University of Minnesota Health Plan Task Force January 14, 1998
Comparison of Health Insurance Purchasing Alternatives
Executive Summary Introduction Current Shortcomings Trends Alternative Models Profiles Retirees Further Analysis Summary
Appendices: 1, 2, 3, 4, 5, 6, 7, 8 Glossary


Employers in the Twin Cities market engage in a variety of health insurance purchasing strategies to respond to recent consolidations of health plans, hospitals, and providers. Faculty and staff at the University of Minnesota have the opportunity to adopt or modify these strategies to meet their own health insurance needs. The withdrawal of the Medica Premier health plan and the dramatic increase in total premiums for the State Health Plan were the two most recent, unexpected changes that the State and the University would like to avoid in the future. These adverse changes prompted the Senate Committee on Faculty Affairs, the Faculty Consultative Committee, and the American Association of University Professors to explore alternative health insurance purchasing strategies. To this end, a number of alternative purchasing strategies are reviewed, and profiles of employers using each strategy are discussed.

In its attempt to understand and respond to recent changes in health benefits, the Task Force on Health Insurance posed three critical questions which motivate this report:

  1. Can concerns of the University faculty and staff be addressed by continuing to purchase health insurance with the State Employee Group Insurance Program (SEGIP)?
  2. If not, should the University purchase health insurance independently?
  3. What alternatives exist for the University to consider independently or in conjunction with the State?

The first and second questions should be addressed by the University faculty and staff themselves. Limited information is presented to address the first question by comparing the advantages and disadvantages of maintaining a relationship with SEGIP and other purchasing strategies. These comparisons can also provide indirect evidence for the second question. An answer to the second question can only be provided by the Task Force on Health Insurance, the Faculty Consultative Committee, and the Senate Committee on Faculty Affairs. Full consideration of the third question is the focus of the remainder of this report. It should be noted that evaluation of purchasing strategies is purely qualitative.

The University of Minnesota spent $47,286,492 on health insurance for 14,463 faculty and staff in 1997. Employees’ premium contributions totaled $5,108,492, while employer premium contributions totaled $42,178,452. The State Employees Group Insurance Program (SEGIP) charges the University an administrative fee of $1.70 per month per participant as of July 1, 1997 to cover costs of negotiating and purchasing health benefits. The University has been in a purchasing partnership with SEGIP since 1967, and faculty concerns about the effectiveness of this relationship have arisen in the past. Recent, adverse changes in 1998 health benefits are related to both the SEGIP purchasing process and health care market trends. It is unclear if the University would have greater control over health benefit changes by separating from SEGIP. University faculty may be able to obtain health benefits that meet their needs, but most likely at greater cost. Alternative strategies should be evaluated according to the values, goals and principles that University faculty and staff hope to realize in their health insurance offerings.

There are two cross-cutting issues that must be considered in order to choose the purchasing strategy that satisfies the values and goals of University faculty and staff. The first issue - financing arrangement - has two considerations:

“Self-insurance” would require the University to finance employee medical expenses out of University funds, and require the University to carry the “insurance risk”. Conventional insurance is represented by the current health plan offerings to University employees in which the multiple, participating health plans carry the insurance risk for the employees they enroll. Total replacement would require a single health plan that is offered to all employees to take on the insurance risk for all University faculty and staff. These two financing considerations have associated with them benefits and costs which will be addressed below in the context of each larger, purchasing strategy. The second issue that must be addressed is the decision-making body that is responsible for choosing which health plans are offered to University faculty and staff. Here, there are three options:

The Task Force on Health Insurance is particularly concerned with the implications of the second and third alternatives, and they will be addressed below in the context of each purchasing strategy.

Each purchasing strategy has several issues, such as administrative costs and “insurance risk”, that are transparent to the employee, and some issues that affect the employee as much as the employer. These issues can be summarized in four questions that are addressed for each strategy and are listed in Figure 1 below.

Figure 1. Questions to Evaluate Each Purchasing Strategy

  1. Where do the risks lie in each option?
  2. What are the costs of each option?
  3. What recourse exists for addressing problems with providers?
  4. What are the consequences of problems with a “carrier”?

The first question above is based upon two factors: 1) how the employer pays for incurred medical expenses, and 2) how contracted providers are paid. If the employer self-insures employee medical expenses, then the insurance risk lies with the employer. The State Health Plan and the State Health Plan Select options are currently financed this way. All other health plans are fully insured and the risk lies with the carrier (e.g. HealthPartners). Providers may also take on risk by being capitated. In this case, providers receive a fixed dollar amount per member per month and must manage the patient’s care to ensure that expenses are lower than the per member per month capitation rate. The handling of the insurance risk is the important aspect of this question.

The second question has three components: 1) total premium cost, 2) employee premium cost, and 3) employer administrative cost. The greater concern to both the employer and the employee is the total premium, because the total premium determines how much the employer will contribute which, in turn, determines how much the employee must contribute for each health plan. The employee premium cost will influence health plan enrollment decisions by employees, and this dollar amount is clearly of grave concern to University faculty and staff. The last cost, which is more transparent to employees than other costs, is the administrative expense of each purchasing strategy. In the current relationship with SEGIP, the University pays an administrative fee which is probably a fraction of the cost that the University would incur if health plan negotiation and administration was done in-house. This last cost cannot be ignored by University faculty and staff, because any change in the current relationship with SEGIP would most likely introduce new administrative costs that were formerly subsumed by the Department of Employee Relations (DOER).

The third question about providers focuses on the problem- resolution process that employees can rely upon during the contract year. Some purchasing strategies provide better solutions to provider problems than others. For example, if employees of BHCAG member companies are dissatisfied with their physician in the Choice Plus network, they can seek care with another care system provider. This flexibility is one tremendous advantage to employees that does not exist in some of the other purchasing strategies.

The last question about carriers focuses on the stability of costs over time. In the total replacement strategy, if the University was dissatisfied with the one carrier that insured all faculty and staff, the University might be required to change carriers if the relationship was irreparable. These considerations will be important in considering any change to the current purchasing partnership with SEGIP. Stability can be enhanced by increasing employer purchasing power and by increasing the competitiveness among health plans.

These four questions will be discussed below in the context of each purchasing strategy. Prior to that discussion, the current shortcomings of the current strategy are presented, and trends in the health care market are discussed.

Next Section: Current Shortcomings