Analysis of School Employee Healthcare Benefits: An Update to the 2006 Mercer Study

In 2010, the State of Ohio requested a review of public education spending as part of the Ohio Smart Schools initiative. State leaders were looking for ideas on how to close an estimated $8 billion deficit in the next budget cycle. The Economics Center was retained by KnowledgeWorks to evaluate a series of previous proposals that considered measures for reducing costs associated with the healthcare benefits offered to public primary and secondary school employees.

The Economics Center’s Research & Consulting team examined the 2006 report by Mercer Health & Benefits, which estimated potential savings for the State of Ohio from implementing specific changes to the structure of public school employee healthcare benefits. The Research Team analyzed changes to State legislation since the 2006 report mandating a range of best practices for school districts, and general changes to the economic environment which impacted healthcare costs. Similar experiences in other states were considered to draw particular relationships.

The Economics Center report provides more current context to Mercer’s original savings estimates, and updates those estimates where data are available. As a result, policy makers are better equipped to make recommendations and discuss the issues in the current climate. Some actions suggested by Mercer still yielded savings if more fully implemented, such as pooling. Potential savings from other actions, such as eliminating certain types of plans, however no longer appeared to exist.

Savings Already Captured

It appears that school districts are already spending about $154 million less in 2010 than otherwise would have been estimated based on Mercer’s study and the national growth rate of private insurance spending. This lower spending suggests that school districts are already capturing some savings through changes implemented since 2006.

Pooling
Savings from pooling may be obtainable.

• A voluntary scenario in which an additional 20 percent of enrollees are covered in a joint purchasing arrangement could generate up to $7 million in savings for the State.
• A mandatory program in which all remaining enrollees would be covered in the context of a joint purchasing arrangement could generate up to $35 million in savings.
• Mandating five regional pools or a single statewide pool is estimated to produce about $132 to $138 million in savings on average.
• The structure of the joint purchasing arrangements, in terms of number of providers and number of plans offered, is critically important. Some of the current joint purchasing arrangements may be less efficient than some individual purchasing arrangements. A further examination of current joint purchasing arrangements is necessary to better understand where opportunities for savings may exist.
• It is likely that the school districts not currently members of consortia or joint purchasing arrangements are larger, thus the gains from joining a consortia may be smaller than those estimated.

Self-Funding

• Savings from converting fully-insured plans to self-funding likely still exist. Converting all plans to self-funding is estimated to save about $20 million from the elimination of fully insured risk and brokers commissions.

Plan Offerings

• There are no potential savings from moving all Traditional and POS enrollees into PPO plans at current prices, due to changes in enrollment and employer costs of different plan types. In fact, such an adjustment is projected to cost employers about $4.5 million. This result is in contrast to Mercer’s original finding.

Best Practices

• Implementation of best practices, particularly wellness programs, has increased, suggesting that some savings should already be accruing to employers and the State.
• Since the Mercer study, more school districts are pursuing cost containment strategies for prescription drugs, suggesting that some of the savings Mercer estimated are being captured and remaining savings from prescription drug collectives are reduced from the level Mercer originally estimated.

It is important to note that these are aggregate savings estimates. Any savings from a statewide strategy will not be distributed equally among all Ohio school districts. The actual savings obtainable by a school district will be influenced by the school district’s size and the cost-saving strategies already implemented. In some cases, actual savings to a particular school district may be negligible.

Factors Influencing Healthcare Costs

The costs of providing healthcare benefits to public employees are influenced by several factors.

• While total national spending on healthcare, and private insurance spending, has risen throughout the last twenty years at an annual average rate of about 7 percent, recently this rate of growth has slowed due to the recession.
• This slower rate of spending growth is likely to lead to slower rates of growth in healthcare costs in the near term.
• The current slower growth rates in healthcare spending and costs may provide some temporary relief for state budgets but this reprieve is likely to end once spending returns to its former trend of about 7 percent annual average growth which is projected to occur after 2014 when the new national healthcare reform law is implemented more fully.

Experiences of Other States

Other states have also examined the costs of providing health benefits to public workers and looked for ways to minimize their burdens. Unfortunately, there are few published studies of estimated savings or evaluations of policy implementations designed to produce savings.

• Perhaps the most widespread approach is to pool public employees at various levels. Some states have proposed combining primary and secondary educators with municipal and local government workers, or combining these with state workers.
• Pooling is believed to generate savings through the increased power of the larger pool to negotiate more favorable rates. Larger pools also have lower administrative costs as a share of plan size.
• The potential savings derived from a combination of other measures designed to influence consumer behavior are believed to be significant.
• These other measures include prescription drug collectives, wellness and prevention programs and implementation of “best practices” which generally includes, at a minimum, identifying the lowest-cost and most efficient carriers and plans.
• The savings possible from pooling and mandating best practices depend on the current structure of health insurance offerings. Employers with the most efficient plans have the least to gain from changes to the system, or may see their own costs increase even if total employer costs across the entire state decrease.

Executive Summary: 

School Employee Health Benefits

Executive Summary: 

A Check-up on School Employee Health Care: A Proposal to Reduce Costs without Reducing Quality