ANN ARBOR—A committee of University of Michigan faculty and staff has recommended changes to the way in which the employee portion of health insurance premiums is determined. The changes, if adopted, would affect faculty, staff and retirees at the Ann Arbor, Dearborn and Flint campuses beginning with the 2005 calendar year.Related links: Schedule of information programs Premium sharing chart CHIPD members CHIPD website

The proposed changes include a premium-sharing model that better reflects the cost of choosing more expensive insurance plans; a greater University contribution toward the coverage of employees and retirees than that of their covered spouses and other dependents; and a change from a three-tier to a four-tier structure in order to account for the lower health-care costs of children. The committee said the changes are designed to encourage employees to choose the lowest-cost insurance plan that meets their needs, and to share with employees a small portion of future health insurance cost increases.

U-M insurance premiums cover both employee health care and prescription drug plans. Under the new design, most employees would pay more in co-premiums than if no changes were made, but some employees could see their co-premiums decrease. Despite the proposed changes, the University’s expenditures for employee health insurance premiums are expected to increase substantially in 2005.

A series of programs will be held on all three campuses to give faculty and staff a chance to learn the details of the proposed changes. Employees will be able to ask questions and provide feedback to senior executives of the University. (See box for a complete schedule of campus presentations.)

The Committee on Health Insurance Premium Design (CHIPD) was appointed by Provost Paul N. Courant in April. The committee was chaired by Kyle L. Grazier, professor of health management and policy in the School of Public Health, and included 10 faculty and staff members chosen for their technical and scholarly expertise in the fields of health care management and health insurance (see list of members).

Courant said the University’s goal is to continue to provide a high-quality, competitive benefits package for employees, with a range of choices to serve employees’ individual needs and circumstances. “Offering a competitive benefits package is essential to our ability to recruit and retain the best faculty and staff,” he said. “It is also an integral part of creating a University community of which we can all be proud.”

Rising health care costs

Courant noted in the committee’s charge that the University, like all major employers in the United States, is facing continued double-digit increases in the cost of health insurance premiums. National surveys have consistently identified the rapid and dramatic rise in healthcare costs as the single most critical concern for employers.

“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,” he wrote in the charge.

Robert P. Kelch, U-M executive vice president for medical affairs, said that rising costs in the health care industry are the result of several trends: increasing use of cutting-edge technologies in medical diagnosis and treatment; significant advances in prescription drugs; demand by patients for more and better-quality health care services; and workforce shortages that drive labor costs higher.

At U-M, health insurance costs have risen more than 14 percent per year since 1999. The annual insurance premium per active employee has increased 62 percent (from $3,130 to $5,075) during that time period, and the premium per retiree has increased 164 percent (from $1,686 to $4,453). The University has absorbed almost all of those cost increases, Courant said.

“The University’s share of costs for employee health insurance premiums has more than doubled in the past five years, from $85 million to nearly $175 million,” he said. “That rate of increase cannot continue if we are to maintain a high level of quality and a range of choices in our health-care plans. Our best option is to develop a better model for cost-sharing with our employees, rather than reducing quality or choice of health plans.”

The committee’s work

Courant appointed CHIPD in April to review the methods for how health insurance co-premiums are determined for both active employees and retirees. Although the University has made changes to health care co-pays, deductibles and prescription drug benefits over the years, the underlying premium structure used by the University has not been altered since 1988. During the past 15 years, there have been significant changes in the health-care provider market, health-care cost trends, and in employer responses to those changes.

Furthermore, Courant noted, the University’s old premium structure can result in undesirable outcomes as employees choose their health insurance coverage. As an employee nears retirement age, depending upon which health insurance plan he or she selects, the employee cost for that insurance plan might provide either incentive or disincentive to retire. And the premium structure gives employees no reason to choose a lower-cost insurance plan in most instances, even when such plans might fully meet or exceed employee needs.

In 2003, he wrote in the committee’s charge, “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.”

Prior to the completion of the committee’s work, as an interim measure, almost all U-M employees and retirees were asked to pay at least 5 percent of their health insurance premiums for the 2004 calendar year. Open enrollment for 2004 employee benefits ended on Oct. 24.

The committee’s charge was narrowly focused. Among the issues it was asked to consider were whether the target for the University to pay 85 percent of aggregate premium costs should be reconsidered; whether the approach to determining the University’s contribution should differ between employees and retirees; whether the University’s contribution should differentiate between employees or retirees and their covered dependents; how to handle contributions for dual-employee households; whether the current opt-out policy should be maintained; and how often the premium structure should be reviewed. The committee was not asked to consider what range of health insurance plans should be offered, nor what should be covered by the various plans.

The committee met weekly from April through September 2003 and sought data from the University, the participating health insurance plans, and competing employers locally and nationally. It also solicited comments from the University community.

CHIPD recommendations

In its report, which was submitted to the Provost in early October, CHIPD writes that its proposed new design for health insurance premiums continues “substantial cost-sharing by the University and the maintenance of choice of high-quality plans with different structures, benefits and a range of prices.”

“It provides a very high proportion of the cost of the health insurance premium for employees and for retirees while building in appropriate incentives to consider premium costs in the choice of plans,” the committee report states. “It creates a mechanism for sharing the costs of increasing premiums, while still having the University pay the substantial majority of those increases.”

