Trends Affecting AU's Health Insurance Benefits
A report to the Faculty Senate by Patrick Kehoe, vice chair for benefits, Faculty Senate
Committee on Instructional Budget and Benefits
October 2002
Introduction
The month of November is the traditional benefits open enrollment period at AU. This is the
once a year opportunity when faculty and staff can reconsider and make changes to their
individual choices of fringe benefits including the health insurance plans. Open enrollment is
also an opportunity for those who have chosen not to participate in an AU plan to sign up for
one. Decisions made during this annual open enrollment period become effective the following
January 1.
The Faculty Senate asked me to prepare a report about AU's health insurance benefits plans. This
is my report. I want to acknowledge and thank Beth Muha, Executive Director of AU's Office of
Human Resources, for reviewing two drafts of this report, spotting a couple of minor technical
inaccuracies and for suggestions for improvements. I also want to thank my assistant Toni
Glover who took the time to read the next to final draft and for her suggestions of a few
modifications so at to better ensure clarity.
I have one obligation to fulfill before you proceed to read this report. This is to caution you
strongly that the information contained in my report should not be considered or used as a
substitute for the information you will receive shortly in the official open enrollment packets
which will be sent out by AU's Office of Human Resources. I have deliberately not attempted to
include specific figures about final pricing or other exact figures that will appear in that
document.
Information About Our Current Health Insurance Plans
AU currently offers its regularly budgeted full-time personnel choices of two health insurance
plans, two dental insurance plans and the opportunity to establish a medical flexible spending
account. All costs for these can be paid with salary dollars that are then deducted from that
portion of your salary that is subject to income taxes. If you decide to participate in one of the
two health insurance plans, the university contributes dollars toward its total cost. This
contribution is not counted in your taxed income. The university does not contribute funds to the
dental plans nor to flexible spending accounts.
A medical flexible spending account is not an insurance plan. Rather it is an opportunity for you
to allocate a portion of your salary, freed of income taxes, for use when paying for qualified out
of pocket medical expenses. In deciding to participate in a flexible spending account, you should
be aware that federal law limits your use of these funds and also requires that any money
deposited into a flexible spending account be used for qualified expenses incurred during the
same tax year as the deposit is made. Qualified expenses include such things as co-payments
under our health and dental insurance plans, deductibles for medical or dental treatment and the
like. A medical flexible spending account can even be used to pay for some medical or dental
treatments or for prescription medicines that might not otherwise be covered by insurance. A
similar flexible spending account is available at AU for the payment of certain dependent care
expenses including, when qualified, day care required so that you (or you and your spouse) can
work for taxable income outside of your home. Information about these and other AU fringe
benefits are available from HR and on its web site.
The two health insurance plans currently offered at AU are an HMO provided by Kaiser
Permanente and an HMO with an out of network option provided by Care First Blue Cross. This
latter plan used to be called "Capital Care" but is now known as "BlueChoice". AU retirees who
are covered by the Benefit Extension Program but live elsewhere and those few AU employees
who also do not live in the greater Washington DC area are enrolled in a Blue Cross preferred
provider health insurance plan which has a national network of participating practitioners.
Information About The Increasing Cost Of Our Health Care Insurance
One needs only to look in the newspaper or listen to the media to know that the costs of health
care and of insurance to pay for it are rising in the United States. Indeed some of these reports
have indicated that annual double digit percentage increases are frequent. This is certainly true
for employer provided fringe benefit health insurance including that provided at AU. Yet you
should know that the university administration works to ensure that AU is able to offer the kinds
of plans that many of our colleagues have said they want and at as reasonable a cost as can be
obtained. In fact the administration makes a major effort to be sure that the plans offered here are
favorably comparable to those offered by most other employers (the market).
