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Controlling Health Care Costs

Increasingly higher premiums in K12 districts are being offset in innovative ways.

With public school districts under more pressure than usual in today’s recessed economy to boost revenue and reduce operational expenses, health benefits have become a prime target in union contracts.

As in most companies in America, health plan designs in public districts are being changed to reflect higher out-of-pocket costs, such as higher deductibles on visits to providers, hospital stays, and prescription drugs. District managers are asking teachers and other employees to bear more of the monthly premium costs. Others are opening their own clinics to treat employees. In at least one state—Ohio—several dozen districts have banded together in a health care consortium that cuts administrative costs for all of them.

Such savings on health benefits allow districts to boost teacher salaries, a key issue in union negotiations. Some districts have also cut costs by encouraging veteran teachers with higher salaries to take early retirement, to be replaced by younger teachers at lower salary levels.

Employers usually experience more pressure on benefits costs in an economic downturn, says Scott Hildebrandt, senior associate with Mercer, a global benefits consulting firm. Employees who have neglected their health and now fear losing their jobs may take advantage of health benefits available to them before losing the benefits with the job, Hildebrandt says. In two-income households, a spouse who loses a job will usually join the other spouse’s benefit plan as a dependent, increasing health costs for that spouse’s employer.

In 2008, total national health expenditures were expected to rise nearly 7 percent—two times the rate of inflation, according to the National Coalition on Health Care. Health care spending is expected to rise at similar levels for the next decade, reaching $4.3 trillion in 2017. Also in 2008, employer health insurance premiums increased by 5 percent—again, two times the rate of inflation. The annual premium for an employer health plan covering a family of four averaged nearly $12,700, and for a single person it averaged more than $4,700.


Caps on Growth

But districts are finding ways to mitigate rising health care costs, if not the stress associated with a faltering economy. Under a state-set 4 percent limit on school budget increases, the South Amboy (N.J.) Public Schools negotiated a new contract with the New Jersey Education Association in February that gives teachers an annual 4 percent salary boost for three years in exchange for cuts in health benefits. South Amboy Board of Education President Cindy Zammit explains that under the new plan, copays have increased from $25 to $30 for doctor visits, $15 to $25 for generic prescriptions, and $30 to $50 for brand-name medications.

Also, if two district employees happen to be married and both are covered by their own medical plans that cost the district $14,000 annually for each, South Amboy now buys out one of them for $1,000, but that person will still be covered under his or her spouse’s plan. If an employee has a spouse who works outside the district and has an equal or better benefits plan, the buyout for the district employee is $4,500.

Further, coverage for dependent children ends when they turn 19, not 23 as before, unless the district receives documentation that they are enrolled in a higher education institution.

In addition to the cuts in health benefits, cost savings in South Amboy’s professional development program for teachers help underwrite the teachers’ salary increases. Now, instead of traveling for professional development, teachers are trained in the district or in combined programs with nearby districts while maintaining their regular classroom schedules.

Zammit describes the cost of the salary increase and the savings on benefits and professional development as a wash. South Amboy district administrators are getting a 3.5 percent salary increase with the same benefits reductions, she adds.

The Los Angeles Unified School District reached a tentative multiyear agreement with all of its employee unions in February to redesign its health benefits plan and save the district at least $207 million over three years. A key point of the agreement is a 3.5 percent annual cap on the amount that benefits costs can grow. But if providers increased prices at a higher rate, the health benefit committee of district and union representatives would change the health plans to remain within the cap, or live with changes made by the district, with employees possibly having to bear higher medical expenses themselves. Also, new employees will have to work 25 consecutive years, instead of 15, to earn lifetime health benefits.

Even with the new contract, the Los Angeles district might have to lay off employees and make other cuts to cover a $670 million budget deficit that the district projects for the 2009-2010 fiscal year.

