Monday, January 24, 2011

Bridging the Communication Gap on Employer Provided Insurance

I've been writing a series on the cost drivers in public education. I took a detour, however, over the last few posts to discuss SF 0056, the hard freeze bill being considered by the Minnesota Senate. Now, I want to return to the health insurance topic, where I left off. Before I get to the meat of the topic, however, I'd like to put the issue in context. As we discuss the cost of employer provided benefits in public education, one finds a tremendous communication gap in how we look at employer provided health insurance, depending in part on whether we have it at all, or whether we pay for it directly out of our wages.

The development of our nation's employer-based health insurance system may be traced to the period of 1929 through 1955. Between 1940 and 1950, the number of Americans with private health insurance increased from 20.6 million to 142.3 million. During this time, it became increasingly common for school districts to provide full health insurance coverage for teachers, but in doing that, they were adopting practices common amongst private employers of that day. Teachers entering the profession became accustomed to the idea that one of the financial benefits of becoming a teacher would be health insurance provided entirely at the cost of their school district. It is foolish to blame them for this expectation. They entered a profession that professed to provide strong health insurance coverage as a key component of compensation.

School boards recognized that they could provide this benefit at a reasonable cost, a benefit that was, and is, completely tax sheltered. Some districts may have felt, as well, that they could provide a deserved benefit that would not be added to the publicly discussed teacher salary. We cannot enter the public policy discussion about health benefits for professional educators without giving this fact its due: if you became a teacher thirty years ago, everyone understood that part of what you were receiving in your profession was high quality health insurance.

However, in recent decades, health insurance premium costs began to rise significantly. As health costs, and the cost of employer provided insurance rose, employers began to feel that they had to cost-share with their employees. That created equity issues among employees with families and families. Single covered workers argued that they should not have to cost-share as to premiums, because they do the same job as their family-covered peers. Why should they receive a benefit worth less, or costing less? And that explains why, in many public and private employer plans, the employer provides free single coverage, but requires its family covered employees to cost share.

The reasons that health insurance premiums have been increasing are quite complex, but one of the major cost drivers is that health care is growing significantly as a share of the private and public budget. This growth in the percentage of what we all spend on health care has challenged public and private employer's ability to provide the same coverage, as before at least without making corresponding reductions in wages or salary. Here's a chart I took off of a New York Times article from a couple of years ago. As the table show, health care costs in the United States have been mushrooming since 1970. This growth trend continued apace after 2004.

Percentage of Gross Domestic Product Spent on Health Care

Canada7% 9.9%
United Kingdom4.5% 8.1%

The cost of health insurance premiums has consequently grown way faster than other parts of the family budget. From 1988 to 2004, health insurance premiums rose at about 11 percent per year, many times higher than the rate of inflation. Employers, many of them, responded by restricting coverage, raising co-payments, imposing larger and larger premium cost-sharing, or in some cases eliminating coverage altogether. However, high quality coverage remains a standard benefit for education professionals and other public employees. I'm not writing about something my readers don't understand, of course. We are all living through the cost challenges of the health care system.

Now this provision of health insurance to public employees creates tension and jealousy when we discuss the compensation for education professionals. I often hear from constituents who think that public employees get special treatment. Partly, that's because there is a large-employer small employer divide in the provision of health insurance that the average citizen doesn't usually understand. See Rand Corporation Report. According to the Rand Corporation in 2004, about 2/3 of American companies offered insurance to their employees, but the size of the employer is a major factor in whether insurance is provided. Only about 24% of companies with 50 or fewer employees provided group health insurance, whereas most companies with greater than 50 employees did provide that coverage. Partly, it reflects the ability of public employees to protect themselves more effectively because they are organized. Partly, it reflects a shared belief that there was an unwritten understanding that quality health insurance was one of the compensating benefits for accepting the challenges of the teaching profession.

If we are going to have a realistic policy discussion about the challenges that face us in public education finance, and if we are to bridge the communication gap, we must ever keep in mind the clash between the rising cost of health care, on the one hand, and the expectation in the profession that protection against those costs was a part of the employment covenant. I'll discuss more about this in the next post.

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