In order to ensure that we all will get as much value for our money as possible, the
administration annually engages in negotiations with all the companies which provide our
various benefits. This is an open process in that it includes those of us who are members of the
University Benefits Advisory Team. We are given access to the same reports and information
that are available to the administration and we regularly review all of it before making
recommendations to the administration about any modifications to and pricing strategies for the
benefits. This review process usually begins in late summer and continues until a short time
before the open enrollment period. All members of the former Faculty Benefits Committee have
been ex officio members of the University Benefits Advisory Team. Others from the staff and
faculty also serve on that Team. Now, it is assumed, all members of the new Faculty Senate
Committee on Instructional Budget and Benefits will be ex officio members of this Benefits
Team.
This year, as in the past, the Benefits Team reviewed information compiled by AU's Office of
Human Resources as well as information provided to the University both by its benefit insurance
providers and by its benefits consultant Mercer Human Resource Consulting. The figures
showed that AU's group utilization levels (our experience) are in line with the experiences of
similar groups. While this is the good news it is also the bad news. It means that our costs are
going up.
Translated into dollars, Care First spent the following amounts per AU participant per month
(known as PEPM cost): $284.91 in 2000, $306.00 in 2001 and $338.14 in 2002. Its PEPM is
projected to increase to over $400 next year. Comparable PEPM figures for Kaiser Permanente
were not available probably owing to its organization as a staff model HMO (its own employees
are the physicians and others who provide most of its members' care needs) and Kaiser
Permanente's reliance on the overall experience of all of its participants (the community) not just
those at AU. Care First, by the way, is a different model of HMO. It pays outside independent
providers to meet the care needs of its members.
We noted that both provider companies initially proposed premium increases of almost 22 %.
Later these were negotiated down to 17 % for Care First and a bit over 19 % for Kaiser
Permanente. Later still, after some modifications to the plans were made, the final rates for open
enrollment were reduced to an 11.3% increase for Care First and a 13.8% for Kaiser Permanente.
There were increases proposed for the dental insurance plans as well but these were much more
modest at least in terms of dollars.
The Benefits Team thought it necessary to consider making some changes in the specific AU
health insurance plans in order to reduce the increases in the premiums we would otherwise have
had to pay in 2003. Most of these changes are in the prescription coverage portions of the two
plans. This is because prescription drug utilization costs now represent 31 % of all claims
expense for the AU plans and are where the greatest cost increases are taking place. The Benefits
Team recommended that Kaiser Permanente's prescription co-payments be increased a few
dollars and that a differential be charged for brand medicines when a medically acceptable
generic substitute is available. Care First's plan already does this. The Team also recommended
an increase in the Kaiser Permanente office visit co-payment so that it will be the same ($15) as
now charged under the Care First's Blue Choice plan.
We, the Team, recommended changes to the prescription coverage portion of Care First's plans
too. One change was that AU move to a three tier scheme similar to those which are already used
by more than one-half of all U.S. employer plans. Our recommendation would retain the lowest
co-payment for generic medicines (drugs) but impose increased co-payments for brand drugs
when purchased. In addition, all brand drugs would fall into one of two categories: preferred
brand drugs or non-preferred brand drugs. Preferred brand drugs are maintained on a list (called
a formulary) which is compiled by the prescription service. None of the preferred brand drugs
has a generic therapeutic equivalent. Non-preferred brand name drugs (those not on the
formulary list) have a generic and /or preferred brand drug equivalent. The co-payment for nonpreferred brand name drugs would be higher than for preferred brand drugs. In addition, a small
number of prescription drugs (currently 51) will require advance approval before they can be
dispensed. The prescribing physician would have to initiate this approval process with the
prescription service.
The policy of mandatory generic substitution will continue for participants in the Care First plan.
This policy requires the pharmacy or mail-order service to dispense a generic drug if available
unless the prescribing physician specifically writes on the prescription script that it is to be
dispensed as written and can justify this as being medically necessary. Patients still will be able
to require, absent this "dispense as written" restriction, that prescriptions be filled with brand
drugs but the co-payment for any brand drug for which there is a medically acceptable generic
substitute will continue to also include the entire difference in price for that band and its generic
version. Kaiser Permanente does not offer this option currently.
