Charge
As a responsible employer, the University aims to provide adequate health insurance coverage to its faculty and staff. The University also seeks to recruit outstanding employees; thus it needs to offer benefits that are competitive in the market place. Finally, the University has a responsibility to be a prudent steward of public and private resources in service of the missions of teaching, research, and service. The Committee’s charge is to take all of these considerations into account to recommend the best design for health insurance premiums paid by the University and the co-premiums paid by employees for the health and drug insurance coverage of the employees’ choice. The design should achieve a goal of the University paying approximately 85% of the aggregate cost of health insurance premiums and the employees paying approximately15% of the cost, unless investigation leads the Committee to recommend that a different sharing of premium costs between the University and its employees is more sensible.

Background
The University of Michigan, like all large employers in the US, has been confronted with double-digit increases in health care costs. As a result, increasingly large amounts of resources are being devoted to health insurance at the expense of resources for salaries and other important priorities. Looking at various ways to contain these rising costs, we have determined that the University’s interests in this arena include:

• Responsible stewardship of limited resources and managing costs effectively.
  
• Providing a choice of quality health care plans that meet the diverse needs of faculty and staff.
  
• Structuring a benefit package that contributes to the recruitment and retention of a high quality faculty and staff.

However, the University faces challenges in achieving these outcomes given current and anticipated future trends in health care costs.

National Health Care Cost Trends
Increasing health care costs are an issue for public and private sector employers nationally. National surveys of benefit specialists conducted by Deloitte and Touche have consistently identified rising healthcare costs as the single most critical concern for employers.

As recently as 1998, annual healthcare costs increased 3.7% on average, according to Hewitt Associates data. In 2002, cost increases exceeded 15%. Most analysts predict that double-digit annual increases will persist for a number of years.

Employers everywhere are taking steps to constrain the burdens created by such rapidly rising costs. Among the tactics used are:

• Increasing employee co-payments and coinsurance to encourage cost-effective use of prescription drug plans and health care.
  
• Increasing the employee share of premium contributions to encourage cost-effective selection of plans.
  
• Eliminating high cost plans, or restricting new enrollments in higher cost plans.
  
• Capping the portion of health care costs paid by the employer.
  
• Implementing co-premiums for all employees.
  
• Increasing the portion of premiums paid by retired employees for themselves and their dependents.

University of Michigan Health Care Cost Trends
Health plan costs for the University of Michigan were relatively stable between FY96 and FY98. In FY99 double-digit increases emerged which have continued unabated to the present. During the five-year period from FY98 to FY03 total annual health costs for active and retired employees increased by 100% from $92 million to $184 million (est.). The University's share increased from $85 million to $173 million (est.).

Some portion of the cost increase can be attributed to a growing workforce. In FY98 the covered population of active employees and retirees was 32,078 and by FY03 it had increased 15.5% to 37,046. Although our retiree population continues to grow most of the increase in the covered population is due to workforce growth.

However, the primary driver of the overall cost increase has been increases in premium rates for both health and drug insurance. From FY98 through FY03, the annual costs of coverage per employee (active or retired) increased by 73%, an increase of $2,093. Costs per active employee increased 62% (from $3,130 to $5,075) and 164% for retirees (from $1,686 to $4,453).

During this time, the University made a number of changes aimed at mitigating cost increases. Co-pays and deductible thresholds have increased in all of our plans. Under-subscribed plans have been discontinued as it costs more to offer low enrollment plans. We have negotiated aggressively with vendors to obtain the best possible rates. We separated prescription drug coverage from the health insurance plans to take advantage of savings that can accrue from an actively managed prescription drug program.

We believe that additional savings can be achieved through changes in the ways that premiums are determined, and through changes in the relative share of premiums paid by the University and by employees. The current formulas used to determine health insurance premiums have not been examined in over fifteen years, yet the health care landscape has changed dramatically during that time. We need to have a more coherent, comprehensive design. This will encourage faculty and staff to select the plan best suited to their health insurance needs, while ensuring that the price of the plan is one of the factors considered in decision-making. For instance, our current formula results in an employee contribution of zero for single coverage in all plans, yet the annual premium costs differ markedly. For roughly comparable benefits, our lowest premium plan costs the University $3,233 annually for single person coverage and the highest premium plan costs the University $5,343. From the employees’ perspective, both plans cost exactly the same amount--nothing. Over 70% of our employees and retirees contribute no portion of the costs of their health and drug insurance premiums, and have no reason for considering how the premiums differ across health insurance options.

Design Issues to be Addressed
It appears that the share of health care premiums paid by the University is generous compared to other employers. Our preliminary goal is that the new design results in the University’s share of premiums being no more than 85% of the aggregate cost. There is wide variation in the ways our peer institutions handle this issue. Employer contribution percentages and amounts often differ for employees and dependents, for active employees and retirees, by plan premium costs, and by tier. What contribution model should be used that will achieve our financial objectives while maintaining and advancing our leadership role in the markets in which we compete? Should the University of Michigan adopt a university contribution policy for health benefits based on a target dollar amount, a target contribution formula, or some other method?

