Q & A about
the CHIPD recommendations
Why are the changes necessary?
At U-M, costs for health insurance and prescription drug plan premiums 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.
That rate of increase cannot continue if the University is to maintain a high level of quality and a range of choices in its health care plans. The enormous increases in the University’s share of health insurance premiums—from $85 million to nearly $175 million over the past five years—are consuming resources that would otherwise be used for academic programs, salaries, and the like.
How will these changes affect employees?
Most employees would experience increases in their premiums as the new premium structure more accurately allocates to the employee the cost of choosing more expensive coverage. Some employees, particularly those falling into the new Tier 2, would pay comparatively less than if no changes were made. The CHIPD report includes tables that will give employees and retirees an estimate of how the proposed changes might affect their co-premiums.
How will these changes affect graduate students?
The changes would affect only those graduate students who receive their health insurance coverage through the University as employees. Graduate students who are on fellowship also have access to University-sponsored insurance, but their premium rates are set separately from the process used to recommend rates for employees, so they are not affected by the CHIPD proposals.
Graduate students who are employed as graduate student research assistants
can elect coverage in the GradCare plan. Graduate students who are a member
of the GEO bargaining unit have a range of plan options available to them
as their contract specifies that the health insurance
coverage offered to instructional faculty will be available to GEO members.
The current GEO contract specifies that the University contribution toward
health insurance coverage will be the same as for other University instructional
staff for the specific coverage selected.
For employed graduate students, the report tables that display the estimated impact of the changes would allow students to determine individual impacts depending on the plan and coverage tier they elect. For graduate students on fellowship who elect GradCare, student premium rates for 2004 are $0 for one or two covered individuals or $20 per month for three or more individuals.
Are you considering these changes because of the state’s budget problems and the cuts in funding to the University?
All employers are grappling with concerns about rapidly rising health care costs. This problem is not unique to Michigan and it has been going on for many years. We would have to address our health insurance premium structure regardless of the state’s budget climate.
Why are health care costs rising so fast?
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.
Why didn’t the committee recommend adjusting premium rates by an employee’s income level?
The committee explored this idea, but it presented a number of problems. The University only has information about the salary level of the employee, and not any other members of the household. So it would be hard to implement any kind of “sliding scale” for premiums based upon income that would be fair. The committee concluded that setting premiums according to salary could create a number of unintended consequences, and that such a policy would require further study before implementation.
Nevertheless, the committee was very concerned about the impact of these changes on lower paid staff. It recommended that the University study ways of addressing disproportionate impacts, including adjustments of cash compensation.
Is this plan meant to shift costs to employees, or will there be real savings?
A portion of the cost increases in health insurance premiums will be shared with employees, but the University will continue to pay for the majority of those cost increases. In fact, we believe that redesigning the premium structure will encourage employees to choose the lowest-cost health insurance plan that meets their needs. We anticipate these changes will minimize future cost increases for the University and for employees alike.
Why do you want to create a new tier for insuring one adult plus children?
It is much more expensive to provide health care to adults than to children. The new tier structure recognizes this and helps to lower premium costs for many employees by better aligning the premium structure with cost experience.
How will the University address concerns of retirees, faculty and staff members who live far from Ann Arbor?
The CHIPD report acknowledges that of the health care options currently offered by the University, only Blue Cross-Blue Shield provides comprehensive coverage with complete portability. The committee recommends that the University explore offering additional affordable, comprehensive health insurance plans that are portable for those who live in a variety of geographic locations, particularly retirees. We are actively developing an RFP (Request for Proposals) for an additional plan that would be both comprehensive and fully portable, and would be less expensive than BC/BS. It is our goal to have such a plan added to the choices available for 2005.
How do these proposed changes compare to what other employers are doing?
We do not believe these changes will hurt our ability to compete for faculty and staff. CHIPD looked at three sets of employers—local and regional employers (such as Pfizer and General Motors), other top universities across the country (such as the University of California), and other regional health systems (such as Henry Ford Hospital). While competing employers offer a range of benefit levels, the proposed changes would result in a University contribution to health insurance premiums that is more generous than the medians for the employer groups studied.
We must continue to provide a high-quality, competitive benefits package for our employees. Doing so is essential to the ability to recruit and retain the highest quality workforce. CHIPD recommends that that we review our health insurance premium structure regularly in light of our total compensation package, in order to make sure we remain competitive with other employers.
Does the proposal specify that the University will cover 95% of an employee’s insurance premiums, or 85%?
CHIPD recommends that the University contribute 95% of the average premium of the two lowest-cost comprehensive plans for employees and retirees. Under this proposal, the University would contribute a smaller percentage of the premium for more expensive insurance plans, and a smaller percentage of the premium for spouses and other covered dependents.
