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Districts Seek Ways To Cut Soaring Health-Insurance Costs

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School budget managers, who have struggled over the last decade to contain soaring energy costs through conservation measures and even school closings, are now grappling with another equally intractable fiscal problem--health-insurance costs.

Driven upward by spiraling hospital and medical fees, health-insurance premiums are rising at a pace that has spurred school districts from coast to coast to dream up less expensive alternatives to their current programs, including the least costly of all: keeping their employees fit.

In 1982, the cost of health care in America rose 11 percent, compared to an overall inflation rate of 3 percent, according to the U.S. Commerce Department. It was the fastest-growing cost in the Consumer Price Index, officials said.

This school year, health-insurance costs rose an average of 25 percent for many districts, and for some as much as 45 percent. In the state of Washington, costs soared 54 percent.

Districts are "lucky if they get away with 25 percent," said Nestor R. Roos, professor of insurance at the University of Arizona's business school. The costs reflect the "huge" increases in hospital rates and doctors' fees, he and other experts said.

Health-insurance coverage became commonplace in most school districts after World War II, and during the 1960's and mid-1970's employers bore most of the costs, according to Ronald D. Rakich, director of risk management at the Texas Association of School Boards. These days, health costs consume about 3-to-5 percent of most school budgets, and employers tend to pay for individual coverage while employees pay for dependents, he said.

Administrators across the country are experimenting with a variety of cost-cutting options, including hiring third parties to audit claims made under their programs (one district recovered millions of dollars this way), forming new insurance "pools" among small districts, and launching rigorous fitness programs. Some districts can already point to significant savings as a result of their efforts.

$19.5-Million Health-Insurance Bill

Two years ago, Boston was faced with a $19.5-million health-insurance bill for its 28,000 public employees, including teachers. "Something had to give. It was getting ridiculous," recalled Leo J. Ronan, the city's assistant insurance coordinator.

City officials attacked the problem by hiring an outside accounting firm to examine each insurance claim. Officials were startled, they said, by the findings: "We found 2,000 people who weren't even eligible. We found out we were getting bills from people who had left the city years ago--retirees all over the country who'd go into a hospital and use their Blue Cross card," said Mr. Ronan. "We were losing millions of dollars."

Although the city continued to contract with Blue Cross to process the claims, it hired the auditing firm on a permanent basis to audit the claims, according to Mr. Ronan. That move saved $2,750,000 in fees and commissions the first year, he said.

Many other public-employee groups have discovered similar accounting breakdowns and are moving to hire auditors, said Natalie Wasserman, executive director of the Public Risk and Insurance Management Association, a Washington-based, nonprofit organization of insurance administrators in local governments.

The audits are "revealing enormous gaps in the system," she said. ''People are being charged for things that never occurred." As a result, several accounting firms are now specializing in claims auditing, she added.

Some school districts have turned to "self-insuring" (also called self-funding) as a way of cutting costs. Under this approach, a school district pays for claims out of its own operating budget instead of buying health insurance, although most districts still purchase insurance to cover exceptionally high claims, according to Mr. Rakich.

He estimated that in most states about 10 percent of the districts are now self-insuring. This saves substantial taxes--those levied by states on insurance companies, which pass them along in customer costs--on premiums and earns interest for the districts, Mr. Rakich said. It is a relatively safe system, he added, because a district can predict insurance costs with "pretty good accuracy."

$21-Million Self-Insurance Fund

The Boston City Council, for example, maintains a $21-million self-insurance fund--on which it earns substantial interest--instead of making monthly payments to Blue Cross, Mr. Ronan said. The city is insured with Lloyd's of London for claims of $75,000 and over, he said.

About 320 of Texas's 1,100 school districts are now self-insured, some of them on an individual basis and some in a larger pool, said Mr. Rakich. "The trend is toward self-funding, because it's a cost-containment measure," he said.

Other districts and their insurance companies are now experimenting with partially self-funded plans.

When the Mt. Diablo School District in Concord, Calif., was faced with a 44-percent rate increase earlier this year, the district threatened to cancel its policy, recalled Daniel C. Pope, the district's budget director. "We threatened to go self-insured. Then [the company] offered a compromise."

Under the compromise, which the district accepted, the company offered to drop the premium by $45 per person if the district would pay for the first $500 on each claim but still contract with the company for the higher claims. Mr. Pope said the district estimated this would cost about $200,000 less than the original proposal.

Formed Their Own Trust

In central Washington state, in the rural Yakima area, school employees from 14 districts have withdrawn from the statewide insurance program and formed their own trust, or pool, which has enabled them to negotiate rates that may save them about $900,000, according to Ray Duerre, the group's insurance broker.

The group, called the Central Washington School and Employee Benefits Trust, was formed four years ago with about 800 members; its greatest growth occurred when insurance rates under the statewide plan soared 54 percent in one year. The trust currently has about 2,000 members, according to Mr. Duerre.