We currently have three coverage tiers (single, double, family). It is increasingly common practice to have a four-tier structure with coverage levels of 1) single, 2) two adults, 3) one adult with any number of children, and 4) two adults with any number of children. This recognizes that actuarially determined costs are different for tier 3 families than for tiers 2 and 4. Should we expand to a four-tier structure?

The University currently specifies the ratios to set premium relationships among tiers so that they are standard across vendors. Common practice is to allow vendors to set appropriate relationships given group experience. Should we change our practice in this regard?

Our goal is to minimize the overall costs of the insurance coverage elected by our employees while still providing coverage that meets the health care needs of our populations. What method should be used to determine the University’s contribution to health and drug insurance premiums? Should there be separate formulas for health insurance and for drug insurance, or should these be considered in combination? How should the formula(s) accommodate our tier structure? How often should a design be reexamined? In what ways does the design help to minimize the total costs of health coverage?

Currently, we have different formulas to calculate the University’s contribution to premium costs for active employees and for retirees. These differences lead to an unintended consequence. Depending on which insurance plan the employee selects, the employee cost for that particular health insurance coverage might provide either incentive or disincentive to retire. The formulas we use ought to accomplish sensible cost sharing but not encourage or discourage retirement by creating marked differences in contribution levels. Should we use the same formula to determine the University’s contribution for active employees and for retirees? If not, how will we insure that the formulas used do not produce unintended impacts on retirement decisions?

Many employers have a formula that explicitly distinguishes between the share of premiums that the University pays for employees or retirees on one hand, and the share that the University pays for their covered spouses, partners, or dependents on the other hand. Should our contribution formula(s) incorporate this distinction?

The University currently reimburses part of the premium cost for Medicare Part B insurance coverage for our retirees and for their family members covered by our insurance. In doing so, we are recognizing that Medicare insurance coverage is part of the overall insurance that covers the health care costs of our retirees. However, as we survey peer research universities, we find that only two others reimburse any portion of the Medicare Part B premium, and none reimburse for spouse or partner premiums. How should the University treat the premiums for Medicare Part B insurance coverage? How should this treatment be integrated with the premium structure overall?

Some universities make somewhat larger University contributions for insurance coverage for employees at the lower end of the salary scale, or for employees with low family incomes. Should the University of Michigan incorporate greater subsidies for low-income faculty and staff in our premium structure? How would we determine who was eligible for extra support? What information would be necessary to implement such a subsidy fairly?

The University is Washtenaw County’s largest employer and it is not surprising that many of the people who work here have a spouse or partner who also works for UM. How should our rate structures recognize two-employee households? How could we protect individual privacy in this structure?

Our current practice is to make monthly payments to employees who do not elect insurance coverage under their own name (opt-out payments). These payments can encourage employees to avoid over-insuring their families. However, the current practice does not necessarily lower the overall costs to the institution. For example, our current practice allows opt-out payments even when the University is paying for the individual’s insurance coverage through the benefits election of a spouse or partner. Under what circumstances should we use opt-out payments? What should govern our use of them and how should amounts be determined?

Timing
The Committee will begin meeting immediately and will submit its report by the end of September 2003. The Fall Term will provide an opportunity for the University community to discuss its recommendations. Decisions on changes will be made before the end of Fall Term and we expect that changes will begin to be implemented as soon as possible and in any case, no later than in the 2005 benefit year.

Expected Output
The Committee will offer recommendations on as many of the questions above as is practical within this time period. In addition, we hope the committee will raise other issues that are important to consider as we move to make changes in our premium structure.

Membership
John E. Billi
Associate Vice President for Medical Affairs, University of Michigan
Associate Dean for Clinical Affairs, Medical School
Associate Professor of Internal Medicine and Medical Education, Medical School

Marty Eichstadt
Benefits Director, Human Resources and Affirmative Action

Kyle L. Grazier, Chair
Associate Professor, Health Management and Policy, School of Public Health

Richard A. Hirth
Associate Professor, Health Management and Policy, School of Public Health

Robert Kahn
Professor Emeritus, Psychology Department, College of LSA
Professor Emeritus, Health Services Management and Policy, School of Public Health
Research Scientist Emeritus, Survey Research Center, ISR

Marilyn Knepp
Associate Vice President for University Budget, Planning, and Administration, University of Michigan

Charles F. Koopmann, Jr.
Chair, SACUA
Associate Chair, Otorhinolaryngology Department, Medical School
Professor, Otorhinolaryngology Department, Medical School
Professor, Pediatric & Communicable Diseases Department, Medical School
Physician Billing Director, Faculty Group Practice, Medical School

Joel Slemrod
Paul W. McCracken Professor of Business Economics
Professor, Business Economics and Public Policy, School of Business Administration
Professor, Department of Economics, College of LSA

Cheryl Soper
Controller and Director of Financial Operations

Laurita Thomas
Administrator, Human Resources, UMHS

Health and drug insurance premium expenditures charts