Monday, February 7, 2011

Insurance Pools for Public Schools

After the cost of salaries paid to the teachers, administrators and staff, the next largest cost for any school district is that of providing health insurance. Today's Columbus Dispatch ran a story about a concept which is again getting some attention in the Statehouse - insurance pooling.  This is because there is a belief by some that Ohio's public school districts can - in aggregate - save money with this approach.

So what is "insurance pooling" anyway?

I'm far from being an expert into the nuances of health insurance, but I think we all understand the general concept:  we pay someone else to assume some of the risk associated with an aspect of our lives.

Take car insurance for example. We spend a fair amount of money on our cars, and we would be pretty annoyed to wake up one morning and find our car gone. In other words, once you buy a car and park it in your driveway, you run the risk of it being stolen and you being out all the money you've paid for it. However, you can reduce that risk by paying an insurer to assume some of it. So let's say you buy a $20,000 car, and the insurance company offers to give you $20,000 in cash if someone steals your car and it isn't recovered. You'd make your decision on that offer based on how much the insurance company wanted to charge you to take the risk. Let's say they charged $100/yr.

Would you buy that insurance?  Probably.  That $100 premium seems like a reasonable amount to pay for the peace of mind you would get knowing that if your car were stolen, you'd get sufficient money to replace your car.

Why is it a good deal for the insurance company?  Because they know that not every car gets stolen. In fact, a very small percentage of cars get stolen. So if they can sell an auto theft policy to thousands of customers, but have to pay out loss claims to only a small fraction, they win the bet. The cost of auto theft insurance premiums are kept in check by competition between auto theft insurance companies (everyone knows the Gecko, and that Nationwide is on your side).

Health insurance starts with the same concept: we pay the premiums for health insurance in order to have someone else assume part of the cost of our health care, should we need it. It's quite a bit more complicated than auto theft insurance, but the general idea is the same: insurance companies need to have the bets in general come out in their favor in order to stay in business. They need to be able to charge enough in premiums so that they can pay out claims and still make a profit. And unlike the case with auto theft - everyone is going to make claims against their health insurance.

Another way in which health insurance differs from auto theft insurance is that it has become a custom in this country that health insurance is, in nearly all cases, paid for by the employer, not the individual. From the perspective of the employer, the cost of an employee includes the full gamut of salary, benefits and taxes. Benefits can be defined as money an employer spends on behalf of an employee but not reported on his/her W-2.

For example, the contract with the teachers' union says each member receives life insurance coverage in the amount of $40,000 at no cost to the employee. The school district isn't assuming that risk - it buys a master life insurance policy that covers all the employees. But if an employee dies, the death benefits is paid to whomever the employee names as his/her beneficiary, not the school district. Therefore the cost of this life insurance policy is a component of the compensation package for the employee, not protection for the school district.

Until the signing of the 2008 contract with the teachers' union, health insurance coverage was handled the same way. The school district bought a master insurance policy from an insurer, and paid 100% of the premium. However, to reduce the premium, the employees share in some of the costs, by way of co-pays and deductibles. Starting with the 2008 contract, the district's employee began paying a share of the basic premium as well, stepping up to 10% (capped at $136/mo for family coverage) effective Jan 1, 2010.

In 2010, the School Board, on the advice of the Treasurer, decided that it would no longer buy health insurance covering 100% of the risk, but would instead build its own fund from which to pay claims. This is called self-insurance. The idea goes to the basic principle of insurance: in exchange for having the school district - that is the taxpayers - assume the risk for paying claims, we would not have to pay an insurance company to put its own profits at risk. In other words, it should save us money. So far, it seems to have done just that, but only time will tell - after we have a few more years of claims history to examine.

That doesn't mean we can just tell the insurance company to take a hike.  It is enormously complex and expensive to handle health insurance claims. Every time an employee goes to a doctor, is rushed to the emergency room, or is issued a prescription, someone has to go through the process of deciding whether the claim is valid and appropriate to pay. It would be stupid for the school district to scale up and staff an operation internally to do that. So we contract with a "Third Party Administrator" (TPA) to take on that function.

