.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.
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.