FACULTY PERSPECTIVE:  The University’s Response to the Rising Cost of Health Care Insurance

The Executive Committee of the University of Michigan-Ann Arbor Chapter

Last year, UM Provost Courant appointed a Committee on Health Insurance Premium Design (CHIPD) “to examine multiple dimensions of the formula for determining what the University and its community pay for health coverage.”  Except where noted, all quotations in this article are taken from the report of this committee.) The main impetus for the study was the ballooning costs of health care insurance over the past few years. At the University of Michigan, total cost increases from 1999 to 2004 for one employee have ranged from 66% (M-Care HMO) to 145% (Blue Cross Blue Shield of Michigan with United of Omaha, subsequently referred to as BCBSM/United).   The report of this committee was issued on September 30, 2003, and most of its recommendations (with a few notable exceptions) will go into force January 1, 2005. These changes include, but are not limited to, transferring more of the cost to faculty and staff, charging higher premiums for dependents than for employees and retirees, and creating a fourth category of premium for employees, i.e. one adult with children. This article describes some of the changes and their affects on individual costs. The full report is available for reading or downloading at www.umich.edu/~hraa/chipd/report.htm.

The ten-member committee “was not appointed to be representative of any constituent groups, but rather for their expertise and experience” despite efforts of faculty governance, and staff organizations (including organized labor groups) to get a broader representation on an issue that will affect the pocketbooks of all UM employees. The committee did consider the greater impact on lower-paid employees, but claimed that tying premium cost to earnings “raises difficult issues of fairness, consistency, and benefits-administration.” (It should be noted that in this article insurance costs include both health insurance and prescription drugs, but not co-pays or deductibles.)

The report’s overall recommendation was to transfer, on average, 15% of the cost of health insurance to employees, phasing it in over three years. The Provost did not accept this, only agreeing to “stay at or as close as possible to that percentage.”  Subsequently, he also announced that the full 15% will go into force in January 2005 without a phase-in period. There is a trend of other major employers with health plans to move towards a 30% employee payment. Whether the university will adopt this goal is anyone’s guess; however, the administration’s current plan is for the university to contribute 95% of the average of the costs of the two least expensive comprehensive plans for each employee or retiree, but adjust the contribution for dependents to maintain an overall average university contribution of 85%. (In 2004 these plans are M-Care HMO and Care Choices HMO for employees, and M-Care HMO and M-Care POS for retirees.)

A change which will benefit some employees is the introduction of an additional premium tier for families with one adult with children, intermediate in cost between the one-adult and two-adults plans. The total premium costs, employee plus university contribution, for the various tiers are expected to be in the ratios 1.00 (1 adult) : 1.54 (1 adult + children) : 2.00 (2 adults) : 2.82 (2 adults + children). Rates for retirees are more complex because they depend upon whether the covered individuals have Medicare.

Appendix C of the CHIPD report provides tables showing the premiums for the various insurance plans in 2004, along with the employee/retiree contributions and university contributions. In order to illustrate the new plan, the tables also show the corresponding figures for the various plans had the proposed changes been fully implemented this year. (Note that a cost-sharing plan was implemented this year, although not the one proposed by CHIPD).

Comparisons are instructive; there will be winners and losers. For example, this year a family of two adults with children is paying about $90 per month for either M-Care HMO or Care Choices HMO, the least expensive full-coverage plans. (About half of all covered individuals are enrolled in one of these two plans.) Had the proposed plan been in effect, the cost would have been $135, 50% higher. The corresponding figures for BCBSM/United, the most expensive plan, are $500 (actual) and $430 (proposed), 14% lower. But in 2003, out of 37,046 individuals covered, only 156 individuals were in this family category. And, under the new plan, some of these might be in the new one-adult with children category.

For retirees, the vast majority of whom are Medicare eligible, M-Care HMO and M-Care POS are the least expensive plans with actual premiums of $14 for a single adult and $28 for two adults. The corresponding premium under the new plan would have been $10 and $65. (This example illustrates the large difference in cost between a single retiree and a retiree with a dependent.)

However, the majority of retirees (about 62%) are enrolled in BCBSM/United, again, the most expensive plan. These people are currently paying $16 for one person and $33 for two people, not much more than those enrolled in M-Care HMO and M-Care POS. But, in the new plan, the corresponding estimated premiums for BCBSM/United in 2004 would have been $50 and $150, a significant increase for the second person and an added incentive to change to less-expensive plans. This is the only plan available to retirees who no longer live in the area, or spend significant time away from it, although the CHIPD report does recommend that the administration explore the availability of other portable plans.

While employees can make before-tax health insurance payments through payroll deduction and health care reimbursement accounts, most retirees will have to make after-tax payments and thus, depending on their tax brackets, health insurance premiums will almost certainly cost them at least 18% more of their taxable income than it costs active employees. (You need about $118 taxable income to net $100 after paying tax at 15%, $133 if you are in the 25% bracket.) Also unlike most employees, retirees will not generally have annual salary increases to offset the anticipated continuation of large annual increases in health care insurance, recently estimated at 15% a year.

Provost Courant's decision to carry out a broad review of the health care insurance program in response to the rising costs seemed reasonable, and perhaps overdue. Certainly, the recent rapid growth in health care premiums has made a significant impact on the allocation of university resources. However, the total absence of representation by lower and middle income employees (and perhaps retirees) in a study whose primary focus was how to shift costs to employees and retirees was disappointing. While some of the CHIPD recommendations seem to be desirable (e.g., the establishment of a fourth premium tier for families of one adult with children), it is clear that the premium changes represent an effective decrease in income for most employees with families and, especially for retirees. The general reassignment of costs to individuals and the way this will be carried out must necessarily affect lower-income people with families and retirees with fixed low incomes the hardest. The impact of this change will be especially difficult because the CHIPD’s recommendation to phase in the general shift of costs was not accepted by the provost.

Prepared by Edward M. Chudacoff and Ronald J. Lomax, members, University of Michigan Budget Study Committee.