Understanding Health Care Budgeting

John Day Associate Provost for Budget and Academic Planning Understanding Health Care Budgeting Faculty Senate Briefing

Health Care Budgeting The University is “Self-Insured” • We do not have a “policy” with an insurance company – we are the insurance company • We don’t pay premiums like individuals do for health insurance • Anthem manages our claims processing and the network of providers but we make the actual payments • We make a projection each year of how much money we should budget to make these payments • If we purchased coverage from an insurance company , we would spend more than we budget now because insurance companies add a profit margin. • Most companies with over 1000 employees use this self-insured approach Faculty Senate Briefing

Health Care Budgeting The University is “Self-Insured” • This has benefits on the “upside” • If we spend less on health care than budgeted, we save money • With an insurance policy , you pay the premium regardless of how much coverage you use - if you use less than you pay in premiums, you don’t get any money back • But this has risk on the “downside” • If we spend more on health care than budgeted, we have to come up with the difference • With an insurance policy, if you have a large claim beyond what you paid in premiums, the insurance company has to make up the difference. • For an extreme negative fluctuation, we have stop loss insurance which kicks in once claims start to go beyond a certain amount Faculty Senate Briefing

Health Care Budgeting Budget Components – Required Reserves These are one-time-only (OTO) funds, not base budgets Run Out Reserve = $3,644,000 This represents an estimate of three months of claims that would be incurred but not paid at any point in time. Required by law to pay claims in the event that an insurance company (us in this case) would go out of business – not very applicable to us, but required Claims Fluctuation Reserve = $3,150,492 This is one half the difference between our predicted claims and the point where our stop loss insurance kicks in. Will need to add $1,059,610 this year Faculty Senate Briefing

Health Care Budgeting Budget Components – Base Budget Carry Forward Budget Actuals University Revenue Tuition/Subsidy/Etc Unit Budgets Salaries 3-9s Salaries 3-9s Payroll Health Care $36,982,000 Health Care Contribution Health Care $4,689,000 Health Care Employees $41,671,000 • A budget is simply an estimate, based on history and trends • The expected amount of money to pay health claims is generated from two sources: • A portion of the tuition/subsidy revenue allocated in each department’s budget as a standard amount for each employee (Standard Rate) • Employees contributions • Both parts are collected into the health care budget month-by-month as payroll is distributed • With conservative projection, some carry forward would usually be desirable Faculty Senate Briefing

Health Care Budgeting Standard Rate Calculation Projected Health Care Budget = Standard Rate Number of Employees Covered 36,652,839 FY07 = 9,520 FY08 = 9,541 3,850 • A simple mechanism to tie the idea that adding employees in a unit requires more dollars in the health care budget. Units wanting to add an employee need to come up with funding for salary and benefits. • The rate is flat regardless of “real” impact of that employee on health care expenditures – same for single, couple or family • Therefore this number has almost no relationship to the “market” value of health care coverage to an individual employee • Same approach is used for Employee/Dependent Fee Waivers (total budget needed divided by number of employees) – also not tied to “actual” usage or potential exposure Faculty Senate Briefing

Health Care Budgeting Relationship to Salary Studies • Comparisons with other institutions are driven by the reporting requirements of AAUP . This is done the same way across all institutions to create an apples-to-apples comparison. • Total Compensation includes: • Base Salary – defined as 9-month base with no increments (excludes chair stipends, overloads, etc) • Budgeted Health Care – this is the standard rate (9541) including life insurance (116), dental (429), and disability (232) • Employee Fee waivers (tuition discount) – again the standard rate (1686) • Retirement (14%) • Worker’s compensation (0.69%) • Medicare for those in that system (1.45%) • Unemployment insurance Faculty Senate Briefing

Health Care Budgeting Relationship to Salary Studies Salary Studies are based on snapshots in time so there is always variability between the averages reported and the actual expenditures – this happens at every institution in the comparison Therefore, when we don’t actually spend all the budgeted dollars for salaries, health care, employee waivers, or the other compensation categories, this has no implication for the “validity” of the salary survey results. Faculty Senate Briefing

Health Care Budgeting Budget Variances • Actual expenditures for health care will never exactly match the budget • The goal is to have a realistic budget as close as possible to expenditures • If we make the health care budget too small, expenditures will exceed the budget and the claims fluctuation reserve must be used to make up the difference. Then we have to move money away from other areas of the budget. • If we make the health care budget too big, then there is less tuition/subsidy revenue to pay for everything else (salaries, utilities, fee waivers, etc) and there will be carry forward Faculty Senate Briefing

Health Care Budgeting Carryforward University Revenue Tuition/Subsidy/Etc Health Care $36,982,000 Employees Health Care $4,689,000 • What happens when there is carry forward and the claims fluctuation reserve does not need to be increased? • One view is that the proportion of funds paid by the employees represents an “overpayment “ • Alternatively, insurance premiums represent an assumption of risk. The insurance company is betting they will spend less on you than you pay in and you are betting that it might be higher. There are no refunds if you lose the bet. Faculty Senate Briefing

Health Care Budgeting Carryforward University Revenue Tuition/Subsidy/Etc Health Care $36,982,000 Employees Health Care $4,689,000 • Budget Variance (up or down) in the remainder of the health care budget simply results from the inability to create an exact projection for the budget that perfectly predicts the future • This happens throughout the budget • Budgeted salaries • Health care • Utilities • Fee Waivers • Etc. • The source of the unexpended funds or the payment of a negative variance in these cases is tuition and subsidy Faculty Senate Briefing

