UPDATED: Privatizing teacher insurance unlikely; merger with state employees gains support. Plus, a genuinely new idea. | Arkansas Blog

Wednesday, September 24, 2014

UPDATED: Privatizing teacher insurance unlikely; merger with state employees gains support. Plus, a genuinely new idea.

Posted By on Wed, Sep 24, 2014 at 2:13 PM

The legislative task force assigned to unravel the public school employee (PSE) insurance mess held its monthly meeting in Hot Springs on Tuesday. Its chair, Sen. Jim Hendren, is away on military duty (he's in the Air National Guard), but the task force moved forward with its discussion of reforming the PSE insurance system.

After the special session earlier this summer instituted stopgap measures to keep the insurance system marginally afloat, the task force began researching a longer-term overhaul. Two very different paths have been proposed as possibilities. The first is to merge the PSE insurance system with that of Arkansas state employees (ASEs), a pool that is smaller, better funded and in better actuarial shape. The second is to eliminate the PSE system altogether and privatize school insurance.

On Tuesday, the task force also heard from a Republican legislator with an entirely new reform proposal: provide a generous package of benefits for new teachers, thus incentivizing participation of younger, healthier people in the risk pool. More on that promising proposal at the end of this post.

In last month's meeting, the committee heard about the PSE/ASE merger option for overhaul; this month's meeting was supposed to be focused on the second path, privatization. Let districts purchase insurance on the open market, the argument goes, and they'll be able to find better rates than EBD is able to offer. Small districts could make up for the fact of their smaller risk pools and diminished purchasing power by purchasing cooperatively with other districts. A few superintendents — such as as Jerry Noble of Green County Tech — have suggested this is the best path forward based on the experience of other states with similar schemes.

But according to Bob Alexander of the Employee Benefits Division, which manages the PSE insurance plan, privatization would leave many small districts out in the cold. EBD asked BlueCross, which pays claims for the PSE insurance plan, to estimate how much it would charge three sample districts (one small, one medium, one large) for insurance purchased on the open market. The numbers suggest that employee premiums for smaller districts would rise, while those of larger districts would fall somewhat. That's exactly what one would expect. A smaller district has a smaller pool of employees, so it presents more risk to an insurer and is more expensive to cover. (Alexander also said later that these example numbers came with so many caveats that they "really have no value." These three districts chosen by EBD have unusually good participation rates already, because BlueCross won't issue a quote on a pool with under 75 percent participation. The majority of districts have participation rates far below that, and the system-wide average is around 65 percent. The BlueCross quote also doesn't include the added cost of insuring retired teachers, because retirees aren't broken out by district.)

Judging from the response of lawmakers and the testimony of advocates for districts and teachers, privatization is going nowhere. Richard Abernathy, head of the Arkansas Association of Educational Administrators, said that making insurance a district responsibility would exacerbate an existing inequality between school districts. "It’d wind up similar to our teacher salaries around the state," he said. "We currently have schools starting out at our minimum salary of $29,200, and then we have districts starting out at $44,000...In the short term there may be in fact lower [insurance] costs; in the long term, this would widen the disparity between employees." That's happened elsewhere, said Brenda Robinson, president of the Arkansas Education Association (the teachers' union): "We have repeatedly seen that when other states tried this idea, many small districts were not able to purchase insurance at all." The AEA and AAEA say that Minnesota and Missouri both now have a number of small districts without any health insurance whatsoever as result of a similar policy.

Yet if privatization is going nowhere, the first possibility — merging PSE and ASE pools — seems to be gathering steam. Both Abernathy and Robinson said they support the merger proposal. Republican Sen. Jason Rapert, a member of the task force, said, "it almost sounds to me like we’re getting to the point where it’s common sense. We have a larger pool, we have a greater opportunity for participation." He said the task force should move forward with developing a merger proposal in time for the 2015 session.

There's one big problem. As described at last month's task force meeting, merging the PSE plan with the ASE plan without dedicating any additional revenue would cause school employee premiums to drop by 23 percent...but state employee premiums to rise by 33 percent. As Jim Hendren candidly put it in August, the merger would be "good for PSEs and bad for ASEs." And that sets up a potential internecine conflict between the two groups of public sector employees.