The Rockwood (Mo.) School District has held its health care cost increases to about 3 to 4 percent annually, about half the national average, for five years, reports David Glaser, chief financial and legislative affairs officer. The self-insured district in part bids out its prescription drug coverage every three years and asks bidders for their lowest prices on the 10 medications most commonly prescribed in the district, as determined by Rockwood’s benefits manager.

With efficiencies like that in its health plan, Rockwood agreed with teachers for salary increases averaging 6 percent this year and 5 percent next year. “The increase is the full cost of teacher increases including their annual step increase,” Glaser says. “Most people recognize that the great teachers are underpaid.”

A committee of administrators, teachers, support staff and retirees that oversees the district’s health insurance plan understands that “the more expensive the plan is, the less money is available for salary increases, and that influences how they approach it,” Glaser says.

In Schaumburg (Ill.) School District No. 54, where premiums of $12.7 million for medical programs are 6.45 percent of the district’s budget, the cost of claims is less in inflation-adjusted dollars than it was six years ago because fewer claims are being submitted, says Mohsin Dada, assistant superintendent for business services for the Shaumburg district.

Schaumburg’s health benefits plan ties the district’s contribution to the dollar amount of claims that employees submit. The district pays the full premium for employees “as our claims are contained,” Dada says. But if the total dollar amount of all claims submitted this year goes up more than 5 percent over last year’s total, employees will have to kick in 50 percent of the premiums next year.

Schaumburg’s district also has an aggressive wellness and preventive care program that reimburses employees for heart, blood pressure, cholesterol and similar checkups. The district’s benefits committee is considering paying part of the cost of health club memberships and reimbursing employees who enter programs to help them stop smoking or lose weight. But that is a sticky issue, Dada says, because some committee members feel that “if people have not taken care of themselves, why should we pay for them to do it?”

Meanwhile, the district also cuts costs through its early retirement program for teachers, replacing teachers who retire at the $90,000-$100,000 salary level with “relatively new” teachers who start at around $40,000, Dada says. Schaumburg offers an incentive of up to a year’s salary to encourage early retirement. “It’s a win-win situation for the teachers and the district,” Dada declares.

On-Site Clinics

Some districts, including Houston (Texas) Independent School District and Maryville (Tenn.) City Schools, cut costs by operating their own clinics on district properties. Offering primary care services through a worksite clinic costs less for employers than having employees visit off-site doctors and hospitals and also reduces time lost by employees who would seek care elsewhere, according to a Mercer report, “Survey on Worksite Medical Clinics.”

The Houston district, with 30,000 employees, will open five on-site clinics this fall that employees enrolled in one of the district’s four medical plans can use at no cost for primary and urgent care, wellness coaching, and health care referrals. Concentra, a health care provider for other Houston employers, will operate and staff the clinics.

Benefits-eligible employees who are not enrolled in a Houston district medical plan, or individuals employed as district crossing guards, with no other health benefits, can use clinic services for a $25 copay. All active district employees, regardless of their participation in benefits plans, will be able to get free annual health screenings and flu shots at the clinic, and school bus drivers can get physical exams for as low as $5.

Houston district managers expect to break even on the clinics the first year but save money long-term, says Chief Financial Officer Melinda Garrett. “It’s about making sure we have healthy employees,” resulting in lower health care costs later, Garrett says.

Maryville City Schools, with 750 full- and part-time employees, opened a clinic on school property in 2000, using an old house that was once used as an assessment center. School maintenance workers added new carpeting, tiles and new paint. The clinic runs under contract with a local hospital, Blunt Memorial, which provides a registered nurse and nurse practitioner to work there. The district pays monthly invoices from the hospital that vary depending on the number of hours the clinic staff works, supplies purchased for the facility, and lab charges for blood tests.

The Maryville district’s health care costs increased less than 1 percent last year, which Mindy Stooksbury, district director of fiscal services, attributes to more employees using the clinic. She estimates that 15 percent of employees use the facility, which is optional.

