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

	1970	2004
US	7%	15.3%
Canada	7%	9.9%
Germany	6.2%	10.6%
United Kingdom	4.5%	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.

School Finance Cost Drivers: Health insurance, part I

I've been trying to explain some of the cost drivers that confront us in public education. Today, I'm going to talk about health insurance contributions made by the district to our public employees. I apologize that this material isn't simple. I can't help that. When I joined the board of education, it was complex. It's still complex. One of the reasons that I write these posts, is that I believe that its really important for citizens to understand how the finance system works. Our Board of Education has been working really hard to involve members of the community, average citizens and community leaders, in understanding how we budget, and the budget challenges that we face. My thinking is that providing factual detailed information about school finance assists in that purpose. As I share this information, I'm not trying to justify increased spending, or decreased spending, or increased compensation or decreased compensation. My belief is that the facts, once you understand them, speak for themselves.

In a prior post in this series, I explained that in the last year, the legislature raised school district contributions by one half percent per year for the next four years, raising our costs by $500,000 per year, for a grand total unfunded cost increase of $2 million. I explained next how the funding formula for special education reduces our funding by $350,000 per year, so that during the biennium, our funding will be cut by $700,000. I explained, however, that federal law prohibits us from cutting special education expenses to balance the special education budget, requiring us to transfer that out of regular education. Then, in my last post, I explained that lanes increase employee compensation by about $190,000 per year, for a total cost increase of about $380,000 for the biennium. Now to health insurance.

The district has two kinds of coverage agreements with its employee groups. Some groups have fixed dollar contribution agreements--that is, by agreement, we pay a fixed dollar amount towards their premiums, no matter what the premiums will be, until we agree to a higher amount. Some employees, typically licensed employees with single coverage, have their full premiums paid, and our cost of coverage rises with the premium increase, no matter how much the increase.

The District's cost for health insurance contributions rise in two ways. With respect to most of our employees, we make agreed fixed dollar contribution amounts towards family or single health insurance. When we enter into our bargaining agreement with, for example, our custodians, our clerical workers, or our paraprofessionals, the agreement designates a fixed contribution, specified for that particular bargaining unit, towards the total health insurance premium for each employee. Now different bargaining units have different preferences for the level of insurance contribution that we provide. Sometimes, the negotiator for a group will say, we'd like to take some of the total cost of our compensation in this year's agreement, and move some of the dollars off of salary and move it over to health insurance contribution. When they do that, its cost neutral, and we would be foolish to refuse to do that, since we're not changing the total cost to the district.

Now for these bargaining units, the ones with fixed dollar premium contributions, our costs stay the same throughout the two year term of the bargaining agreement. When the bargaining agreement comes to an end, our health insurance costs for these employee groups stay exactly the same. We know exactly what our premium costs will be during the contract, and then under the "continuing contract" provisions of PELRA, we continue to pay that same dollar amount towards insurance for these employees during the period when we negotiate the contract.

What happens under a fixed dollar contribution agreement, when the cost of health insurance rises. That will happen in the second year of the contract, around October, when the insurance carrier announces its rate increase, which may be anywhere from 5 or 6 percent to 20 percent. For employees covered by the fixed dollar contribution agreement, the employee covers the increase. If the employee's insurance premium is $1000, and the District contributes $500, then if the premium goes up to $1100, the District still contributes $500, and the employee has $100 more deducted out of the paycheck. It is easy to estimate the total cost of the package, because we have not agreed to pay the increase.

When employees work under a fixed dollar contribution agreement, they push us very hard to keep their insurance coverage economical and affordable. When the insurance company announces its premium increase, the employee group often wants us to bring those costs down, because they don't want to pay more for their insurance premiums. Indeed, at times there is a bit of friendly friction between the employees with full premium coverage and those without over what kind of group policies we should buy.

I want close this post by emphasizing several things. Sometimes folks rail against health insurance costs for public employees. But providing these benefits is an important attractor --an asset for us in encouraging qualified employees to work for us. The cost of health insurance, paid on behalf of employees is tax exempt, so a dollar of health insurance coverage provides more than a dollar's value to the employee. Providing coverage that employees value represents a wise use of the public's money. The issue for those of us who are involved in the decision making process is to make sure that the plans we select are cost effective, and that we provide coverage that is financially sustainable. Because the cost of health care is going up so fast, this is a great challenge to all governmental units, and I'll have more to say about that in the next post.

OK. That's a lot for one post. I've started in this post to explain the difference between fixed dollar contribution agreements and full premium agreements. I'll continue this discussion in tomorrow's post.