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11/20/91

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Health-premium genesis outlined

Changes in the university's health benefits plan for staff and faculty were already in the works, but the $25 minimum monthly charge to all faculty and non-union staff members was added in response to the budget crisis, says Prof. Alain Enthoven, who chaired the faculty-staff committee that made the first set of recommendations.

Long before the university's budget crisis emerged last spring, the 13-member Committee on Faculty and Staff Benefits, appointed by President Donald Kennedy, had been on a mission to curb the skyrocketing costs of health care, Enthoven and other committee members say.

Committee members and university benefits administrators were concerned that Stanford remain competitive in labor markets. At the same time, they worried about the rising costs of health insurance, Enthoven said. A consultant was hired to assist in a reevaluation of the health benefits plans.

The committee made recommendations for substantial changes, including having Stanford pay a more significant portion of the premiums for the dependents of employees. Then, the budget crisis led to an administration proposal to the committee last July for a more dramatic change - a minimum $25 monthly charge to all employees signing up for insurance. Previously, employees had to pay nothing to cover themselves, no matter which health plan they chose.

The added proposal was "in the same spirit" as the committee's earlier recommendations to emphasize cost- consciousness among all users of Stanford benefit plans, said David Gilbarg, a professor emeritus who is on the faculty-staff committee. The earlier suggestion was to require employees and retirees to pay the difference between the cost of the coverage they chose and the lowest-priced plan available to them.

When the $25 minimum was proposed to the committee instead on July 9, Gilbarg said, "There was some discussion. There wasn't as much objection as one might have thought. In other words, it wasn't a resounding no.

"We didn't take a vote. Typically we don't. There's discussion and there's a sense of what the group feels that is summarized by the chairman."

Added Jane Meier, associate director of Student Health Services and a member of the committee: "We did question why [the employee contribution] needed to be so high. We basically thought that in a year when salary increases were so meager that it would not be seen very kindly to slap this on top of minimal pay increases.

"I think our concern was heard in that the actual proposal that eventually came out was that these charges weren't going to start until March when people get their pay increases," Meier said. (The change is in March for exempt employees and delayed until October for non-exempt employees so they will receive two salary increases before it takes effect.)

Said Enthoven: "I don't think the committee was enthusiastic. Nobody stood up to cheer, but I think we all realized, given all the problems we were dealing with, this seemed to be a fair way to spread the pain."

Originally, the committee had recommended that the university require contributions by everyone except those individuals who chose the lowest-priced plan and for themselves only. The committee also proposed that the university provide a larger subsidy to employees who were covering dependents.

There were multiple reasons for those decisions, "but on top of it all, we are in competition with other universities for faculty and with private industries as far as staff," Gilbarg said. "We found we were in a weak position competitively, especially for employees with dependents."

Stanford "wasn't even in the ballpark" for family coverage, said consultant Mac Regan of William M. Mercer Inc. In 1990, he matched Stanford employees' out-of-pocket costs for health insurance to employees of a comparable group of universities and to a sampling of large Bay Area private employers.

The mean out-of-pocket contribution for employees covering two or more dependents with the lowest-priced plan at Stanford was then $150 a month, compared to $29 at other universities and $41 at other Bay Area employers studied, Regan said. This was because Stanford was contributing a smaller proportion of the total premiums for families than were the others, he said.

Single coverage employees, on the other hand, were paying nothing at Stanford compared to a $5 mean at the other universities and $9 in the Bay Area market for the least expensive coverage.Mercer said he projected that by 1994, if no changes were made in the contribution formulas, Stanford families would be paying $400 a month for coverage.

"The provost asked us to make recommendations to slow the growth. Benefits were growing much faster than pay and so it was coming out of the money Stanford had available to pay employees," Enthoven said.

One factor in the rising cost, he said, was that many employees had no price incentives to choose less expensive plans because the university was paying the full cost of the employee's coverage no matter which plan the employee chose.

About half of Stanford employees enrolled only themselves and tended to choose the more expensive plans, he said. With that many takers, the more expensive health plans "felt no price pressure to keep their costs down."

"Normally, if a supplier raises his price, he worries that the competition might take his customers," Enthoven said. "In this case, the customers didn't worry at all about the price."