In essence, it means we continue to pay the insurance company for all the administrative services they performed as our insurer, but we don't have to compensate them for assuming any risk.

We can do this because we're one of the largest school districts in Ohio, and have the resources necessary to build a fund large enough from which to pay claims (the fund gets it money from the part of our budget which formerly went to pay the insurance premiums, including the employee contribution). But Ohio has tons of small school districts which could not afford the risk - a single large claim could wipe out their cash reserves. So they are forced to buy insurance and bear the cost of transferring the risk to the insurance company.

The General Assembly is therefore once again looking into health insurance pooling - the idea that all school districts in Ohio should band together in regional groups to buy health insurance.

I try to keep partisan politics out of this blog, but I don't think this conversation about insurance costs is really a cost conversation at all. It's about winners and losers. If we made a huge insurance pool out of all the school districts in the state, there would be no net change in insurance claims or the cost of insurance. The only difference is that some districts would pay more in premiums, and some would pay less.

Obviously, the winners of a pooling program will be the districts with high per-employee claims costs. The demographics of a district's employee will have a lot to do with that. If the staff is young, there will be lots of claims associated with pregnancy and child rearing. If the staff is older, there will be all the claims that come with aging, such as diabetes and heart disease. For example, Hilliard Schools and Olentangy Schools are nearly identical in size, but our employee population is older. That's because we had our big growth spurt in the 90s, and hired tons of young teachers then - teachers who are 20 years older now. Olentangy has been growing for the past decade, and is still growing. So they have a preponderance of young teachers now.

The losers will be the districts which have a healthier employee teams, whether through effective wellness programs, demographics, or just the luck of the draw. Such districts should be enjoying lower per-employee health insurance costs, and will see their costs go up if forced into pools with districts with higher claims histories.

The losers might also be districts like ours, who have the wherewithal to be self-insured. If we are forced to join an insurance pool, we would again be paying premiums, and those premiums will likely be more than our claims cost plus the cost of the TPA contract. The only way for that to not be true would be for us to join a significant pool of districts with claims costs lower than ours. In other words, becoming a winner by making others become losers.

The Republicans have again won control of our state government, and are going to use that power to execute their agenda. I have no problem with that, any more than I have problems with the way the Democrats have pushed their agenda at the national level the past two years. Parties are put in power by the will of the voters. As long as we have political parties - and it's too bad that we do - that's the way it will be.

But while the common image is that Democrats stand for big tax-and-spend government and do so with the support of labor, and that Republicans stand for minimalist government with the support of big business, neither stereotype is any longer true. Both major parties are now of the tax-and-spend variety, and while they may each have a reliable base of supporters, the big money in this country places bets on both Red and Blue. Big business backs Democrats when the Democrats promise to send tax dollars their way, and big labor backs Republicans when Republicans have influence over labor issues (e.g. when John McCain sat on Senate committees that influenced education spending).

In the case of health insurance pooling, the Kasich administration seems to want to replace the free market with a government-mandated solution. That seems like something we'd expect from a Democrat. As always, there's the claim that by getting the government involved, money will be saved.

Do any of us really believe that?


  1. Just as a clarification, I believe HCSD also has a catastrophic insurance policy (all self-insured organizations do, or should) in case claims exceed a certain threshold.

    At least that's what I was told by the board President.

  2. Yes, the district does have such coverage. It can be thought of as an extremely high deductible policy, where the district can collect only when the claims by a single employee (or dependent) exceeds X, or if the total of all claims in a year exceeds Y.

  3. The crux of your argument is this sentence:

    Which is not true, at least according to page 63 of this document:

    The School Employee Health Care Board (SEHCB) has been directed to update the Mercer report with current data so we should know definitively whether money will be saved by pooling across the state.

    There are other aspects of pooling where savings should result. Currently, we have 614 districts with hundreds of insurance committees, hundreds of insurance brokers, untold hours of time spent by both district administrators and union officials, all duplicated and none of which are helping kids. Statewide pooling of health care would eliminate all of this overhead while maintaining excellent coverage and simulataneously reducing premiums averaged across the state.

