Health-care cost surge squeezes city budget, employees

As part of the Journal's continuing explanation of the forces behind the city's budget crunch, reporter Scott Russell examines employee health-care premium hikes, which suck up 30 percent of next year's property tax hike, and hit employee wallets harder, too.

Forget new programs; nearly a third of next year's $12 million tax hike will pay for employee health insurance increases -- and employees will pay more, too

Health insurance costs for city, park and library workers will increase by 19 percent in 2003, translating into a $3.6 million tax hike -- or nearly three dollars in 10 of the mayor's proposed $12.3 million property tax increase.

The mayor and City Council have proposed an 8 percent cap on annual property tax hikes -- so when insurance costs rise 19 percent, something else has to go.

Governments are still working out their cuts. The mayor has proposed targeted police-force reductions. The Park Board may close several neighborhood ice rinks. The Library Board is eying reduced hours.

It's impossible to link health insurance hikes directly to specific cuts, but rising insurance rates have contributed to those cuts.

The health insurance spike also affects city workers -- particularly their ability to negotiate better raises, union leaders say. The city's top-of-the-line family health coverage premium will increase by $154 a month in 2003 -- the city will pay $110 more a month, the employee $44 more. The total hike is the equivalent of an 89-cent-an-hour raise.

The city's long-range budget forecast includes 20 percent annual health insurance increases for the next six to eight years, said Patrick Born, the city's finance director.

Such hikes aren't likely, but, said Born, "it is what we think we need to estimate. We don't have a better way to estimate. If it is that much, we want to have it in our plan."

Costs are up all over Everyone faces higher health-care costs. The federal government will pay 11 percent more for its employees in 2003, according to Benefitnews.com; large private-sector employers will pay 15 percent more, according to the consulting firm Towers Perrin.

The reasons are many. Baby boomers are getting older and need more health care, and drug costs are increasing. Nationally, BlueCross BlueShield reported a 23 percent increase in prescription costs per member in 2001.

Health care providers say inadequate government Medicare and Medicaid payments shift costs onto private insurers -- and the businesses and employees they cover.

Mark Skubic, vice president of public policy and government relations for Park Nicollet, said Methodist Hospital in St. Louis Park loses $20 million a year on Medicare patients. That is, the government paid it $20 million less than its costs, he said.

"Medicare is a command-and-control market. We have to take what they give us," he said. "It's $20 million we have to make up somewhere else. To the extent that we can, we have to pass those losses on to others, otherwise we wouldn't be in business."

The city's plan The city, Park Board and Library Board offer three health insurance options through BlueCross BlueShield of Minnesota.

For each employee, the local governments pay 82.5 percent of the Comprehensive Basic HMO plan, the middle-cost plan. Workers who want the better plan (Aware Gold) pay the difference, and workers pay less for the lowest-coverage plan (Preferred Gold Limited).

This year, the city's per-employee contribution is $565 a month for family coverage and $161 a month for single coverage. In 2003, the city will pay $110 more a month for the family plan and $32 more a month for singles.

The City Council voted to approve the 2003 insurance plan Sept. 27.

The city is in the middle of a three-year deal with Blue Cross. Before 2001, the city had contracts with Medica and Health Partners, said Carol Schmidt, former benefits manager.

The city saved nearly $6 million when it switched to Blue Cross in 2001, she said. (Blue Cross offered an 8 percent premium increase compared to the 20 percent hike proposed by the Medica/Health Partners plan.)

Blue Cross capped 2002 increases at 18 percent, Schmidt said -- but did not put any restrictions on 2003 increases.

In 2003, the city will seek competing health insurance proposals for 2004 coverage, Born said.

"It is disruptive to our employees to change health-care providers every year," he said. "We try to do it as often as we think we should be testing the market."

The vanishing raise After the city pays its premium hike, it has less money left for raises. Much of the raises workers get pay the premium increases.

Aware Gold's cost would have increased by 27 percent in 2003 had employees not tentatively agreed to pay more out-of-pocket.

Aware Gold is the city's top-line health plan; roughly two thirds of all employees choose it, the city's human resources department said. Had benefits remained unchanged, the total Aware Gold family premium would have increased nearly $200 a month in 2003, to $936. Employees with family coverage would have paid $89 a month more, to $261.

Employees cut their premium increase in half by paying higher co-pays. A labor-management plan approved by the City Council upped most employees' Aware Gold office-visit co-payments by $10 and drug co-pays by $4.

Todd Pufahl, business manager for City Laborers 363, said a scheduled 3.1 percent wage increase would give a top-paid city laborer making $18.93 an hour roughly 60 cents more per hour. Had the co-pays not been raised, a worker with Aware Gold family coverage would have paid roughly 50 cents of the 60-cent raise for higher premium costs.

Dennis Goldberg, a management consultant for the Library Board, the Minneapolis Public Housing Authority and the Minneapolis Community Development Agency, said everybody he talks to -- whether representing labor or management -- asks one big health-insurance question: "Where is all of this going to end?"

"I sense a lot of anger out there among employee groups and employers alike," he said. "We are all in the same boat together."

County self-insurance hit hard Comparing insurance rates from employer to employer is difficult. The average age of workers at a particular business or agency, and recent health care needs, affect premiums.

Hennepin County faces health insurance increases similar to the city's. It was hit hard on its self-insurance plan, called "Metropolitan Health Plan," said Benefits Manager Paul Cegla.

Enrollees were sicker and ran up higher-than-expected costs, said Cegla, adding, "The experience has been terrible," in the Metropolitan plan. The county budgeted for an $18 million Metropolitan Health premium in 2001, he said, but higher-than-expected costs added another $2.4 million. The staff recommended that BlueCross BlueShield take over coverage.

County workers would pay $90 a month more for the Metropolitan plan's family coverage -- a 38 percent jump to $327 -- under the proposal going to the board Nov. 5.

The county also offers workers two Health Partners plans, Cegla said. Those family premiums are increasing 13 percent.

Schools get a pass,this time Insurance premiums for the Minneapolis Public Schools only increased 3.8 percent this September, said Michael Goar, the district's executive director for human resource and labor relations.

The school district offers three Medica plans to its employees, he said. Medica sought a double-digit premium increase, so the district said it planned to seek other insurance proposals. The two sides continued to talk and made adjustments to co-pays and out-of-network coverage.

Such small increases may prove extremely short-term. "They wanted to keep us," Goar said. "It's one year only. We have to renegotiate again."