The committee’s major recommendations are:

• The University should contribute a higher share of the cost of coverage for employees and retirees than for dependents, and a higher share of the cost of coverage in lower-cost plans than more expensive plans.

• The new plan calls for the University to contribute 95 percent of the average premium of the two-lowest cost comprehensive plans for employees and retirees (currently Care Choices and M-Care HMO). Those who enroll in plans with more generous design features, and consequently higher premiums, would pay the difference in cost for the more expensive insurance plans.

• The University would cover a somewhat smaller proportion of the premiums for dependents, currently estimated at about 80 percent. The goal would be a total University contribution of 85 percent of the aggregate cost of premiums.

• The current three-tier structure (single, two-person, and families of three or more) would be expanded to four tiers: Tier 1, single; Tier 2, one adult plus any number of children; Tier 3, two adults; and Tier 4, two adults plus any number of children. The tier for one adult plus children would have relatively lower premiums than those tiers including two adults, reflecting the substantially lower health-care costs of children compared to adults. Using 2003 data, the committee estimated that more than 3,600 employees would fall into the new tier, and the cost of coverage for these households would be less than under the current system.

• Although the University’s insurance program is designed to spread the risk of expensive medical care across a large population, the Blue Cross/Blue Shield plan tends to attract a group of employees that, because of age and gender mix, requires more expensive health care. CHIPD recommends adjusting BC/BS rates to better spread that risk across the entire insurance pool, while retaining the portion of BC/BS premiums that compensate for more generous plan design.

• Families where both adults are employed by the University will be encouraged to sign up for the mix of insurance coverage that maximizes the University contribution and minimizes their employee share of the premiums. Under the recommended structure, two-employee families would benefit from higher University contributions when they elect two single coverages (Tier 1) or a single coverage plus one adult with children (Tier 1 plus Tier 2).

• The plan design changes would take effect in calendar year 2005, but would be monitored closely to ensure that the University remains competitive with other major employers in its key markets. Additional changes might be needed to respond to changing patterns of enrollment in the various insurance plans, as well as the shifting economic and budget landscape.

Impact on employees

The exact premiums that would result from the CHIPD proposals won’t be known for several months, when health insurance plans and premiums can be negotiated with the specific plan providers. But the committee used 2004 premium rates to calculate the relative impact on various employee groups and health plan choices.

Under the new design, some employees would pay comparatively less in premiums than if no changes were made. But most employees would experience increases in their premiums as the new formulas more accurately allocate to the employee the cost of choosing more expensive coverage. The figures cited by the committee in its report are not actual premium rates for 2005; rather, they help convey the direction and magnitude of the changes being proposed (see tables that compare 2004 premiums under the old and new structures).

Even with these proposed changes, said Kelch, the University’s cost for insuring its employees will not decline. Steep increases in the cost of health insurance are expected to continue for the foreseeable future. “But I believe this proposed structure will encourage more prudent health care choices, and ultimately that will minimize increases in the cost of health insurance both for the University and for our employees. That’s really what we’re aiming for,” he said.

Timothy P. Slottow, executive vice president and chief financial officer, noted that health insurance premiums normally are taken out of employee paychecks on a pre-tax basis. That means employees will not pay Social Security, Medicare, federal income or state income tax on the amount of any health insurance premiums they pay.

“For those employees who would see increases in health insurance premiums under this proposal, the effect of paying premiums on a pre-tax basis means the actual cost to the employee will be significantly lower than what the charts suggest,” Slottow said. Employees can further lower the cost of their health-care expenses by taking advantage of a Flexible Spending Account, which allows them to set aside part of their salary on a pre-tax basis for anticipated health expenses not covered by insurance.

Slottow also emphasized that health insurance coverage is part of a package of benefits offered by the University that includes retirement, paid time off, long-term disability, life insurance, dental insurance, and options for vision and legal coverage. The committee recommended that the University regularly review its health insurance benefits in light of the competitive market for faculty and staff, and that health coverage be evaluated as part of the total compensation package offered by the University.

As part of its research, CHIPD reviewed health benefits offered by other employers including other top universities, major employers in the region such as Pfizer and General Motors, and other regional health care systems. Although competing employers offer a range of health insurance coverage, the proposed U-M premiums for 2005 are more generous than the median figures for the employer groups that were studied.

Next steps

The University’s executive officers and regents must make a final decision about the 2005 health insurance benefits structure by the end of the fall term, so that proposals can be requested from vendors beginning in January 2004.

In the intervening weeks, a number of campus programs will be held so employees can learn about the committee’s recommendations, ask questions about the proposed premium structure, and share feedback with University leadership. (See a schedule of the campus presentations.) A website also has been developed at (www.umich.edu/~hraa/chipd/), with detailed information about the proposed changes and a complete copy of CHIPD’s report. Comments and questions also may be sent confidentially via e-mail to chipdcomment@umich.edu.

“The issues the committee was asked to address are very complicated, and they have the potential to affect the health insurance choices of every U-M employee,” said Courant. “It will be important for our faculty and staff to make sure they are fully informed about the recommendations. I encourage each of our employees to take the time to inform themselves about these issues, whether by attending a campus presentation or by visiting the website.”