Sunday, January 30, 2011

Health Insurance Premium Increases Creates Fiscal Challenges for School Districts

One of the most common complaints that school districts hear from their professional educator employees is that if we ask them to pay all or a portion of employee health insurance premium increases, that increase represents a pay cut, because of course the number on their paycheck will be smaller as a result. We respond, "no, when your cost of health insurance rises, that's not a pay cut, that's the health care industry taking a larger bight out of your compensation". This difference in point of view about health insurance premium costs permeates the public education industry and contributes to a fundamental communication gap when we discuss public education finance.

I've been writing about the compensation cost drivers impacting school finance. This is the third post on the issues relating to health insurance.
In last Tuesday's post, I explained that health insurance has been an important part of the compensation covenant that public educators believed was entered into with those entering an education career. I provided figures showing that in the last several decades health costs have risen far above the rate of inflation, so that health care and health insurance costs have become a larger and larger share of the family budget for everyone in America. I discussed the stress that these rising costs have placed labor management relations for any employers who have traditionally provided so-called full insurance coverage, from the steel and auto industries, to large corporations generally, to state and local government, and to school districts.

In the last decade, the consumer price index rose 28 percent, or 2.8 percent per year. During that same time, the medical component of the consumer price index rose by 49 percent, or 4.9 percent per year. And health insurance premium costs rose even faster. What that means is that an employer simply cannot cover the entire inflationary cost of health insurance without taking a huge bite out of any increases provided in the rest of employee pay.

The measurement of medical cost inflation is controversial and complex, but however you measure it, its going up way faster than general inflation. Insurance prices are going up even faster than the rate of health care cost inflation, as I have said. All of us have been experiencing this inflationary challenge. People who pay for their own insurance --- a relatively small portion of the insurance market--have been finding insurance increasingly unaffordable, and their medical bills when uninsured increasingly unaffordable too. Employees who cost-share their insurance premiums have been finding that every year, their net paycheck after paying their share is, well, a little lighter, or shall we say, quite a bit lighter. Employers who cover the entire insurance premium have been struggling to find ways to continue giving raises in pay, while covering the cost of the growing premiums. At the same time, co-payments and deductibles are rising, taking a second bite out of pay.

Public education is one of those industries with a history of covering the entire insurance premium for professional employees. As the cost of health insurance rose dramatically, most districts required premium cost sharing for family coverage, but many still cover the entire cost of single coverage. But the rising cost of premiums puts tremendous stress on districts' ability to keep providing that coverage while also providing pay increases that seem meaningful to our employees. And, when the State freezes revenues for school districts, it is impossible to cover those premium increases without making significant cuts in school programs to make up the difference. In our school district, the built-in cost increase that will result from uncapped health insurance premium increases paid by the employer is estimated at $300,000 this year, and a second $300,000 next year, so that without increased revenues from the state, we will have to make a total of $600,000 in cuts to fund them.

As we discuss issues regarding school finance, and especially educator compensation, we need to keep in mind that it is not useful to pollute the discussion with attacks on teachers. I keep saying that school finance is primarily about arithmetic. If I were the King, I like to say, I would cut the salaries of corporate executives, football players, stockbrokers, lawyers and surgeons, and I'd raise the salaries of teachers. I'm trying to focus on is the arithmetic of school finance and to explain the factors that have led us in Minnesota to drive our costs up higher than our revenues will allow.

That brings me back to my main topic: the communication gap in our discussion about health costs and competition.

One of the communication hurdles that we struggle to overcome in this context is the commonly stated belief by many employees, and even some on the management side of public school districts, that when the employee's cost of health insurance goes up, that the employee has received a "pay-cut," unless the employer covers the increase. I admit, it sure feels like your pay has been cut, because you have less money to pay for everything else, but in fact, its the health industry taking a larger and larger bite out of what you earn, not your employer.

When the cost of something goes up, that doesn't mean that your employer has cut your pay. When the price of gas goes up, more of my paycheck goes to fuel for my car, but I haven't experienced a pay cut. If the prices of groceries goes down, I haven't received a pay increase. Suppose that I participate in one of those cafeteria plans that allows me to "flex" child care expenses. If my child care costs go up, I'm going to have to flex more, in order to pay for them out of the flex plan. My paycheck will be smaller, but the increase in child care costs didn't decrease my pay. When prices go up for something, it redistributes some of my pay away from some other things, or decreases my savings.

As I said at the outset, in the last decade, the consumer price index rose 28 percent, or 2.8 percent per year. (This is an average, so some years, the increase has been much higher, of course, and other years, lower.) During that same time, the medical component of the consumer price index rose by 49 percent, or 4.9 percent per year. But it is extremely important that we understand that the 28 percent increase includes the 49 percent. In other words, the rate of inflation (the 28 percent) is an averaging of the entire market-basket of what people buy, including their medical costs--such as insurance.

Compensation costs for school districts under the traditional model is driven by the base compensation plus steps (a reward for time of service), lanes (a reward for additional education, salary schedule improvement (an inflationary upward adjustment in everything on the schedule) and fringe benefit costs--the greatest of which is the employer's contribution to health insurance.

That brings me to the undeniable arithmetic of employee compensation:

It is not possible to hold employees harmless from health insurance inflation while providing pay increases which match the regular rate of inflation, without either going broke, or receiving revenue increases significantly higher than the rate of inflation. The 2.8 percent rate of inflation in the last decade includes health cost inflation. In fact, it is health care costs that are a significant share of that increase. Without those cost increases, the overall rate of inflation would be significantly lower. That means if public school districts are going to become financially sustainable, even if the State were to provide us with inflationary increases in revenues per student, we could not continue to cover the entire cost of health insurance premium increases.

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