“On behalf of ASEA and the more than 27,000 state employees, we do not support an option that would increase health insurance premiums,” said Danny James, director of the Arkansas State Employees Association. “The overall goal, the concept — a bigger pool — that’s great. But when it comes to the dollars and cents...the numbers aren’t there.” State employees have been denied a cost-of-living adjustment in recent years, said James, and their insurance benefits have already been watered down recently as an indirect result of the troubles in the PSE plan. “If the merging of these two entities happens, [EBD] can see upwards of a 33 percent increase in state employees premiums. That is not acceptable….you’ve been through this with teachers, you don’t want to go through it again with state employees.”

James is correct. It’s not just a fairness issue, but a practical one. If state employee insurance becomes 33 percent more expensive, many of those folks will stop buying insurance. That would only create a wider adverse selection death spiral, which would be a disaster. The fundamental problem with the PSE insurance system has always been its chronic lack of funding. To avoid simply creating a bigger, uglier problem in a merged pool, more money would have to be added to the system as well.

The question is how much more, and who bears the cost. It would cost a staggering $95 million annually to merge the pools into one and retain the same level of benefits but not increase ASE rates above current levels, Alexander said last month. If a merger happens, some sort of middle ground of new revenue would have to be found.

As Democratic Sen. Joyce Elliott mentioned, it seems only fair that districts contribute a portion of their own local money towards the insurance fix as well as the state. Because some districts are flush with cash (think Northwest Arkansas) and others are struggling to survive, Elliott suggested a progressive approach. “We could make contributions based on wealth the way we do with other things,” she said. Indeed, the state’s share of funding provided to a school district (as opposed to the local revenue directly generated by that district’s property tax receipts) generally varies according to the wealth of the district. “The courts don’t require equal funding, they require equitable funding,” said Elliott.


BILL GOSSAGE: Has a proposal to fix the teacher insurance system. - ARKANSAS HOUSE
  • BILL GOSSAGE: Has a proposal to fix the teacher insurance system.
The task force also heard a new proposal from Rep. Bill Gossage, a Republican from Ozark. It’s an idea that hasn't been discussed at all before, to my knowledge.

Gossage wants to give teachers in their first five years on the job a more generous benefits package, which would entice a younger population into participating in the insurance system. The state would pay for the full premium during a new teacher's first two years — free insurance, in other words — and the extra benefit would drop off gradually for the three following years.

It’s fair to assume the vast majority of new teachers who are offered free insurance would take it. More participation in the plan (especially since new teachers skew young) would then drive down rates for all teachers. For that matter, it would also potentially help address the disparity in teacher salaries across the state, which Abernathy referenced earlier.

“Premiums are based on the health of the pool,” explained Gossage. “There’s two ways primarily to increase the health of the pool. One of those is to require people to be part of it and one of those is to put a lot of money into it to make rates so low everyone gets into it..” But paying a larger benefit for new teachers increase the health of the pool in a targeted way. There are about 2,300 new teachers each year statewide, according to Gossage. The annual cost of premium for employee-only insurance is about $2,200...though that increases to $9,700 for full family coverage (here are monthly rates, for reference). In any case, it would cost the state a minimum of $5 million to pay the full cost of insurance for new teachers in their first year.

Those numbers are very preliminary and subject to the range of caveats attached to all insurance talk (they’ll be fleshed out in a future meeting.) Also, I’m not sure how well veteran teachers will like this idea, considering how high their premiums are already. But, again, getting a big infusion of new teachers into the risk pool helps everyone in the long run. 

“After five years you’re going to substantially increase the number of healthy people, young people, in the pool without expending a tremendous amount of money,” said Gossage. “I would assume this would cause the premiums to decrease.” 

There's also no reason why Gossage's proposal couldn't be combined with other reforms, such as the ASE/PSE merger.

Support for education reporting provided by the Arkansas Public Policy Panel.

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