University takes measures to reduce health care expenditures

In response to costs that have doubled in the last five years, the University will undertake a two-part plan to slow the rate of increase of its expenditures for employee health insurance, Provost and Executive Vice President for Academic Affairs Paul N. Courant told the Board of Regents April 17. The current budget pressures facing the University have increased the urgency for addressing the rapid growth in health insurance costs, he said.

In a preliminary measure, the University will require most employees and retirees to pay a share of the cost of health insurance premiums beginning Jan. 1, 2004, Courant told regents. Currently, 70 percent of employees and retirees, including virtually everyone with individual coverage, pay no co-premium, he said.

To create a longer-term solution, the Committee on Health Insurance Premium Design, made up of faculty and staff and appointed by Courant, will begin work immediately to examine the best way to determine University and employee contributions for health insurance on an ongoing basis.

Courant presented regents with a number of statistics to provide context for the magnitude of the expense. The combined amount paid by the University and employees toward health insurance premiums is estimated at $184 million in fiscal year 2003 (FY03), up 17 percent from the prior year and double the figures for 1998 ($92 million). In that same period, the share assumed by the University increased from 92 percent to 94 percent of the total.

"It has been 15 years since the University took a comprehensive look at the way it determines the employee portion of health care premiums," Courant said. "The 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 data about the University's actual experience." For example, when the current formulas were adopted, HMOs were relatively new offerings, and only a small portion of faculty and staff enrolled in them. Now, they are the most popular type of plan, Courant said.

"The wider payment of co-premiums will not stop the increases in cost to the University; it will only slow them down," Courant said. "Even after most employees begin to pay a co-premium, the cost to the University for providing health insurance probably will increase by about 13 percent in 2004."

The committee's primary work is to design a comprehensive, rational structure that determines University and employee premium-sharing and that is financially responsible, competitive in the marketplace, and responsive to the needs of faculty and staff, Courant said.

The committee also will consider structures used by other universities and businesses—such as a fourth tier that would cover households that consist of one adult with any number of children. A fourth tier would recognize that costs are lower for this configuration than for households of two adults, or of two adults with children.

"I want to emphasize that these actions—both 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," Courant told regents. "They [the offerings] are very important to the health and welfare of our faculty and staff, and their families, and are important aspects of our ability to recruit and retain the highest quality workforce."

The committee will report its findings and recommendations in September, followed by a period for campus discussion. Final decisions are slated for the end of the Fall 2003 semester, with implementation as soon as possible.

How benefit changes will affect employees

In 2004, almost all employees who now pay nothing toward their health insurance premiums will pay a 5 percent co-premium, and the University will pay the remaining 95 percent. Employees who now pay a co-premium most likely will see no change in the proportion of the contribution they make toward their insurance premium. As always, if rates increase, both the University and employees will see an increase in their contributions (see chart>).

The recommendations of the Committee on Health Insurance Premium Design regarding co-premiums will take effect in 2005 and will supersede the 2004 arrangement.

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 non-represented staff, the University negotiates to incorporate similar changes during future contract talks.

In addition to the change in co-premiums, the University will eliminate a $6 per month flex credit that was initiated in 1995 when U-M went to a flexible benefits system. The flex credit was intended to the share savings that resulted from going to the new program, but it has more than paid back any savings to employees, Courant said.

Committee on Health Insurance Premium Design

• John Billi, associate vice president for Medical Affairs, associate dean for clinical affairs, and associate professor of internal medicine and medical education, Medical School

• Marty Eichstadt, benefits director, Human Resources and Affirmative Action

• Kyle Grazier, chair, associate professor, health management and policy, School of Public Health

• Richard Hirth, associate professor, health management and policy, School of Public Health

• Robert Kahn, professor emeritus, Psychology Department, LSA; professor emeritus, health services management and policy, School of Public Health; research scientist emeritus, Survey Research Center, Institute for Social Research

• Marilyn Knepp, associate vice president for University budget, planning and administration

• Charles Koopmann Jr., chair, Senate Advisory Committee on University Affairs; 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, Business School; professor, Department of Economics, LSA

• Cheryl Soper, controller and director of financial operations

• Laurita Thomas, administrator, Human Resources, U-M Health System

Related information: Click for accompanying charts>

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