City health insurance deal makes friends, not enemies

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March 8, 2004 // UPDATED 9:26 am - April 25, 2007
By: Scott Russell
Scott Russell

Health costs provoke bus strikes, but Minneapolis workers find a way to save taxpayers -- and themselves -- money without cutting coverage. A harbinger for us all?

How mighty a force is health insurance? It's powerful enough to shut down Downtown's light rail line, if Metro Transit officials are to be believed. They delayed the line's April 3 opening because bus drivers and other transit employees -- squeezed in a contract offer of large health insurance increases and tiny pay raises -- went on strike just as LRT preparations were peaking.

Yet when city of Minneapolis managers and their unions sat down amid similar tight budgets and 20-percent-per-year premium hikes late last year, they quietly settled their differences -- by agreeing to a drastic overhaul of how city workers pay for their health care.

The new plan may be a harbinger for other workers in the public -- and the private -- sector.

City employees will pay more out-of-pocket and manage more paperwork. But it isn't all workers taking it in the teeth: in one plan, their premium costs drop by three-quarters and the city will also offset their out-of-pocket expenses by contributing to a special worker fund.

In the end, the city, its workers and Blue Cross/Blue Shield all hope to spend less on health care. The savings is based on the assumption that workers -- faced with the real costs of care through higher deductibles -- will be smarter health care shoppers without compromising care.

The result, so far, is peace.

Timothy Giles, Minneapolis director of employee services, credited the city's Labor Management Committee for embracing a major new medical plan. "Without its cooperation, we never could have done it," he said.

Jill Kielblock of AFSCME Council 14, a union official and committee member, said the plan helps avoid premium increases that made insurance unaffordable for workers.

"Initially, when people look at it, I think they see something scary and negative," she said. "But once you have the opportunity to explain to them the whole package ... most people come to see it as an OK thing."

Risk-reward

The city has more than 6,100 benefit-eligible employees and retirees, including those with the independent boards such as the Minneapolis Park and Recreation Board and Library Board, city staff said.

The new insurance plans require workers to pay for all of their health care up to a certain amount, then policies cover costs 100 percent.

In return for shelling out more up-front, workers pay lower insurance premiums.

After the city-union agreement last fall, only 100 more employees than usual opted out of city coverage during open enrollment, city staff estimated. (Presumably, those workers' spouses had better policies.)

The comparison between the city and the Metro Transit negotiations is not exactly apples-to-apples. For instance, the City Council has passed a 2 percent salary increase cap while a recent Metro Transit offer is a 0 percent wage increase in the first year and a 1 percent increase in the second year. Most significantly, Metro Transit proposes eliminating retiree health benefits for those hired after Jan. 2. The city contract does not have retiree benefits.

However, soaring health care costs are a main driver in both negotiations.

Triggering change

In 2003, the city rebid its three-year health insurance contract. Blue Cross came back with the low bid: a 22.5 percent premium increase in 2004 and a maximum 18.5 percent annual increase in 2005 and 2006.

It made health care increasingly unaffordable.

The total cost of a family premium for the popular Aware Gold health plan would have increased from $890 a month in 2003 to nearly $1,600 a month in 2006 -- "a pretty healthy mortgage payment," Giles said.

Traditionally, the city pegged its contribution to a low-cost plan, Giles said; employees pay more if they want a higher-benefit policy.

Employees choosing the high-end Aware Gold plan faced the biggest hike under Blue Cross's initial proposal -- 106 percent in three years (if Blue Cross used the maximum 2005 and 2006 increases.)

Employees' monthly Aware Gold payroll deduction would have risen from $215 in 2003 to $315 in 2004 and $444 a month by 2006. Annually, workers would pay $2,750 more, or $5,300 annually, to retain their coverage -- not including co-pays.

"We said that is not acceptable," Giles said. "We need to do more than tinker around the edges with this. We need to look at a redesign."

The city and its independent boards will offer four new plans: two primary care plans and two open access plans.

How it works

Workers agree to pay higher deductibles in the new plans: $250 to $1,000 for single coverage and $500 to $2,000 for family coverage. After meeting deductibles, employees pay a percentage of the cost of visits and prescriptions up to a set amount.

The carrot: lower premiums -- $8.8 million less than the initial estimate to continue the status quo plan. Of that amount, the city ducks $6.1 million and the employees $2.7 million, said Myron Rademacher, city human resources information systems director.

Over 60 percent of employees chose a plan similar to the old Aware Gold, Rademacher said. The plan has the highest out-of-pocket costs but also big cost offsets.

Under the plan, families pay the first $2,000 in health bills. After that, they pay a percentage (commonly 20 percent) until they reach $3,000 total out-of-pocket.

After that, Blue Cross pays 100 percent of all medical costs for the rest of the year.

The monthly health care premium then drops from $315 a month to $80. That guarantees a worker will save $2,820, in return for the risk that they would have to pay $3,000 in any given year.

The city then sweetens the pot by making additional payments to the worker.

Recall: the city saved $6.1 million from projected higher insurance premiums. Rademacher said it contributes $5.7 to special employee health funds, called VEBAs -- Voluntary Employee Beneficiary Association accounts. Employees tap the fund to pay their out-of-pocket health care costs.

Three of the four new health plans have VEBA accounts; the city contribution varies. The plan chosen by most workers has the highest VEBA contributions -- $1,860 a year for family insurance.

Add it up and it's a heck of a deal for workers: they save $2,820 on premiums and receive $1,860 a year for their VEBA. In return for that $4,680 gain, they might -- might -- have to pay $3,000. It's entirely possible they could pay less.

The new plans don't cut the old coverage, Kielblock said. Employees pay Blue Cross's group-discount rate even when paying out-of-pocket.

When you think about it, the numbers don't make sense: if employees don't scrimp on coverage and coverage remains the same, how can everyone save?

Blue Cross spokesperson Jan Hennings said it's because employees have a greater incentive to shop for health care because they pay the first few thousands out-of-pocket.

The new plan should reduce overall health care spending, she said, calling it "the consumerism trend."

Blue Cross is providing city employees with resource guides and other information to help them be savvy shoppers, she said. For instance, a Blue Cross Web site tells them when they could replace a name brand prescription drug with a less costly generic drug.

(A downside is that the consumers will have to keep receipts to document their expenses up to the deductible.)

While the workers save money, so do the city and its independent boards. After contributing to VEBAs, the city still avoids $400,000 in premium payments they would have made had they gone with the status quo plans, Rademacher said.

Giles called it "a tremendous change for the city."