Maryville’s district is trimming health care costs in other ways to make up for a drop in state funding, which increased by only 2 percent in 2008-2009 compared to 5 percent the previous year. The district had been paying the full premium for employees’ dental insurance but this year cut its contribution in half and saved $125,000. Employees covered by the dental plan pay the other half, about $16 per month.

Stooksbury says Maryville City Schools is also considering changing its prescription drug coverage, possibly excluding some over-the-counter medications. “We will try our hardest not to have to lay off anybody,” she says, but the district has imposed a hiring freeze and is not filling positions for ancillary services, including maintenance, custodial and food service, when people leave. “We’re trying to do everything we can to have little impact on the classroom,” Stooksbury says.

The Consortium Approach

In Ohio, 89 school districts and 38 local governments save on health care costs through the Ohio Mid-Eastern Regional Education Service Agency (OMERESA), a self-funded insurance program established in 1985 to provide health care and related benefits to its member organizations.

Each district in the consortium maintains its own health plans and pays the first $35,000 in medical claims for an employee. Payments for claims from $35,000 to $400,000 come out of a pool OMERESA maintains from about $140 million that members pay annually in premiums, explains Craig Closser, CEO of the Jefferson County Educational Service Center, which sponsors the consortium. Closser, who is also a former superintendent of the Jefferson County Public Schools, says the consortium transfers about $2.5 million weekly to its members from the pool to pay claims.

One benefit to members, Closser points out, is that about 93 cents of every premium dollar they pay goes into paying claims, with only 7 cents earmarked for administrative costs. That compares with up to 20 percent for administrative fees charged by private health insurance companies that do business in Ohio, says David Manning, senior consultant with Burns Consulting Associates, a health care consulting firm that works with OMERESA. “We know exactly what we put into it and what our costs are,” says Jerry Payne, treasurer of the Pioneer Career and Technology Center in Shelby, Ohio, a vocational school district that is an OMERESA member.

Some districts might be “turned off” from joining the consortium by private insurance agents who bid lower prices than OMERESA on premiums, Payne says. But while the agents offer one-year deals, “we look to the consortium as a long-term program to save money,” he declares.

Difficulties with Unions

In many districts, dealing with unions on benefits and salaries frustrates administrators. In Pennsylvania, a “very strong teachers’ union”—an affiliate of the National Education Association—allows districts “little if any unilateral authority to adjust benefits or salaries during a contract,” says Jay Himes, executive director of the Pennsylvania Association of School Business Officials (PASBO).

Some districts have tried to reopen negotiations, given the current economic climate, but none has produced tangible results, Himes says.

Robert Schoch, director of business administration in the Council Rock (Pa.) School District, identified by Himes as one that has tried to rework its teachers’ contract, declines to discuss the matter publicly. Instead, he cites other ways the Council Rock district is cutting costs, including renegotiating more than 100 other contracts for services like transportation, cleaning, maintenance, and environmental compliance. “We’re going for no increase on these contracts,” which will save up to $40 million annually, Schoch says.

In New Jersey, the Roxbury School District negotiated with the Roxbury Education Association for 26 months, including 18 months with an expired contract still in place, before reaching agreement in January to cut its health care costs by about $300,000 and give teachers an 18.4 percent salary increase over four years. The district will achieve the health savings by shifting to a cheaper managed care plan, reports Superintendent Michael Rossi.

Negotiating with the teachers’ union is “extremely difficult,” says Rossi, who points a finger at state legislators. “They have crafted dozens of new laws aimed at curbing wasteful spending and going after education but not one piece of legislation has addressed anything with unions,” he says. He suggests that lawmakers “are afraid of political repercussions with the unions.”

“We seek to maintain the quality of our benefits,” says Steve Baker, a spokesman for the New Jersey Education Association, “and fair and reasonable salary increases for our members as well.”

However they approach it, districts will continue to target health benefits and a wide range of other programs and services for cost reductions as they look for ways to reduce spending in an unpromising economy. “We have to get ready,” Stooksbury says, “because we don’t know what we are going to be faced with.”

Alan Dessoff is a contributing writer for District Administration.