More Colleges Turn to 'Self Insurance' to Deal With Rising Health-Care Costs
By creating their own systems, institutions end up with more control and more risk
By AUDREY WILLIAMS JUNE
As at most colleges, everyone at Willamette University had come to dread the
Paying for Employee Health Care
annual premium quote from the health-insurance company.
Administrators couldn't predict or control premiums that kept going up, in one year as much as 36 percent. Meanwhile, employees got used to paying higher co-payments and deductibles and to tighter rules for prescriptions.
"We did all the things that everybody else has done" to keep health insurance affordable for employees and the university, says Carol Black-Rossow, the college's human-resources director. "Like everyone else, we had multiple years of large increases."
Two-thirds of colleges reported in a 2002 survey by the College and University Professional Association for Human Resources that their health-care insurance rates increased by more than 10 percent in the previous year; one in seven respondents said their premiums had increased more than 20 percent. The study, conducted for the first time last year, will be repeated this summer.
As early as the mid-1990s, Willamette and other colleges in the Oregon Association of Independent Colleges and Universities bandied about the idea of approaching insurance carriers as a unit, in hopes of negotiating a group discount. The carriers weren't interested, mainly because they had no incentive to make concessions for customers they already had.
But in the fall of 2001, the group of 17 Oregon colleges discovered another way in which sticking together would help them get a handle on their costs. The solution, they thought, was to form their own insurance company of sorts. The payoff, they hoped, would be benefits rules set by them, not by outsiders, and more-moderate premium increases.
The foundation for what is now known as the Oregon Independent Colleges Employee Benefits Trust, a consortium of seven colleges, was formed.
The practice is called "self funding" or "self insurance." Consultants say that as the rise in health-care costs continues to wreak havoc on college budgets, more institutions are likely to look to self-insurance as a way to control what benefits they offer to employees and better manage how much an institution should spend to provide them. According to the survey by the association for college human-resources workers, 36.2 percent of survey respondents had self-insured health plans in 2002. The survey drew responses from 392 institutions.
Paying Their Own Way
How does self-insurance work?
Rather than paying a fixed premium to an insurance carrier, employers divert their contributions and those of their employees to a trust fund. That money is taken out only to pay claims and administrative costs. An underwriter or actuary sets premiums, based on the history of past claims. Usually, self-insured groups hire outside administrators to design their benefit plans and process claims. If costs are lower than expected, the excess money flows into a reserve fund.
The Oregon colleges were inspired by 16 private colleges in Tennessee, which formed a self-insurance consortium in 2001. When the Tennessee trust officials came to Oregon to talk about how they had formed their self-insurance plan, representatives from both Oregon and Washington State's private colleges listened in rapt attention, Ms. Black-Rossow says.
Afterward, the colleges formed a committee to figure out whether a self-insurance company could be owned by institutions in two states. About eight months later, the group concluded that a joint venture would be too difficult because the laws regulating self-insurance were different in each state.
From there, the Oregon colleges, with the help of lawyers and consultants, crafted a self-insurance plan that goes into effect this week. It will cover about 5,000 people --employees and their dependents --at George Fox University, Lewis and Clark College, Linfield College, Pacific University, Reed College, Western States Chiropractic College, and Willamette.
The Oregon independent-college association's other members, institutions like Concordia University, Pacific Northwest College of Art, and the University of Portland, decided not to join. Some of the colleges that stayed out said the plan was too expensive, although in some instances it would have given employees expanded benefits.
To be sure, self-insurance isn't always cheaper, but it can be. The Oregon colleges expect to pay $9.7-million in premiums this year, compared with the estimated $10.5-million the institutions would have paid in combined premiums under their fully insured plans for 2003, says Rico Bocala, a benefits consultant at USI Northwest who helped guide the Oregon group through the self-insurance process. Four institutions are paying lower premiums than they were; three are paying more.
The real savings may come in administrative costs. Under traditional insurance plans, roughly 18 to 25 percent of the premiums went to administrative costs, but that will drop to about 13.6 percent under the self-insured plan.
Savings from self-insuring won't necessarily be realized up front. But colleges hope for an accumulation of savings over time. "This is not a panacea. It's not the silver bullet," says Mr. Bocala. The real bonus for colleges is "they have a say in what happens in this very difficult health-care environment," Mr. Bocala says.
Self-insured employers design their own health plans, deciding which benefits are important, who should be eligible, and at what limits to cap insurance.
They can assess whether to raise --or lower --premiums at a time that better coincides with the annual budget. And they are not under pressure to make a profit.
"Obviously, we all want to save money, but you can't go into it with that being the No. 1 priority," Ms. Black-Rossow says. "Control and stability were at the top of our list."
Observers say that over all, self-insurance tends to maintain if not improve the benefits employees had under previous plans. For instance, Willamette employees can now get alternative medicine, including acupuncture and massages, under the new self-insured plan, an option not previously available to all employees. The Oregon institutions also still offer coverage through a health-maintenance organization.
"You need to give people options," says Mr. Bocala.
Self-insurance isn't without risks. Consultants say the plans should provide coverage for at least 1,000 people --which is why small colleges usually try to form self-insurance consortiums. The more participants, the greater the pool of people over which to spread unpredictable costs.
To protect themselves against a run of high-dollar claims that could bankrupt their self-insured plans, colleges buy "stop loss" insurance, which can reimburse them for individual claims above a specified amount or acts as a safety net for the plan as whole. Still, there are times when unexpected expenses can outpace the amount of money a plan takes in, forcing an insurance trust to dip into its reserves.
Dealing With a Deficit
Eventually, if the situation isn't corrected --typically by raising premiums or changing the benefits offered to cover the higher costs --the plan will run a deficit.