Health Care Budgeting Not all budgeted benefits show up in health care carry forward • If a college budgets a position and that person leaves, the funds can be used for other expenses – it does not have to used for a compensation • In fact, the health care portion of the standard rate in this case will never make it into the health care budget – the funds will stay in the college. • Similarly, if a college holds a position vacant, the health care budget is built assuming the standard rate will be collected from this position but it will never be charged because no payroll activity will occur and the carry forward remains in the college, not the health care budget • This amounts to $982,000 this year • If actual employee/dependent tuition waivers are less than budgeted, those funds are not expected to carry forward into the next year’s tuition waiver budget Faculty Senate Briefing

Health Care Budgeting Benefit Budget Variances • If there is carry forward in the health care budget, any projected shortfall in the two required health care reserves for the next year (run out and claims fluctuation) should be addressed first. • There is debate about what should be done with any remaining carry forward (currently about $3.5M) • Other IUC universities do not consider health care carry forward to be any different from any other carry forward • If we continue to have carry forward each year, it would suggest that the budget projection should be decreased and the funds allocated elsewhere rather than tied up • But if the trend reverses and we have a reduced budget, there will be a sudden budget shortfall • It is best to have a budget that accurately reflects the costs with a slight carry forward cushion Faculty Senate Briefing

Health Care Budgeting Some Common Misconeptions • The reserve has no relationship to or impact on future health care increases • A reserve is simply a fund balance that can be expended on a one-time basis – like a balance in your savings account • Health care costs are base (recurring) budget expenditures that must be obtained every year – like your monthly electric bill • Spending the reserve to temporarily lower base budget expenditures will not stop base budget health care increases – paying your electric bill from your savings rather than your monthly paycheck does not stop your electric bill from going up in the future Faculty Senate Briefing

Health Care Budgeting Some Common Misconceptions • Maintaining funds in a health care reserve has no affect on our ranking in any salary study. • All institutions use the original budgeted health care not actual expenditures in salary studies – that is what AAUP requires • In addition, the data for the survey must be submitted in November/December, long before we know our actual expenditures • To do otherwise would put artificial volatility into the comparison • If we had a really “bad” year and over spent our health care budget by $1M would that mean our faculty compensation just went up? • The same issue happens with the rest of compensation • Vacant lines and salaries for faculty that leave mid-year are part of the budgeted salary and are “counted” in the salary study • Budgeted employee/dependent waivers never match actual expenditures – no effect on ranking Faculty Senate Briefing

Health Care Budgeting Interpreting the Meaning of Standard Rate • The Standard Rate is simply a rough mechanism for “collecting” the health care budget from planning units in proportion to their share of the number employees. There are several unique issues with using it for more than that • The concept is to reflect to units that obtaining funds for a new position requires both salary and benefits. Otherwise, adding the position on salary dollars alone would create a budget deficit overall when the benefits were added in centrally • Married employees both have the rate charged though they are on one policy. To change this would raise the rate for everyone else in the university • The rate is the same regardless of whether an individual, couple or family are covered. To not do this, would create a perverse incentive for departments to hire only single people to cut costs. • We require the standard rate on all eligible employees – to not do so would create a perverse incentive for departments to pressure employees to not request health care in exchange for more salary or to simply save department money Faculty Senate Briefing

Health Care Budgeting Interpreting the Meaning of Standard Rate • So, the Standard Rate is not connected to the “real” value of your health care benefit • It doesn’t vary for single-couple-family • It is not related to what is “actually” spent on your care (but then no insurance policy ever is) • Standard Rate IS used in the salary studies • Budgeted health care is the closest they can come on to an average for health care • This has flaws (so would any other method) but it is an approximation and an apples-to-apples comparison since all institutions report it the same way • This is simply the way it is and it is not up to us to change it Faculty Senate Briefing

Health Care Budgeting What is the value of your health care? • Amount actually spent on you in a given year? – too volatile and variable across employees to be meaningful • The Standard Rate? – relatively meaningless for this purpose • COBRA amount ? – this is valuing the health care as if you were still in the employee group and having you pay the standard rate (budget not actual) in proportion to your coverage – single, couple, family – This is the method used on recent total compensation reports • Premium if we obtained our health care from an insurance company rather than being self-insured? – much higher given that the insurance company will make a profit • Market value if you had to go out on your own and find a policy? – extremely high considering the coverage we have Faculty Senate Briefing

Health Care Budgeting Employee Contributions So what is the employee contribution to health care? • “Premiums” are flat to the employee - not a percentage of the budget or actuals • A 10% maximum target is often cited • This is the ratio of employee contributions to the actual expenses  • This is a highly sensitive to variability outside our control • If we have a really “bad” year, the employee contribution goes down • If we do really well, employee share could easily go beyond 10% • Note that this is on actuals, not budget so carry forward and reserves are excluded. Faculty Senate Briefing

Health Care Budgeting Employee Contributions • What should be done with the portion of carry forward attributed to employee contributions? • Carry forward of a sufficient magnitude triggers a premium holiday • No other IUC university does this – in fact we have been criticized for doing so • If not triggered, the contribution carry forward drops into the overall carry forward • Of course, if claims exceed the budget, employees will not be expected to make up the difference • Keeping these contributions in the carry forward rather than distributing them back would essentially mean that the carry forward contributes to the claims fluctuation reserve essentially creating an employee contribution when claims exceed the budget Faculty Senate Briefing

Understanding Health Care Budgeting