prevention
Syracuse, New York 13202-2903
(315) 435-3498 Fax (315) 4352869
www.ongov.net DENISE DOWNING
Eugene A. Camp
Office of the State Comptroller
333 E. Washington Street
Syracuse, NY 13202-1428
Re: Onondaga County Draft Audit for Health InsuranceIRisk Management
Audit Report Number: P3-9-35
Dear Mr. Camp:
For each recommendation included in the audit report, the following is our corrective action taken or
proposed. For recommendations where corrective action has not been taken or proposed, we have included
the following explanations.
1 Audit Recommendation:
County officials should study the cost effectiveness of offering a health insurance buy-out payment
as an incentive for employees to decline participation in the County's health insurance program
when they are able to obtain coverage fiom other sources.
Implementation Plan of Action:
We have contacted our consultant for our Health Plan, and have requested
an analysis for the above be done for Onondaga County. We will then review their
recoinrnendations and take action if it is cost ef'fective to Onondaga County.
Person Res~onsible Implementation:
The person responsible in Onondaga County for the I~nplementationfor any action taken
on the above recommendation will be Mark Stasko. Director of Risk Management.
If we can be of any hrther assistance, please feel fiee to call me at 3 15-435-3716.
Director o f Risk Management