Reduced Rates

The trust, after requesting bids from a number of insurance companies, managed to work out with an Iowa firm a contract that reduced its rates from $200 to $163 per month for a family policy. Although the new contract includes a $50-deductible provision, Mr. Duerre still estimates that total savings this year will be about $900,000.

The alternative health-insurance program has not found favor with one statewide teachers' group. Allen E. Johnson, the Washington Education Association's coordinator for member services, said the Yakima trust reduced union strength in the area and was therefore opposed by the state organization. "It was a movement for less control for the union and more for the district," he said.

However, Mr. Johnson conceded that "the local office in Yakima probably was not servicing employees as well as they should have," that employees there were looking for more control over their benefits, and that the Yakima area had limited medical plans available.

Mr. Johnson noted, however, that the new trust incurs high administrative fees for its lawyer, broker, and insurance company: "Our administrative costs are lower than theirs." Trusts such as the one in Yakima are on the rise in California, he said.

Asked about other methods of cost cutting, Mr. Johnson said the Washington association strongly supports auditing of medical services and claims but does not view self-funding as a practical solution now that interest rates are dropping. "We don't see any real savings there," he added.

Incentives To Stay Healthy

Some districts are trying to reduce health-insurance costs by offering their employees incentives to stay healthy.

The Mendocino Unified School District in California launched a "stay well" program two years ago that has thus far halted premium increases, a district spokesman said.

Under the system, the school district puts aside $500 each year to apply against each employee's medical expenses, and whatever is left of that at the end of the year goes into a fund that the employee receives when he or she leaves or retires. "The idea is that the employee won't rush to the doctor so fast if they get a little headache," said Adah Berens, the district's spokesman. She said that for the past two years premiums negotiated with Blue Cross have not increased because the number of claims has declined since the plan was started.

16-Week Physical Fitness Plan

With a similar aim, the Dallas Independent School District is offering its employees an elaborate 16-week physical-fitness plan, complete with stress tests, blood tests, and nutrition counseling. The idea for the $225,000 program originated last year after "our [insurance] consultant told us if we didn't do something soon, we'd be facing a $300-per-family premium--up from $175," said Robby V. Collins, the district's employee-relations administrator.

The district implemented the plan after monitoring the claims and concluding that about 50 percent of them related to unhealthy lifestyles and such habits as smoking and eating fatty foods. Results from a pilot project for 100 teachers last fall showed that many of them lost weight and quit smoking, Mr. Robbins said. (One success story was Mr. Robbins himself, who said he dropped a three-pack-a-day smoking habit during the pilot program.)

Last week, Dallas officials were scheduled to meet with representatives from six major insurance com-panies to determine if the companies will consider giving the district a rebate for those employees enrolled in the program. "We want them to take on some of the costs," said Mr. Robbins. "If they all say they can't, we'll have to kill it."

Even if Dallas fails in its effort, the concept of preventive action as a cost cutter is likely to gain support. "If only people took better care of themselves, rates would be lower," said Robert Montgomery, business manager of the Council Bluffs, Iowa, school district, where rates rose 25 percent last year.

Preventive Health Care

So far, the only tested method that comes close to preventive health care is the health maintenance organization (hmo)--a medical-care system that is on the increase today in highly populated areas but is less applicable for rural areas, according to several experts in the field.

An hmo is a facility staffed by a group of physicians and medical specialists who are under contract with an insurance company, and who bill the company instead of the patient. The insurance company in turn contracts with school districts or other entities, which deduct a monthly fee from employees' pay checks.

hmo's encourage prevention of medical problems in several ways: their coverage includes periodic physical checkups for adults and children, while most conventional coverage does not cover checkups, said Linda Holsapple, a spokesman at the Rutgers Community Health Plan, the hmo located in New Brunswick, in New Jersey. hmo's also usually include smoking and weight-reduction clinics in their coverage, she said, and are open some evening and weekend hours.

The disadvantage of hmo's, experts say, is that members are restricted to the doctors and hospitals affiliated with the plan within the hmo region, unless the necessary care cannot be provided. If an individual needs medical help while outside the region, he or she sometimes cannot obtain coverage for those services, according to Ms. Holsapple.

A federal law, the hmo Act of 1973 (P.L. 93-222), requires that employers of large numbers of people offer the hmo plan and pay as much for it as they would for other plans. The law spurred a sudden expansion of hmo's in the 1970's, but their growth has tapered off recently, said Mr. Rakich of the Texas School Boards Association. There are now about 265 operating hmo's, Ms. Holsapple said.

Needs of Individual Districts

Which of these many methods is likely to prove most effective in cutting costs appears to depend largely on the needs of individual school districts and local circumstances. Many experts, including the University of Arizona's Mr. Roos, predict that districts will use a combination of approaches.

Warning that a "catastrophic" situation may lie ahead if costs are not contained by some means, Mr. Roos contended that in any event, all participants in health-insurance programs will have to shoulder an increasing percentage of their cost. "They've got to put more burden on the teachers," he said, "with more cost sharing and higher deductibles."

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