    Your comment equating the two political parties is, at least for now, nonsense. If Governor Strickland and the Democrats had won the 2010 election in Ohio, the debate would be what kind of statewide tax you want to increase, income or sales. Governor Kasich and the GOP legislature have taken tax increases off the table. You might not agree with one position or another, but you can't argue that the parties would have handled Ohio's structural defict (just to name one issue) the same way.

  4. Marc:

    It might be a limitation of this blogging software, but the sentence you wanted to quote didn't show.

    I know the Mercer data needs to be updated to give some guidance to the decision, but we both know it's not conclusive because it won't be based on real competitive bids from the carriers. Or maybe I misunderstand and the intention is to create a statewide self-insured pool, not just a buying pool. In either case, the final numbers aren't known until someone sits down and negotiates a deal.

    Similarly, we can't have a conclusive argument about how Stickland might have handled the deficit differently than Kasich because we'll never get a chance to run the experiment.

    But I will observe that Strickland's attempt to rewrite the school funding mechanism resulted in virtually no change whatsoever - at least not from the perspective of our school district, where the per-student state funding changed by only $16.00. I think this speaks to how much political capital a Governor has to be willing to spend to make a radical change. For Strickland, it's wasn't so much, and it's probably what cost him the election.

    Kasich can't kick the can down the road as did Strickland: D-Day is here. So he'll have to make some radical decisions like it or not. We'll see how long he can stand up to the pressure to not raise taxes. Ronald Reagan caved on that promise, and of course we all remember "read my lips, no new taxes" from Geo HW Bush. That didn't stick either.

    It a cliche to say this, but we're in uncharted territory. In past downturns, we could assume that as the economy recovered, American middle class workers would be put back to work in the steel mills and manufacturing plants. That was especially true in Rust Belt states like Ohio.

    That's not going to be the case this time around. Factories that have been shuttered in the last decade will likely never reopen. Those factories exported manufactured goods across the country and around the world, and drew money from outside the state into Ohio.

    I was talking to a Tea Party group the other day, and spoke about the source of income for schools. One guy held up his wallet and said "It's all from right here!" I pointed out that I worked for company that did business globally, and that something on the order of 20% of the revenue we generated came from Europe and Asia, so therefore a significant chunk of the property taxes we paid to our school district was with money that came from outside the country. That took a good chunk of the funding burden off the local taxpayers.

    Pulling in money from other places is what makes cities, states and countries wealthy. Capital cities are grotesque versions of this, because they do pull in money from other places - but it's the taxes collected from the citizens and businesses in other parts of their State. Good for Central Ohio to have both the state capital and the land grant university both here.

    It will be exceedingly hard for the Governor to bring in the kind of money-from-other-places industries which made Ohio prosper for many years. There's a mass-attracts-mass thing that goes on, and I fear we lost the critical mass this time around. We need some kind of high-gravitational-pull star industry to pull more industries in, the way the autos did for Detroit in the first part of the 20th century, or the microcomputer industry did for Silicon Valley in the last half.

    Until then, it's going to have to be spend a lot less, and tax a bit more I fear. And it's gonna be painful. We'll see if Kasich - and the people of Ohio - have the guts.

    Anyway, I appreciate the dialog and debate. You're a valued friend and mentor.

  5. Kasich is bound to have to eat his words - and even if he doesn't raise state taxes, we will just end up paying higher local taxes as well as higher "fees" for everything the state regulates. He simply can't make up $8 billion by simply cutting spending - the math (not that we have seen any) just doesn't work. I'll agree that it is going to be painful - kind of the same way I feel about the future of the HCSD - as well as most other districts.
    My small business saved on health premiums by going with progressively higher deductibles - and then self-funded that part of it so the employees didn't take the hit. Turns out very few of our folks were running up big bills so we have come out ahead the last 3 years or so. There is risk associated with that plan but so far, so good. Might be too risky for the districts though given the number of employees.
    Maybe the 614 districts across the state need to form "pools" for many things, not just insurance? Every dollar is going to count, even more so than in the past.

