A state takeover of K-12 employee health benefits would create an additional $474 million hole in the state budget rather than save $90 million a year as reported in a study commissioned by Auditor Brian Sonntag, a respected benefits and actuarial consulting firm has found.
"We have reviewed the report and calculated the costs that were specifically referenced but not quantified," said Tim Nimmer, Chief Actuaryfor Aon Hewitt, a division of Aon Corporation, which is headquartered in Chicago, IL. "For example, the report notes but does not calculate the cost for a reserve fund that would have to be created for a new self-funded plan. The report acknowledges but does not quantify the impact of the state losing the two percent premium tax it currently collects.
"We found that when these and other referenced costs are included, instead of generating savings, a state-run system creates a cost of more than $470 million in the next two-year budget and another $180 million a year in costs in subsequent years, plus inflation."
Aon is the world's largest global insurance broker and employee benefits consultant with 59,000 employees and offices in more than 120 countries. As the consultant to the Washington Education Association-sponsored health plans (covering more than 60,000 school employees), Aon Hewitt was asked to review the Hay Group Report.
"We suspected that the financial impact of the proposed state takeover was not as rosy as some have been led to believe, and the Aon Hewitt review has brought that clearly to light," said Mary Lindquist, President of the WEA. "With the huge deficit the state already faces, our hope is that the Legislature will abandon the idea of a state takeover of K-12 health benefits. Now is not the time to be adding nearly a half billion dollars to the state budget deficit."
Sonntag's executive summary to the study by Hay Group, a management consulting firm based in Arlington, Virginia, acknowledges that many of the costs associated with the proposed state takeover were not included in the report:
- "A substantial reserve fund would need to be established" (State Auditor Executive Summary, page 11) – Cost:a minimum of $114 million to meet requirements established by the state Office of Financial Management (OFM).
- "Will result in a corresponding loss in State revenue from such premium taxes" (Hay Group Report, page 70) – Cost: Loss of $30 million per year in the two percent premium taxes that are paid by private insurance carriers who provide coverage under all K-12 plans and currently go to the general fund.
- "The Hay Group did not calculate the costs to create a statewide, self-funded plan…a new IT system would need to be created (and) staffing would be necessary to administer the statewide program" (State Auditor Executive Summary, page 11) – Cost: More than $45 million a year in increased administration costs. This is based on current 5.72% administrative cost of the WEA plans (noted in Hay Group Report) compared to 14% administrative costs of for the Health Care Authority plan (per 2004 OFM study on K-12 benefits).
The Hay Group study also recommends equalizing the funding rate of K-12 employees health benefits with state employees but does not include all those costs, which amounts to about $105 million a year when part-time employees are included. The Hay Group Report also assumes that the state could take $144 million in local levy money approved by voters and redistribute it across the state.
"That can't happen under current law and I can't imagine the voters would stand for the state snatching local taxes that they approve specifically for their district and its employees," Lindquist said.
The Auditor's report specifically noted that the WEA plans' Rate Stabilization Fund "can be used only to keep insurance rates stable," is independently audited and cannot be used for political purposes.
Local school districts currently have a choice in providing health benefit plans for K-12 employees. About 55 percent of the 100,000 K-12 employees in the state are in plans administered by the WEA, with the remainder in other plans selected by districts.
"This idea flunks on every level," Lindquist said. "It's bad for employees, bad for districts and bad for taxpayers. It would replace a voluntary system that performs well with a mandatory system that reduces benefits, imposes higher administrative costs and would likely force people to change doctors.
"It doesn't save money for the state – it costs, big time. If this proposal were to be approved, it could only be interpreted one way: as a punitive measure toward teachers and other K-12 employees."
About Aon Corporation
Headquartered in Chicago, Aon Corporation is the leading provider of risk management services, insurance and reinsurance brokerage and human resources consulting and outsourcing, with 59,000 people working in over 500 offices in more than 120 countries. The readers of Business Insurance, a magazine and online business research and news firm, named Aon "Best Employee Benefit Consulting Firm" for 2010, 2009 and 2008. For more information, contact Timothy N. Nimmer, FSA, MAAA, Chief Actuary & Chief Broking Officer, Aon Hewitt, 4100 E Mississippi Avenue, Suite 1500 | Denver, CO 80246, Office: 303.782.3388 | Fax: 303.782.3307
Contacts:
Aon Hewitt
Todd Ringwood, 206-467-4628
or
Tim Nimmer,
303-782-3388