There is one last change in our health insurance plans that I want to discuss. This is the
availability of Medicare coverage for those over the age of 65.
Medicare consists of two parts for most of its participants. Part A pays for hospitalization and
related expenses and is funded by a portion of the taxes paid for social security during all of ones
work life. Everyone over the age of 65 who qualifies under the Social Security laws is
automatically enrolled in this Part. Part B, by contrast, is voluntary for those who are eligible and
must be purchased by those who participate in it (it currently costs about $54 a month per
person). Medicare Part B pays for physician visits and many of the kinds of health care that does
not involve hospitalization on an in patient basis. These are the same kinds of things that our
regular AU health insurance pays. Medicare also does not pay for prescription medicines in most
situations.
Federal law makes an employer health insurance plan the primary payer if available so long as
the person covered is still on the active employment payroll. This means that for those of us at
AU who are not yet retired, enrollment in Medicare Part B after age 65 might not be appropriate
because our regular health plans will pay all of our expenses that would otherwise be covered by
Part B. When someone retires, however, the law makes Medicare Part B as primary if the retired
person has it. Until now, AU retirees have been permitted to make this decision on their own.
Those who have chosen not to purchase Medicare Part B have just remained fully covered by our
regular insurance under the AU Benefits Extension Program. This may now have to change.
Kaiser Permanente has informed AU that effective January 1, 2004, that is one year from this
January, AU will be surcharged for any retired AU employee who is over age 65 and is in our
Kaiser Permanente plan but who does not also have Medicare Part B coverage. The surcharge
has been set at $229 per month per individual participant or well in excess of what it costs for
someone to get Medicare Part B coverage.
Care First has not yet made a similar proposal. Our figures of usage, however, demonstrate that a
mandatory enrollment in Medicare Part B for Care First covered retirees who are over age 65
would save the AU plans an estimated $160,000 a year (current estimate) or almost 6% of the
total claims paid in the 2001 plan year.
The consultant informed us that already 95% of all employers nationally coordinate (as it is
termed) mandatory Part B coverage with their own plans for retirees who meet Medicare
eligibility. Thus it was our recommendation that AU do so as well.
The Past Decade Has Not Been Like It Was Nor May It Be Like It Will Be When It Comes
To Health Care Costs
I have been a member of various AU benefits committees and teams since the fall of 1985. I
want to provide a brief history of where we were at that time and how we came to the place we
are today. In closing, I will offer a prediction of where we may be going.
In the mid to late 1980's AU offered us the choice of eight or nine individual health insurance
plans. This was at that time fairly typical for employers who had enough employees to make it
work. The AU plans included a traditional indemnity insurance that paid for most of all of the
cost of almost any medical care intervention after an annual deductible had been met. Indemnity
plans were at one time the preferred type of insurance for most people. AU also offered several
HMO plans that cost participants less than did the indemnity plan both in terms of premiums and
out of pocket provider fees. While generally controversial in some circles, these HMOs tended to
appeal to many at AU. Finally, AU had one other plan. This was a very inexpensive (in terms of
the premiums charged for it --only one dollar a month at one point) catastrophic medical costs
insurance. This last plan only covered costs that exceed a very high deductible in any one year.
As I recall, this last plan tended to appeal to persons who had other medical insurance such as
through a spouse's employer.
Regretfully the 1980's was an era of broad based price inflation in the United States. Among the
things that increased in cost most rapidly and substantially during those years was the cost of
health care and the insurance that paid for it. Employers had tended to offer pretty good
insurance as fringe benefits beginning in the post World War II years but until the 1980's this
never constituted a serious economic burden. Typical plans paid for just about everything and
perhaps this upset the ordinary workings of the supply and demand marketplace. Whatever, the
fact was that medical costs began to increase and substantially.
