The University is undertaking a short-term and a longer-term plan to slow the rate of health insurance expenditures.

The Problem
We are dealing with two significant challenges. One, which we have discussed at some length this year and which we will discuss yet more, is the general budgetary situation that we face due to the State’s financial difficulties. If the Governor’s proposals go through, we face a cut of over $36 million between the initial FY 2003 budget and the 2004 budget. In this context, our normal practice of looking for ways to reduce costs has become more assiduous in all areas. And as we have discussed, this reduction comes in addition to over $40 million in cost increases that we will have to manage next year including increases for financial aid, utilities, a modest salary program, and spiraling health insurance expenditures.

This rapid growth of health and pharmacy benefit expenditures is our second major challenge. We had been well aware of this problem long before the bad news from the state, and we had been working on it—my office, the CFO and his staff, the EVPMA, and HR—for several years. During this time, the University made a number of changes aimed at mitigating cost increases. We have changed co-pays and deductible thresholds in all of our plans. Under-subscribed plans have been discontinued because 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. Going into the current fiscal year, we had begun a process to recommend changes that would begin to go into effect in January 2004 and beyond. We are building on that process to make what we think will be lasting and significant changes.

Here are some basic statistics, many of which are in the handout:

• Total expenditures on health and drug coverage in the current year—$184.2million—is twice that in FY 1998.
• The University contribution to premiums for health and drug insurance covers 94% of the total premium, up from 92% in FY 1998. I note that nationwide 85% is generally viewed as being at the high end of employer shares for health insurance premiums
• Almost 70% of our employees pay nothing out of pocket for health and drug coverage (premiums). The current system obscures the real costs associated with each plan, making it possible to make decisions about coverage without regard to cost.
• Just in the last year, University contributions for benefits overall rose by an amount that equals more than 1% of our total salary pool. The implication is that we could add a full percentage point to the salary program if we could simply stabilize the share of compensation going into benefits—or we could increase the available resources for other priorities.

How did we get into this situation?
Of course, we have experienced the national run-up in health care costs, just like everybody else. In addition, the basic formulas that we use in order to determine University and employee contributions to health and drug benefits were determined before 1988. There has been no active periodic review of the decisions that result from these formulas. And while we have actively worked on individual components of health and drug coverage, the underlying formulas have not been changed in response to major changes in healthcare trends, including the growth of managed care, nor have they been adjusted in light of actuarial data and data on use by our faculty and staff.

The formula that was determined in the 1980s provides that the maximum University contribution for active employees is 85 percent of the weighted average premiums for family coverage, where the weighting is based on plan enrollment. For retirees, the maximum University contribution is the full premium cost of Blue Cross/Blue Shield/United coverage. The University also uses a variety of other technical and actuarial procedures that serve to obscure the relationship between the cost of actually providing insurance and the choices that our employees make. Tellingly, the current system often contains large implicit incentives that affect retirement decisions, and the sign and magnitude of these incentives vary considerably from year to year. So one year, there’ll be a payoff to retiring that year and the next year, there’ll be a disincentive to retiring. That is the result of having no rational structure. Whatever the purposes served by the formulas in 1988, in the current context there is no coherent rationale for these practices.

What are we going to do?
As I said a few minutes ago, we have both a short-term and a longer-term response. Fundamentally, and for the long haul, we wish to develop a system for determining the premium and co-premium structure of our health and drug benefits that fits the structure of health care today, and that leads to rational decisions going forward. To this end, we are charging a faculty and staff committee, whose members will include people with expertise in health care and health care policy, to look at a number of specific issues related to the University’s share of insurance premiums and the employee co- premiums.

We expect the committee’s recommendations will permit us to pursue a policy of cost-sharing between the University and its employees that is much closer to our peers in terms of employee share while continuing to provide quality health care for everyone. Being closer to “market” on University provided health insurance will allow us to be competitive with health benefits while at the same time directing more resources to our highest priorities—to teaching, to learning and to research.

This group will have an aggressive charge and time-line. The committee will work over the summer and make a set of recommendations in September. The committee will be charged to make recommendations on the best way to determine University and employee contributions for health insurance in light of best practices, market considerations, and the University’s responsibilities to its faculty and staff. We are setting explicit goals for cost savings to guide the committee’s work. Our current thinking is that the University contribution to health insurance premiums, in aggregate, should not exceed 85% of the total cost. That’s compared to 94% today.

