Time To Trade In the 'Rolls Royce'? Districts Facing Health-Cost Crunch
In January 1986, when Joseph F. Singleton, deputy superintendent of a Long Island board of cooperative education services, enrolled his schools in New York State's new health-care program for public employees, he was told to budget for about a 10 percent increase in premium costs after the first year.
He expected costs to go up again at the end of the second year, he says, since the new plan--a revised version of an insur6ance program the state had run for 20 years--was what he describes as a "Rolls Royce of a plan" that covered everything from eyeglasses to dental work.
But he also expected that the so-called Empire Plan would meet state officials' expressed aim of curbing the rising costs of health care.
Instead, 1988 started off with Mr. Singleton facing a 63 percent increase in health-care premiums--nearly $15 million more than the $26 million that had been appropriated--as well as with a court order requiring the districts to find a way to come up with the money.
The $26 million was already nearly half the regional unit's entire 1987-88 budget of $56.2 million. A $41-million bill for health care in 1988 poses a nearly insurmountable problem, according to Mr. Singleton.
"In short," he says wryly, "the school districts have been had."
They are not alone. Group health-insurance rates nationally jumped an estimated 12 percent to 30 percent on Jan. 1, say insurance officials. The substantial rate hikes ended a three-year period in which insurance companies had held their annual increases to less than 5 percent.
Group rates rose more than twice as much as the medical-care component of the Consumer Price Index, which climbed 5.6 percent in 1987, down from 7.7 percent in 1986.
Moreover, they hit school and child-care budgets still reeling from enormous hikes in liability-insurance rates imposed in the early 1980's.
According to Marc H. Rosenberg, a spokesman for the Insurance Information Institute, the cost of health insurance has increased this year at a much higher rate than liability insurance. "The market has stabilized for liability insurance," he says. "But health-related expenses are rising much faster than anything in the economy."
This double-digit inflation for4group insurance plans came as a surprise, school officials say, since the insurance crisis of the early 1980's was said to have prompted major cost-containment efforts and new competition in the health-care industry that would lead to lower prices.
The 'Woodwork Effect'
Dona De Sanctis, a spokesman for the Health Insurance Association of America, blames what some insurance officials call the "woodwork effect"--the periods when people seem to "come out of the woodwork" to use their health-care benefits.
"There are three reasons for an increase in premiums," Ms. De Sanctis says. "Use, use, and use."
In fact, officials for the Empire Plan say they experienced an estimated 80-percent increase in visits to the doctor in 1986.
"There's an element of truth to that," says Mr. Singleton, "but I have to ask what controls were built into the system to limit overuse."
The regional school-services district Mr. Singleton heads, which represents 10,000 employees in schools in Suffolk County, is one of more than 50 districts that have sought to have the validity of the Empire Plan's data examined in court. The plan combines Metropolitan Life, Blue Cross/Blue Shield, and Equitable Financial Companies insurance coverage.
A civil suit filed by the Suffolk County schools in December charged that the insurance company unfairly increased its health premiums by as much as 64 percent and did not allow the schools enough notice to budget for the hike.
But last week, a state judge dismissed the lawsuit, saying it lacked merit. Though the school districts plan to appeal the decision, the judge held that the high 1988 premiums must be paid.
Meanwhile, the New York State comptroller has said he will investigate the issue of the data used by the Empire Plan to justify its price hike.
Setting Limits Said Difficult
Both school and insurance-industry officials acknowledge that controlling costs requires adroit, and sometimes controversial, finagling with the components of health-care benefits. Such controls, they say, can range from capping benefits or asking employees to share some of the costs, to limiting the amount of time retirees can remain in the insurance plan.
But these are difficult decisions for school financial officials, who often must craft benefit plans through negotiations with unions. A survey by the University of Michigan in 1984 found that two-thirds of unionized education employees preferred more benefits to an equivalent amount in increased wages.
According to Michael Kahn, a researcher with the National Education Association, little information is available on how school districts' health-care costs have grown. His organization is planning to examine the issue this year in response to the great demand for more information. "I'm not sure everyone has a handle on how bad it really is, but there is a lot of concern," he says.
"Traditionally, labor unions would look for the 'Cadillac' insurance plan to get full benefits for employees," explains Lou Nayman, a researcher with the American Federation of Teachers. "The insurance companies would set the rates and the union and the school board would fight over who pays."
"Now we realize we can't just take an insurance company's word for the costs," he adds. "It makes a lot more sense to work together with the employer to find the best plan, and to force the company to justify costs."
But education employees still expect comprehensive coverage, a recent survey suggests. A 1987 report by the Education Research Service Inc. indicates that, in a sample of 987 public-school systems, 9 out of 10 provided teachers with group hospitalization, medical/surgical, and major medical insurance. In 8 out of 10 cases, the school system paid the full premium for single-employee coverage, and 3 out of 10 systems paid for family coverage.
The attempt to continue such comprehensive coverage in the face of mounting costs has brought most school districts to the door of health-maintenance organizations (h.m.o.'s), Blue Cross/Blue Shield, and self-funded plans. And a growing number of districts are attempting to keep medical costs down by experimenting with "Wellness Programs"--helping employees quit smoking, lose weight, and deal with stress.
Many combine such options with a commercial insurance vendor's plan to expand employee choices.
In addition, some large school districts are turning to self-insurance to cut costs.
Kenneth N. Bush, assistant superintendent for administration of the Carollton Farmers Branch, a school district near Dallas, thinks his 1,600 employees have benefited from the switch from a national insurance carrier to a self-insurance plan.
"The employees realize that we are the company that's providing the insurance," he says. "No more trying to see what we can get out of another company. If we save money in health care, it benefits them directly through their salaries."
Mr. Bush says other cost-containment measures also helped, such as requiring a second physician's opinion, auditing claims through a separate agency, and encouraging the use, where possible, of outpatient care, rather than hospital stays.
Still, the Carollton schools saw an increase of about 20 percent this year. The district paid about $2.4 million for employees' medical treatment out of a total budget of $54 million in 1986-87, and this year expects claims to consume about $3.1 million of its $60-million budget.
Moving To Cap Outlays
Lauren H. Fickett, associate superintendent of the Mt. Diablo Unified School District in Concord, Calif., says that three years ago he was well on his way to paying $10 million in premiums for 4,000 employees.
After long negotiations with the teachers' union, he split his districtwide insurance plan--which then relied on Blue Cross/Blue Shield and a commercial vendor--into several different plans from which his employees could choose.
They had the option of either staying with the commercial vendor or joining an h.m.o. or a cooperative trust fund. The amount employees could receive in benefits was capped, Mr. Fickett says, and the option for lifelong coverage was dropped.
Last year, the district paid $6.5 million for health care, about $81,000 under budget. He has not yet determined whether 1988 will bring another increase, but he has budgeted for an additional 10 percent.
Mr. Singleton in Suffolk County says he plans to propose that his schools opt out of New York's Empire Plan and into some sort of co-payment system, which would shift some of the cost burden to employees. But the decision will depend on union negotiations, he notes.
"It would not be prudent for any school district to make a quick change in their health-care system," Mr. Singleton says. "But one thing's for sure, these days if you want to buy a Rolls Royce, you have to pay for it."