Teacher salaries and benefits are by far the largest expenditure in every school district, averaging around 82 percent of the entire budget.99 Benefits packages by themselves take up roughly 25 to 30 percent of the compensation budget100, and health insurance is typically the second-largest item in the annual budgets of school districts, just behind salaries and wages.101 With health care costs rising and school district revenue projections remaining flat, school districts now more than ever must be value-based purchasers of employee benefits.

Competitive bidding among a variety of health care providers and administrators allows school districts to identify the most cost-effective supplier of benefits.

ANALYSIS

Former teacher and union leader Myron Lieberman explains that unions encourage increases in benefits over salary increases so that "the salary schedule doesn't look as high, which helps unions maintain public support. The other benefit is that they're able to tell teachers what a terrific deal they got." Often, union leaders argue that teachers aren't getting paid enough-giving voters the sense that schools are underfunded.102

Prior to 1994, the primary insurance plan options for school districts were the MEA-controlled Michigan Education Special Services Association (MESSA), the School Employers Trust (SET), Blue Cross and Blue Shield of Michigan (BCBSM), various health maintenance organizations (HMOs) and third party administrators (TPAs), and some modified traditional plans developed in conjunction with TPA services. A detailed description of each of these plan options can be found in Appendix I on page 45.

Two changes since 1994 have had an impact on the packaging and delivery of health care benefits to districts. One is in the way BCBSM is marketing its products and the other is the increased popularity of managed care products. Both changes are convincing many school boards, administrators, and union members to consider different options for their health care plans rather than "rubber stamping" MESSA as their insurance carrier.

In the past, most administrators automatically turned to the high-priced, union-run MESSA because they were unwilling to battle with the union for changes in employee health care plans. Since revenues could always be increased through regular millage campaigns, many assumed cost considerations were relatively unimportant. MESSA's stronghold in the school market is largely due to this miscalculation and also to its former ability to leverage strikes to exact yearly average benefit increases in excess of nine percent for the last ten years.

A June 1997 Michigan Insurance Bureau audit revealed that MESSA had a surplus of $105 million in excess premiums. MESSA's effective premium rate increase for July 1, 1998 to June 30, 1999, as approved by the Michigan Insurance Bureau, is 10.97 percent. In order to comply with the terms of its 1996 settlement agreement with the state of Michigan, MESSA will apply $29 million of its excess premiums surplus toward reducing the final rates charged to its members.

Some school boards have objected to using MESSA, a wholly owned subsidiary of the MEA, because a portion of the school districts' health care premiums is used to bolster the political and organizational strength of the MEA.103

Funding changes necessitated by Proposal A of 1994 are also compelling many school boards to seek lower cost alternatives to MESSA that maintain current employee benefit levels. Now that changes in the law wrought by PA 112 have eliminated union strike pressure, over 300 districts still using MESSA have the opportunity to explore ways to better manage their resources within existing funding levels.

Unfortunately, even after the PA 112 reforms, many school districts are prevented from changing their health care plans because they failed to negotiate the proper language into their collective bargaining agreements. The areas of an agreement that address funding, specific benefits, and the agreement's relationship with the master insurance contracts are critical for control of health care plans, yet in many cases district officials have not evaluated this language for years.

RECOMMENDATIONS

1. School districts should take advantage of changes in the law to regain control of, and restore flexibility to, health care decision making by (a) removing any contract language that identifies a specific health care insurance administrator, and (b) naming themselves as policyholders for their insurance plans.

(a) Budget pressures and responsible management require school districts to maintain maximum flexibility to choose the most cost-effective ways to provide their employees with bargained benefits. Districts that have found themselves contractually "locked in" to using the expensive MESSA plans now regret surrendering the freedom to choose other administrators.

Accordingly, district negotiators should bargain specific benefits without naming any specific administrator; depending on the negotiated language, a change in insurance administrator or the method of funding should not affect the collective bargaining agreement as long as the benefit levels are bargained in good faith.

(b) PA 112 has made the right to name the holder of a school district's health care insurance policy a prohibited subject of bargaining. School districts should take this opportunity to name themselves as policyholders to the insurance plans they choose. Districts gain a number of benefits from such a move, including the following:

  • The ability to acquire the claims history data associated with their chosen health care benefit plan. A claims history is a listing of the type and amount of the medical claims made by employees covered by a health care plan. Having the claims history allows a district to evaluate its own data and is essential for acquiring competitive bids from different insurance providers. This information does not violate employees' privacy rights and is necessary for making sound business decisions.
     

  • The chance to manage components of the plan such as prescription drugs, mental health benefits, and provider network development.
     

  • The opportunity to purchase supplemental programs independently (e.g., life, disability, dental, and vision insurance). This allows school districts to obtain the best value by packaging benefits to fit the needs of the district and its employees.

Districts using MESSA as their insurance administrator have experienced reduced control over their health care plans because MESSA names itself as the policyholder for the plans it takes out on behalf of districts and refuses to share certain vital information about those plans with school boards and administrators.

2. School boards should competitively bid health care plans in order to minimize their expenditures while maximizing the quality of employee coverage.

Competitive bidding among a variety of health care providers and administrators allows school districts to identify the most cost-effective supplier of benefits.

Districts that have sought bids and ultimately switched from MESSA to other insurance carriers have saved from 6 to 28 percent on the cost of providing identical coverage to their employees.104 That has translated into savings as much as $500,000 per year.

Please see Appendix I on page 45 for a comparison of various health care plan options that school districts should evaluate.

3. School district negotiators should come to the bargaining table prepared with benefits proposals that are based upon structured total compensation models.

The school board is responsible for the thorough analysis of all cost and budget controls for each line item, including payroll, benefit, and pension funding. Total compensation models help that analysis by calculating the cost of every portion of employee wages and benefits, including paid leaves, fringe benefits, employer-related costs such as Social Security and workers' compensation taxes, and other expenses.

School districts must take care to bargain benefits language that allows flexibility in health care funding, including the option of self-funding either all or part of their health care plans. Negotiators should be well-versed in all aspects of current and proposed vendor contracts: the well-prepared district negotiating team comes to the bargaining table with knowledge gained from evaluating a variety of health care plans.

4. School boards must work with employee unions to develop trust and a recognition of the need for change.

Teachers and other district employees may be suspicious of changes in their health care benefits, fearing the reduction or elimination of benefits they currently enjoy. Less expensive alternatives to MESSA that provide the same level of coverage do exist, and boards and employees should work together to implement the best alternative plan that fits everyone's needs. Teachers should always be informed about any proposed changes in their level of health care benefits.