As costs went up, indemnity insurance plans began to be impacted the most. This resulted in the
imposition of higher annual deductibles and a reduction in the percentage amount of the
reimbursed provider fees. Still premiums increased and more and more employees moved away
from the traditional indemnity type plan to the newer HMOs. That certainly took place at AU.
More specifically what happened here and probably elsewhere was a migration from the
indemnity market to the HMO market of the kinds of people who tended to use health insurance
less. Many of these of course were younger employees who just happened to make less on
average than their more senior, and frankly statistically likely to be sicker, co-workers. This
created a further cost increase pressure on indemnity plans that was described at the time as
being a death spiral. I recall one year during that period when we at AU were faced with a
projected 137 percent increase in premiums for the indemnity plan. Those of us on the benefits
committee actually felt relieved when the increase was negotiated down to only 72 percent!
Changes were obviously required.
One change was a reduction in the percentage of the total individual premiums that AU could
pay. This meant that a major portion of the increased costs were automatically being passed on
directly to the participant employees.
Somewhere along the way, someone noticed that AU had been paying for the entire cost of
retirees' health insurance premiums including any costs of spousal and dependent coverage. This
was not actually provided in AU's official Benefit Extension Program. The practice, however,
was thought to have originated during a more cost friendly era. This practice was stopped at least
prospectively and caps were also placed on the amounts that AU would contribute to health
insurance premiums for those of us who had not yet retired.
Major structural changes in the number and composition of the plans offered were initiated. At
AU the death spiral was forcing out the traditional indemnity plan. Also the AU benefits
consultants convinced us that it was necessary to reduce the number of plans AU offered so as to
maximize our bargaining power with the remaining insurance companies. We dropped most of
the plans (but with some grand fathering of participants) and moved to two: Kaiser Permanente
and MD IPA. Still even though both had been among the eight or nine theretofore offered, the
changes meant that many of us at AU had to change physicians and, if memory serves me well
on this point -- and it does--, this was not at all popular! Both of the new plans offered were
HMO's and neither included out of network use options except in certain emergency situations.
This lack of out of network access was soon identified as being unacceptable especially because
some participants in AU's plans happened to live in areas not served by these two plans'
networks. A year or so later, we dropped MD IPA and switched to Blue Cross Blue Shield of the
National Capital Area's Capital Care. Our present offerings from Kaiser Permanente and Care
First are (but of course with modifications made over the years) these two final plans.
Both of our present plans, Kaiser Permanente and Care First's Blue Care, are what are termed
HMO's. Blue Care also includes an out of network option that is similar in some respects to
traditional indemnity health insurance. In recent years, AU has been able to return to a
contribution strategy that has greatly increased the portion of the health care insurance premiums
that the university pays. This return was part of the administration's effort to make our entire
compensation package (consisting of salary and fringe benefits) more competitive in the general
employment market.
Both of the health insurance plans that AU now offers us are sound and typical of those that are
generally available to employees elsewhere. The premiums we have had to pay for these plans
have also been relatively reasonable and even held fairly steady for the past few years. We all
know, however, that the costs of health care in the United States are again increasing at a
substantial rate. HMOs or something may have been able to curtail these kinds of increases
during the 1990s but my reading suggests HMOs may no longer be able to do so. Perhaps
different strategies for controlling health care costs, including possible legislative interventions,
will emerge. Whatever happens, it will be incumbent on all of you, my colleagues, to maintain
the faculty's involvement in the process by which AU determines what health care insurance
benefits it will offer. It has been a pleasure and honor for me to have been one of your
representatives in this process for the past seventeen years. I retire next summer. Carole and I
will then relocate away from the DC area. Someone new will need to step up to fill the position I
have occupied. I want to thank all of you for having accorded me this high privilege.
Patrick E. Kehoe
Professor of Law and Director of the Library
American University Law School
4801 Massachusetts Avenue, N.W.
Washington, DC 20016-8182
pkehoe@wcl.american.edu
Phone: voice 202 274 4374 fax 202 274 4365