Those with families to cover did exert price pressure; because they had to pay, they tended to choose the less costly health maintenance organizations. Once covered, however, they also had little incentive to keep the costs of serving them down, because the fee they paid for each doctor's visit was minimal, Enthoven said.

"We decided the most important thing we had to do was establish that everybody would be cost conscious in their choices," he said. "The purchase of family coverage has always been cost- conscious, but we recommended that the university renegotiate the co-payment fee - to $10 a visit - so that even those using the cheaper health maintenance organizations would recognize that service costs money."

The provost had asked the committee to make recommendations to trim $1.5 million from the projected increase in the cost of benefits. "We came up with a proposed savings of $2.8 million and proposed spending $1.3 million of that to ease the plight of families," Enthoven said.

The committee's decision to recommend that the university contribute more toward coverage of employees' dependents was based on considerations besides the consultant's research on the labor market and concern for family hardships.

Committee members were concerned that families might increasingly choose to go without coverage.

"If a plan becomes very expensive, as our family plans were, those who are healthy are tempted to go without insurance and take a chance," he said. "When that happens, you get a process known as adverse risk selection, in which those who need coverage are the only ones enrolling, and this causes an upward spiral in premiums."

The committee would have liked to have seen the changes apply to all employees and retirees, but changes affecting the United Stanford Workers had to be negotiated through collective bargaining.

In contract negotiations this fall, the union leadership elected to stay with the existing contribution formula, Enthoven said. That means that a union employee with two or more dependents to cover will pay $189 a month for the least expensive plan this next year, compared to $145 a month for a non-union family and $0 for a union member without a family.

In a recent newsletter to its members, the USW said that 60 percent of its membership - those not covering dependents - will "still pay nothing while non-union people pay from $25 to $31."

Enthoven and consultant Regan said that having all employes pay something for their health insurance is a trend among employers.

Some of his clients, Regan said, are worker/management task forces that are looking for ways to curb costs without cutting quality of coverage.

"Labor unions haven't been that supportive of contributions and have tended to prefer to cut costs through benefit cutbacks. The problem is you can only cut benefits so much and have them be meaningful," Regan said.

Enthoven, however, reiterated the point of everyone's paying something.

"There is some advantage in everybody realizing that health care costs money," Enthoven said. "There are many theories about why health care costs are rising so rapidly in this country, but it is surely the case that one of the most important factors is cost- unconscious demand."

Some Campus Report letter writers have noted that the difference between the least expensive and most expensive plan in the coming year for a single employee without dependents is just $6 a month - hardly enough to make them choose on the basis of price. That difference, Enthoven said, is a fluke in timing.

"The gap has usually been much bigger - up to $48 a month - but it was unusually small this year because Kaiser Permanente, the lowest-priced plan, had an unusually large price increase the past two years to finance a large expansion related to a large increase in membership," he said.

"The way to prevent the gap from growing again is to put price pressure on all the health plans."

The committee's recommendations bear some similarity to the national health plan Enthoven published with Richard Kronick of University of California at San Diego in the New England Journal of Medicine and the Journal of the American Medical Association. Their so-called "managed competition" plan was endorsed by the New York Times in its Nov. 17 editorial as the plan that "best fulfills" two key principles.

Those principles are that it relies on competition, rather than government regulation, to provide low prices and high quality, and it relies on sophisticated purchasing agents, rather than individuals, to shop and negotiate for the best health care deals.

Enthoven's and Kronick's plan also was criticized in the same issue of the Times by columnist Toby Cohen who said it allowed the richest 20 percent of Americans to buy their way out of average health care.

Some critics of the new Stanford plan say that having children is a lifestyle choice than no employer should subsidize, Enthoven noted.

"I don't think anyone on our committee believes that children are a lifestyle choice similar to someone deciding to smoke or have a cocker spaniel," he said. "I, at least, believe children are our future, and when we retire, our Medicare and Social Security will be paid for by those children.

"When it comes to benefits, there are many conflicting theories of equity. Some people say, 'To each according to his need.' Others say 'To each according to what she produces.' Some say, 'Treat everyone equally.' Others say, 'Equal pay for equal work.' And still others say, 'Stanford should contribute less on behalf of people who make more money.'

"People tend to emphasize the theory of equity that suits their personal interests best," Enthoven said. "What the committee tried to do is balance all these considerations and come up with reasonable solutions."

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