Concern About the Financial Efficiency of MESSA

Although it is not a unique phenomenon, MESSA insurance premiums have followed a trend of rate increases for the past several years. MESSA does not suggest that its members should help cover the cost of premium increases, but that any increase should be paid by school districts. Past performance also indicates that in those years when MESSA retained earnings from the premiums paid by school districts, those earnings were used to fortify insurance benefits for MESSA members. Even though the money came from taxpayers, MESSA apparently never considered returning it to school districts in the form of lower insurance rates. Hence, school districts are particularly concerned about MESSA's financial performance and the behavior of its insurance premiums.

There are many reasons why insurance premiums rise from year to year. For the most part, premiums fluctuate because of changes in operating costs, inflation, and actuarial predictions of future claims. In the case of MESSA, premiums are rising mostly due to unreasonable benefit designs, but inefficiency in the administration of MESSA insurance plans is also a cause.

Between 1989 and 1992, MESSA's operating expenses increased 32.6 percent, from $20.8 million in 1989 to $27.6 million in 1992. This translates into an average annual increase of 10.9 percent across the three year period. Yet during this period, the number of participants in MESSA insurance programs remained relatively stable and there were no significant changes in benefit structures or operations. Over the same time frame, the consumer price index rose 13.1 percent, or 4.4 percent per year on average. This makes the rise in MESSA's operating expenses more than twice the rate of inflation. The rise in MESSA's operating expenses should not be confused with the typical rapid increase in the cost of health care. In other words, MESSA's operating costs increased without any apparent justification, because there were neither changes of significant consequence to MESSA's insurance plans nor any inflationary factors that may have driven up costs.

Also between 1989 and 1992, MESSA had $95.4 million in operating expenses, or $23.9 million per year on average. If 80,000 people are participating in MESSA health insurance plans and 20,000 receive other lines of insurance through MESSA, the average annual cost of MESSA administration is almost $240 per member. In the competitive private sector, these per participant operating costs are often less than one-third of what MESSA spends. This trend indicates that there has not been a noticeable effort to decrease costs. All things considered, the public should be quite skeptical about increases in MESSA's operating expenses. MESSA has not been very effective in reducing these costs, and school districts must pay the consequences through higher premiums.

Another area of concern for school districts regarding MESSA's financial performance is its accumulation of savings and retention of earnings. According to MEA Executive Director Beverly Wolkow, on the subject of MESSA, "We just aim to break even."42

Yet between 1989 and 1992, MESSA accumulated a net gain of $87 million on revenues of $1.316 billion. In other words, 6.6 percent of MESSA's total receipts during this period were not expended on insurance benefits, but were amassed as surplus income. At the end of fiscal 1992, MESSA had reserves of $74.7 million covering gross premiums of $341.9 million. These reserves may appear to be the equivalent of 2.6 months of claims, but MESSA does not use them to pay for any claims! Blue Cross maintains a separate insurance reserve for MESSA that is used to cover claims resulting from unusual losses or bad experience.

With this kind of financier reserve, MESSA has several options. It could increase either the covered cost percentage of benefits or the actual quantity of benefits provided. MESSA could also use the reserves to stabilize rates whenever Blue Cross attempts to recover a significant loss resulting from abnormal utilization of benefits. It can use reserved funds to level out premiums among school districts, so districts with good experience ratings subsidize those with poor ratings. Or, when MESSA quotes insurance rates for school districts, it can "low ball" the initial price and make up any difference through higher premiums in subsequent years. Regardless, MESSA is taking in more money than it is spending, and a portion of the public funds that MESSA receives from school districts is accumulating as retained earnings.

Furthermore, MESSA has over $100 million in the form of cash, cash equivalents, investments, and receivables. Approximately $74.7 million of this reserve can be applied as a surplus, or the aforementioned "reserve." And while MESSA will argue that this money is an insurance reserve, nothing prevents MESSA from applying it to any expenses. For example, if any effort was initiated by a public body to hinder the future operation of MESSA, this fund could be tapped to finance the opposition. MESSA might do well to keep only the necessary amount of reserve funds for expenses such as product modifications, and then return the excess money to customer school districts in the form of premium reductions. Nothing presently compels MESSA to give any surplus public funds back to school districts, even when the additional funds are a blatant excess.

It is important to distinguish between the design of MESSA's benefits-the type of coverage provided-and MESSA's cost of administering those benefits. For the design of the benefits contained within MESSA health insurance plans, MESSA's total cost of providing the benefits can be among the lowest available. One reason for this is that benefit costs decrease as the size of purchases increases. In other words, MESSA has produced an economy of scale by representing in excess of 80,000 participants.

Because of this, MESSA can be competitive with other insurance providers, even though MESSA's administrative costs are unusually high. Specifically, MESSA's total administrative expenses are around 13 percent of annual premiums, when most TPAs have administrative costs equal to 4 or 5 percent of annual premiums. The economy of scale resulting from MESSA's group size obscures the fact that there are significant savings to be had in reducing administrative costs.