In his charge to CHIPD, the Provost asked the committee to consider a goal of 85% for the University contribution to the aggregate total cost of health insurance premiums. The committee concurred that the 85% goal was consistent with national norms. That figure would represent the University proportion of total premium costs for all plans and for all covered individuals.
What will my premium actually be in 2005?
We cannot know at this time what actual premiums will be for 2005. Our insurance providers will establish 2005 premium rates sometime during the coming year, prior to open enrollment in Fall 2004.
What is the benefit of taking premiums out of my salary on a pre-tax basis?
When you earn a salary, the University withholds taxes for Social Security and Medicare (payroll) taxes, federal income tax, and state income tax—and as you know, when you file your income tax returns, you are paying those taxes to the government. When you pay your health insurance premiums on a pre-tax basis, the amount of the premium reduces your taxable income and you do not pay taxes on that amount. So your take-home pay is greater than it would be if the entire salary amount were taxed, and your eventual tax bill is less than it would have been.
For example, let’s say your insurance premium is $100, and let’s assume all your taxes together add up to a rate of 40%. That means your $100 insurance premium only reduces your take-home pay by about $60. You avoid paying $40 in tax so the net effect of a $100 co-premium is only $60.
How can a Flexible Spending Account help me?
Flexible Spending Accounts (FSAs) allow you to set aside a certain amount from each paycheck on a pre-tax basis, and put that into an account to be used for medical expenses that aren't covered by your insurance.
While you can't use an FSA to cover your share of your health insurance premiums, which is already deducted from your paycheck on a pre-tax basis in most cases, you can use FSAs for a variety of other expenses. Such covered expenses include: deductibles; co-pays for office visits and prescription drugs; vision care, including eyeglasses, contact lenses, and lens solutions; dental care, including orthodontia; and a number of over-the-counter medications and medical supplies. Using an FSA can reduce your tax burden and ultimately reduce the cost of your out-of-pocket medical expenses.
How will you handle families where both adults work for the University?
Families in which two adults work for the University can elect the mix of coverages that provides the greatest benefit (and the lowest premium) expense for the employees. In a family with two adults and no children, employees would benefit the most from having each person choose single coverage. In a family with two adults and one or more children, it would be best to have one person choose single coverage and the other choose coverage for one adult plus any number of children.
What’s the impact of these changes on retirees?
Under the proposal, we would still offer the same coverage tiers to our retirees, their spouses, and other eligible dependents. We would still offer a choice of plans, and we also are actively exploring the addition of another comprehensive, fully portable plan as an alternative to BC/BS. The committee did not recommend any changes to the University’s practice of reimbursing a portion of the premium for Medicare Part B.
Premiums for retiree insurance would be established according to the same methods recommended for active employees. Retirees would see an increase in cost-sharing of premiums under the CHIPD proposal, just the same as active employees.
Will these changes cause shifts in enrollment patterns?
Yes, people may change their insurance elections as the cost of the various choices becomes more apparent to them.
Will you continue to have an opt-out policy for people who decline U-M-provided insurance?
The opt-out policy rewards employees who can obtain their health insurance from, say, a spouse’s employer at a favorable rate. However, we do not want our employees and their dependents to go without health insurance. The committee recommended the University continue allowing employees to opt out of U-M-provided health insurance only if they certify they are insured elsewhere.
Under this new plan, would spouses be better off choosing to be insured by another employer?
Employees and retirees will choose the insurance coverage that best meets their family’s needs. In some cases it will make sense for employed spouses to seek insurance through their own employer. In other cases, electing family coverage through the University will be the best option.
If these changes don’t take effect until 2005, why must a decision be made by the end of the year?
Open Enrollment takes place in October 2004 for benefits effective in January 2005. In order for that to happen, the University needs several months to request proposals from vendors and establish the actual premium rates for 2005. That process must begin early in 2004 to prepare for Open Enrollment in the fall. Also, making a decision soon will give employees and retirees a full year in which to plan for changes in health insurance premiums before they take effect in 2005.
Who will make the final decisions about our health insurance premiums for 2005?
The president and the executive officers will decide what changes to make in the health insurance premium structure. Their recommendations will be presented to the Board of Regents for consideration, most likely in December.
How can I communicate my opinions about these proposed changes?
You may attend one of the campus programs that have been scheduled in the next few weeks. Or, you may send e-mail to chipdcomment@umich.edu. Your feedback will be considered confidential. The comments made via e-mail and in the various campus sessions will be compiled and shared with the executive officers and the Regents. They will carefully consider the feedback they have received before making a decision in December.