Texas A&M University System, facing an estimated $4.5-million shortfall, recently had to change its self-insurance plan midyear to avoid such a scenario. In March, certain co-payments and deductibles were increased or introduced to help the plan dodge the deficit. For instance, charging more for drug co-payments will save about $1.9-million by August 31.
The plan covers 31,000 people --employees, their dependents, and retirees at all the Texas A&M campuses and several state agencies.
"As a governmental entity, we can't crank up the profits," says Steven W. Hassel, director of benefits programs for the Texas A&M System. "You really almost have to do a semi-annual adjustment if you want to stay current with the trends."
Last year, the Texas A&M self-insured plan, which was started in 1995, nearly depleted its reserve fund when it paid out $3.5-million more in claims than it received in premiums.
Part of the problem, Mr. Hassel says, is that health-care costs increased much faster than experts predicted in April 2002. That's when Texas A&M had to estimate how much health-plan rates would be for the year that began in September. But by the fall, costs were about 3 percent higher than the 13.5-percent increase projected by actuaries, mainly because of pricey prescription drugs, Mr. Hassel says.
Employees at Texas A&M, who also have the option of joining one of several fully insured HMO's offered by the system, have already been warned that more plan changes will probably come in September.
"Unfortunately, it's not so much if, but when, you'll have to deal with this," Mr. Hassel says. "You do begin to wonder how much longer employees and employers can sustain this."
About a year and a half ago, members of the Independent Colleges & Universities of Florida decided they'd had enough. After a failed attempt to get an insurance company to sell it a fully insured plan as a group, the colleges, in January 2002, also turned to the Tennessee consortium for help.
Soon, 15 of the Florida association's 27 institutions agreed to chip in $5,000 each to pay for a feasibility study that, in part, would help members compare what each of them was spending for health care. The study showed that some institutions saw health-care costs go up 8 to 10 percent annually while others were dealing with increases in the 40-percent range.
"We learned that some of our schools were seeing rates increase much faster than national trends," says Ben Donatelli, a consultant who helped craft its self-insurance plan.
The hard part was agreeing on what benefits to offer employees and how to structure the health plans. A committee worked for nearly five months, hashing out such items as a definition for the "full-time employee" who would be eligible for benefits.
Eventually, the panel came up with three plans that were accepted by 15 colleges --although not all were part of the original 15 that started the self-insurance process. Insurance carriers, third-party administrators, and stop-loss insurance carriers quoted their rates for the plans. "They were significantly lower than what some schools were anticipating," Mr. Donatelli says.
In the fall of 2002, nine institutions committed to the new plan. Mr. Donatelli says some of the other institutions gave in to pressure from their current insurance brokers, while a few were in the midst of another significant project and didn't want to take on a new venture.
Those who moved forward had to agree to stay with the consortium for five years. Such a safeguard protects the critical mass of plan participants needed to make self-insurance less risky. State officials also required the group, the Independent Colleges and Universities Benefits Association, to put up $500,000 to pay off unmet claims if the consortium were to break up, Mr. Donatelli says.
The self-insured plan took effect on April 1, covering 4,000 people at Clearwater Christian College, Florida Institute of Technology, Nova Southeastern University, Palm Beach Atlantic University, Rollins College, and Southeastern College of the Assemblies of God. By June, that number is expected to rise to 5,000 as three more institutions --Edward Waters College, Saint Leo University, and the University of Tampa --join the consortium once their current insurance coverage expires.
In the end, the process generated "about eight or nine inches of material" that had to be filed with Florida state agencies that questioned the proposed group relentlessly for five months, Mr. Donatelli says. "You had to really want to do this to get it done."
No Thanks
The hefty start-up costs associated with the formation of the Florida colleges' self-insured plan were just one of the reasons that the University of Denver decided about six months ago that switching to self-insurance would be a bad move.
Paying its own claims would eliminate a 2-percent state tax the university pays based on the amount it spends on premiums, says Dick Gartrell, director of human resources. And the institution would also be able to reduce its administrative costs by at least 6 percent.
The savings, officials say, weren't great enough to offset the potential risks.
"As volatile as the health-care market is right now, we just decided it wasn't the right time," Mr. Gartrell says. "There are so many new medical procedures that are so costly. If you end up with a few cases of those, you could really run into problems."
Health-insurance costs for the 2004 fiscal year, which begins in July, are expected to run the University of Denver $4.9-million, Mr. Gartrell adds. For 2003, the university's cost for insurance that covers about 2,050 people is $4.5-million.
In Oregon, state law allows the Oregon benefits trust to accept members from contiguous states after coverage takes effect. "I'm very confident that others will join as it gets harder for them to sustain their fully insured plans," Ms. Black-Rossow.
The University of Puget Sound says it plans to apply for membership. It's among the Washington institutions that tried early on to form a two-state self-insured benefits group.
Washington's private colleges proceeded on their own, but the venture collapsed. It was too hard for the 10 members of the Washington Association of Independent Colleges and Universities to agree on what benefits the group should offer and how much they should cost.
"Some people were self-funded, some were not. We were all paying different premiums," says Karen L. Goldstein, vice president for finance and administration at Puget Sound. "Some schools that were paying a lower amount didn't want to pay a higher amount to join."
Today, the 671 employees who are eligible for benefits at the University of Puget Sound have only one health plan, rather than two. That's because the discontinued plan didn't draw enough participants, and claims were more than the premiums, says Rosa Beth Gibson, the college's human-resources director. The institution's former carrier decided not to renew its contract with the university for 2003.
Meanwhile, premiums on the university's single health plan have increased nearly 10 percent. Last year, the increase was a startling 28 percent. Such fluctuations may make self-insurance even more attractive in the future.
Section: Money & Management
Volume 49, Issue 34, Page A33