Saturday, September 25, 2010

Rising health care costs hit home

The rising cost of health care is one of the public policy topics that probably receives more attention in the press than the rising cost of college, the latter of which I know a lot more about.  For almost 30 years I've worked at universities almost without interruption, and the five years I wasn't working at a university I was covered by my wife's health insurance under her union contract as a teacher, which was similar to what I received as a university employee.  Having worked in universities and benefited from the very generous benefits many universities offer, I've been largely protected from the challenges that many families face in gaining access to and paying for health care.  I recognize that not all higher education institutions offer such generous benefits, but the ones at which I've worked have had very good coverage.

For example, the current coverage at Penn State (which self-insures its employees) costs me $247.62/month for coverage for our family.  As a benchmark, I have a close friend who is my age and self-employed, and has to buy insurance for himself.  He pays over $500/month just for individual coverage that is nowhere near as comprehensive as I enjoy as a Penn State employee.  And for my monthly premium, the coverage my family receives is close to universal; we pay small ($10-$20) co-pays for office visits, and beyond that, most office visits for primary care physicians, specialists, hospital stays, procedures, etc. are covered in full.  There are of course exceptions; you do pay more if you go outside the approved network of providers (20% of the cost), but the network is fairly inclusive of health care providers, at least in our area around State College.  We also have relatively good prescription drug coverage.  Many preventive procedures are free.

As an example, a couple of years ago, our youngest daughter was in the local hospital for four days.  She had no surgeries or unusual procedures, other than a X-ray or two.  The bill came to over $15,000, and we paid nothing other than a $50 co-pay for our emergency room visit before she was admitted to the hospital.  This comprehensiveness of the coverage is similar to, and priced in roughly the same ballpark (adjusting for health care inflation) to what I enjoyed when I worked at MIT and at the University of Michigan.

Well, the other shoe has dropped here at Penn State.  Earlier this month the university announced the details of changes to the health care coverage effective next January 1.*  The monthly premium for family coverage is going up 12% (the individual premium is increasing at the same rate), not an unusually large rise given recent history.  However, the coverage that Penn State employees receive is changing radically.  The university is instituting two types of charges that didn't exist in the past.  The first is an annual deductible, something that is common in many other health insurance plans.  Families will pay a $500 deductible, which means that the subscriber has to pay the first $500 of health care costs in a year, before the insurance coverage kicks in.

In addition, the university is instituting a co-insurance charge of 10%, meaning that the subscriber is now responsible for paying 10% of all charges, with the health plan paying the remaining 90%, up to a maximum of $2,000 per year (including the deductible) for a family, or $1,000 for an individual.  While 10% doesn't sound like much, you have to remember that under our current coverage the plan pays 100% of the costs.  Here's a link to the details of the new plan.

Thus, the impact of the deductible and co-insurance charges is that many families will end up paying $2,000  (in addition to their monthly premiums) above and beyond what they're paying this year.  The combination of the increase in the premium along with the out-of-pocket additions means that my cost for health care next year is likely to go up by about $2,400. This represents an increase of about 80% in the out-of-pocket costs, not including co-pays.  But the co-pays are going up also, so 80% is probably a reasonable estimate of the increase.

Before you run off and blame the federal government's health care overhaul passed earlier this year, for causing these increases, I can comfortably say that that's not the reason.  Rather, the university - like many employers - has been struggling with rising health care costs and how to control them over the last couple of decades.  This has been a topic discussed in two university-wide panels on which I have served in the last few years, the University Strategic Planning Council, and the current Academic Program and Administrative Services Review Core Council.

The university has taken some steps, such as instituting wellness programs, to try to help control the demand for health care services among its employees.  It also waives the co-pay for visits to two local clinics staffed by employees of Penn State's Hershey Medical Center, in order to encourage employees and their families to use these services (at presumably lower cost) than opting to go to other providers or an emergency room for care.

But eventually Penn State must have realized that more of the costs had to be shifted from being borne by the university to being paid by employees.  The changes being implemented effectively accomplish this.  There are obviously large equity issues at play here.  The additional out-of-pocket costs represent a little over 2% of the gross income of a professor or administrator making $100,000, but it's 8% of the income of a secretary making $36,000.

Now that it has instituted deductibles and co-insurance for the first time (at least in the eight years I have been here), it is unlikely that these will ever go away.  Penn State employees covered by this plan should realize that they still benefit from health insurance coverage that is probably better and relatively less expensive than what most people in the country have access to.  But they should also realize that these costs will continue to rise in the future.

* Last January 1st, the university drastically changed the health care coverage for retirees, with new employees hired after that date receiving a defined contribution health care plan in retirement, while existing employees enjoy a defined benefit health plan.  But that's a topic for another day.


  1. Yes, this issue has really stressed me out as a single mom. While I may not have to find $2,400 a year, I am probably looking at something close to $1,800. It continually frustrates me that at PSU there is very little consideration toward the financial burden of single parents. Even in the case of "sick child" days. They are great, except that as a single mom, I use all of mine by August because there isn't anyone else who can stay home.

  2. Yup, I'd say that $1,800 is a pretty good estimate with the co-insurance, increase in premiums, deductibles, etc. No question that someone in your position is in a tough situation.

  3. When I moved to my new position in July, it became very clear how good the benefits at PSU had been. My current institution has a similar deductible, even with the most expensive, most comprehensive health insurance option available.

  4. True, Bryan -- which is why I've tried to point out that we still do have good benefits compared to most other employers. But having said that, they certainly are changing.

  5. Don - I think you did a good job of balancing that. Jess is still at PSU through the end of this academic year, so we've been paying close attention to this, too.

  6. Don't forget that you can lower the overall cost a bit by guesstimating how much you may pay and setting aside that money in a flex account at PSU. Anything that's not reimbursed by the plan can be reimbursed through the flex plan using pre-tax dollars. It's effectively a discount to the out of pocket costs equal to whatever your federal tax rate is. Of course, you have to pre-fund it out of your pay check.

  7. moralhazard -- we plan on setting up a flex account this year. In past years, our out-of-pocket didn't make it worth it to bother with the hassle in order to gain the tax savings. but with the deductible and co-insurance, it will definitely be worth our while.