  6. Hillirdite - exactly right.

    Governor Kasich would be crazy to consolidate school districts because it very disruptive and entirely unnecessary. You can achieve the same result by consolidating services. In Franklin County, is there any reason to have 16 transportation supervisors, 16 food service directors, 16 separate organizations duplicating curriculum services, teacher mentoring services and a wide range of other tasks.

    The Franklin County Education Service Center already provides shared services. All that would be required is to expand the scope of services that can be provided. If you do this across the state, you can save some serious cash without impacting education. It does come at a cost, however - the perceived loss of local control. If something goes wrong on a school bus, parents like to be able to call the principal, superintendent or the board. A county-wide operation would be less accountable.

    I disagree with your view that the Governor will raise taxes. There are too many members of the legislature that signed "no new taxes" pledges during the campaign and Governor Kasich said as recently as yesterday that he will not raise taxes. We'll know it a month or so...

    Paul there is a bug in your blogging software that seems to object to pasting text. When I try, I get a little red icon that looks like a camera. When I remove the pasted text, all works as it should.

  7. Marc: Yeah, I think the issue is that the editor doesn't permit certain HTML tags. I've run into that when pasting stuff from another program. What that happens, I paste first to NOTEPAD and see if there's any gunk I need to edit out.

  8. Marc, why consolidate the services and not the administration?

    Just b/c we have always done things a certain way doesnt make it right.

    Look at the Newsweek rankings for high schools in the Fairfax County Public Schools.

    Then go the newsweek website and look at the rankings of Franklin County Schools.

    Apparently a 'loss of control' does not always result in reduction in performance

  9. T:

    By the way, it's me not Marc which keeps bringing up the point of local control. But it's in the context that most things that most people complain about regarding their schools can be dealt with at the local level if the School Board and community have the will to do so. The trouble is, not many do.

    I think the public is of two minds when it comes to this local control stuff. For those things which are particularly painful to deal with locally - notably negotiating the contract with the teachers union - there are those who would like to see the State step in and take away some of the power of the unions.

    But it's a slippery slope I fear. We don't talk about it out loud, but many people very much like the idea that their school district boundary is like an invisible fence around their communities, often used tacitly as an economic border which might as well have a sign on it saying "Po folks keep out."

    The more we start looking to the State to fix the economic problems in our districts, the greater political leverage the State has dictate other aspects of school operations, such as district boundaries and consolidation.

    All I'm saying is that if you let the camel push his nose farther into the tent...

  10. 4 words: Right to Work state

  11. Hillirdite: Actually, you can close the budget gap jut by cutting spending. The Dispatch had a tool to let you make your own decisions on how to close the gap. Their goal, I believe, was to show people how "difficult" the Governor's job is.

    In reality, it was incredibly easy to close it, and to do so not only without increasing taxes, but by CUTTING them as well. (Which, of course, we know spurs economic growth and therefore revenues too, but their calculator didn't try and address that.)

    I almost balanced the budget the first try ($350m deficit) without really trying; the next time I had a $1.5b surplus...

  12. Anon - of course it is "incredibly easy" to just go into a budget and take out what YOU feel is not necessary. But that is a fantasy. I'll bet I could come into your house and cut YOUR budget that easily too - "OK kids, no more cable, no more cell phone, turn the heat down to 65, turn the AC off all summer, etc etc. ad nauseum. As I said, fantasy.
    Of course you CAN close the gap - I'm the first one who says many government entities have a spending problem, not a revenue problem. So I'm with you at least part of the way.

  13. T, when you share services, you cut administration. You can achieve most of the savings associated with consolidating school districts by having those school district share administrative services, only you accomplish that objective with none of the angst typically associated with separating a community from their school or their school district.

  14. Hillirdite: it was incredibly easy, but not because I was cutting someone else's budget.

    I approached it in a very simple manner: we have "needs" and "wants". When Ohio is in the mess it is today, the "wants" get cut.

    And that's exactly the same way I would cut my own budget, and recommend anyone else cut theirs too.

    (And heat above 65 isn't necessary when you can put on an extra sweater or a blanket. A/C is another matter though :-) )

    In all cases, it's a spending problem. On that we definitely agree!