The charge to the committee asks the group to examine and make recommendations in the following areas:

1. How do we set the appropriate target for the University’s share of total premiums?
2. Should we change to a four-tier structure of insurance coverage: single, single adult with children, two adults, two adults with children? At the moment we have a three-tier structure…as it turns out, it’s actually more expensive to insure two adults or two adults with children than it is to insure a single adult with children, and that should be considered.
3. What should determine the rate ratios, that is, the premium relationships among tiers for each plan? (We currently use a pre-set formula; the norm is to use actual experience.)
4. Should the algorithm we use to determine the University’s contribution to premiums apply equally for active employees and retirees? Or should retirees be treated differently?
5. What algorithm should be used to determine the University’s contribution for any given tier of coverage?
6. For retirees who are covered by Medicare, how should the Medicare Part B premium be integrated into our algorithm?
7. Should we make any distinctions in the level of the University’s contribution for families of differing income levels?
8. How can we make costs more apparent, and more transparent, to employees so that costs for both the employee and the University are minimized?

The group will consult widely, and will discuss its progress both with the executive officers and with the Regents as its work progresses. Following the issuance of the group’s recommendations, we will provide the University community a period for discussion and comment before making final decisions on the changes. We expect that decisions will be made during the fall term of 2003 with implementation as soon as practicable, and no later than January 2005. Second, while we are waiting for the group’s recommendations, we will make some short-term changes in the current co-premium structure, to take effect in January 2004. This change will result in almost all employees paying some share of the premiums for the health and drug coverage that they select. Remember that currently 70% pay nothing (toward their health insurance premiums). This is a short-term solution that helps alleviate the budget pressure that has been created by the rapid increase of costs in this area. The University will save about $6 million by instituting this measure. The changes for 2004 will be for one year only, and will be superseded by decisions made as a result of the above-mentioned committee’s work. Most employees who have not shared in the premium cost in the past will see a co-premium of about $15 - $30 a month per person covered, depending on the plan chosen.

This change, of course, will not come close to covering the increases in health insurance costs we anticipate for next year. In fact, the University contribution will, in general, increase by more than twice that of the employee contribution. Overall, we anticipate that employee contributions will increase by about $9 million under our new plan, while the University contribution will increase by about $25 million.

The change we are making for January 2004 will establish the practice that almost all employees share in the costs of their insurance coverage and will produce an immediate reduction in what the University would otherwise pay. We are confident that the committee's work will lead to even greater savings for us because of employee cost-sharing and because the premium structure will encourage employees to take cost into account as they choose the most appropriate coverage for themselves and for their families. The more immediate change will not affect all staff at once because of existing collective bargaining agreements, some of which have specific provisions governing co-premiums. In general, when changes such as these are enacted for the non-bargained-for staff, we negotiate to incorporate similar changes during subsequent contract bargaining for our unionized staff. The vast majority of our staff is not governed by union contracts.

I want to emphasize that these actions—the short-term change and the longer-term recommendations of the committee—are not intended to diminish the number or quality range of the health plans offered by the University. The change that will be effective in January 2004 will make only a small revision to the formula used to calculate the University’s and employees’ share of the premiums. The committee’s work, similarly, focuses on premium and co-premium structures and is not intended to reduce either the employees’ choice or benefits.

There is another change that I want to announce today, that is not directly related to health and drug benefits.

Many years ago the University instituted a “flex benefits credit” of $6 per month for all employees. The purpose was to share in some savings associated with benefits policy changes that went into effect in the mid-1990s. Those savings have long since disappeared, and, effective next January, so will this credit. Eliminating this credit will save approximately $1.9 million a year.

Finally, I want to note that we are concerned that the changes that we are making may be especially burdensome for our lowest-paid staff. For the longer term we are asking the advisory committee to look into these effects and possible ways to ameliorate them, as I have already mentioned. For next year, we are doing two things: First, I have asked all of our deans and directors to be especially mindful of the needs of our lowest-paid staff in designing their salary programs. As a general matter, the percentage increases will be largest for the lowest paid, and there has been enthusiastic support for this philosophy across the University. Second, we plan to add $100 per year to the pay of all staff earning less than $25,000, over and above the annual merit program for those staff.