Summary of Findings-
The paper that follows is a review and analysis of Michigan House Speaker Dillon’s proposal to
change how health benefits are provided to all 500,000-plus public employees, retirees and their
dependents at every level of government in Michigan, from cities, counties, townships, villages,
special authorities, and local school districts, to the state, community colleges, and universities.
Speaker Dillon issued a white paper in support of his proposal on July 16, with a subsequent
revision on September 9. A bill creating the framework for governance of the plan, HB 5345,
was introduced on September 10.1 It is expected that additional legislation will be needed for
full development of the proposal.
· The analysis that follows finds that the plan savings as claimed under the proposal are largely illusory, especially those claimed for administrative efficiencies and economies-of-scale.
· The proposal’s idea of capturing additional savings by creating a “super pool” of an
estimated 500,000 active and retired public employees is based on two critical errors of
assumption: assuming that large pools do not already exist in the market (they do) and that the market is served by thousands of totally different insurance plans (it is not: the market is largely made up of slight modifications of common insurance programs).
· Actual administrative costs will far exceed those disclosed in the original white paper, likely in the range of $295 to $370 million based on comparisons to the commercial insurance market and the pool experience in other states.
· The desired underwriting model, whether self-funded or insured, is not clear from the white papers or legislation. In either case, costs that currently have not been accounted for in the proponents’ estimated savings will be incurred: either an appropriation to set aside a startup reserve of $400 to $500 million or costs for re-insurance.
· “Standardization” of benefits is nothing more than a poor synonym for reduced benefits
and/or increased employee cost sharing. It is not necessary to assert false cost savings from alleged administrative efficiencies and dubious economies-of-scale to have a discussion with employees about cutting benefits: that happens through negotiations today. A large and expensive new state bureaucracy is not needed.
· Benefit costs are already being addressed to a significant degree, and for public schools
benefit costs actually declined in the 2007-2008 school year. These savings are occurring in the market today due to the real impact of market forces, and further savings are virtually certain without HB 5345.
· The proposed structure of the Office of the State Employer and its duties cannot sustain a
true collective bargaining system as has been suggested. At best, HB 5345 suggests that
employee groups would be limited to selecting from a small number of predetermined
options. That is simply not collective bargaining.
· Claims of further savings cannot be estimated without knowing what the benefits offered by the proposed “super-pool” will be. Proponents of the idea say that benefit levels will not be reduced. The analysis finds that the only opportunity for obtaining savings in the plan as proposed is by reducing benefits and/or increasing employee costs, and while the sponsor has repeatedly stated that benefits will not be reduced, there can be no other purpose for benchmarking against average costs in the other 49 states without comparing the actual benefit package contents.
Summary of the Proposal Itself-
On July 16, 2009, Michigan House Speaker Dillon released a draft white paper proposing major
structural changes to the current system of public employee health benefits in Michigan, with all
of its claimed “savings” coming in one form or another via creation of a single, mandatory, state
government-run plan for all public employees in Michigan: state or local, university or local
sheriff. The original white paper would more accurately be described as presenting some
concepts for reform than a specific plan. The original white paper does suggest major policy
changes impacting public employees at every level of government from the state to the smallest
locality, local schools to universities, and presumably all government-operated or government controlled quasi-public entities such as special authorities at any level.
HB 5345, introduced on September 10, 2009, outlines a slightly more detailed proposal that
would create a 13-member board and charge it with actually drafting and overseeing the
implementation of the insurance plans and their administration by the Office of the State
Employer. Circulated earlier as a draft, HB 5345 is still short of detail on many issues, but one
clear change is that it retreats from the original white paper suggestion of a double set of
benchmarks for benefit “standardization” by eliminating the proposal to benchmark benefits and
costs against private sector employers in Michigan (HB 5345 retains the concept of
benchmarking against public sector employers nationally).
The original white paper and subsequent documents are also generally devoid of critical specifics
about the current state of public employee benefits, about demographics of exactly which public
employees would be included, about the proposed design of the new plans, about
implementation, and about the proposed employee cost-sharing or projected start-up costs. If the
plan is ultimately developed into more specific, implementable legislation with much more detail
than in the draft bill or HB 5345, further analysis will be needed at that time to review and assess
the accuracy of whatever savings claims are made at that time.
Much of the savings claimed from the general proposed structure as outlined by the proposal’s
supporters are overstated, have already occurred due to changing market conditions, or have
additional offsetting costs that have been omitted.
The original white paper suggests that this single, mandatory, state government-operated health
plan can be a major solution to the imbalance in the state budget (estimated in the paper at $1.3
billion) for fiscal year 2010, which began October 1, and press coverage to date has focused on
the theoretical savings suggested in the concept paper of $700 to $900 million a year. The
revised title page of the most current version of the white paper now claims $900 million in
savings. The action plan and implementation schedule of the original white paper clearly
intended this to be viewed as a FY 2010 budget solution.2
Analysis of the original white paper in its entirety, subsequent updates, and HB 5345, coupled
with other research, knowledge, and experience related to state purchasing, public employee
benefits, collective bargaining, state purchasing, and the state legislative and budget processes
suggests that there are many major questions that remain to be answered about the calendar, the
content of the proposal, and the process suggested.
Even over the longer term, there are serious questions about the potential for the level of
administrative, efficiency, and economies-of-scale savings projected in the original white paper.
There are even questions about the theoretical level of the potential savings estimated from
reducing employee and retiree benefits and increasing employee and retiree cost sharing, because
some of these actions have already begun to be implemented at the state and local levels, thus
reducing the potential for further gains from the status quo of the examples used in the original
white paper—some of which date back to 2005.
It is also critically important to make the policy distinction between savings attainable by
economies-of-scale or efficiencies of operation, and savings obtainable by reducing benefits and
or increasing employee cost-sharing. The white paper itself and much of the subsequent
discussions have tended to blur these together.
1 A third version of the white paper was issued as this analysis was being finalized. The original release of the
paper, labeled “Preliminary Draft,” on July 16, 2009, was titled “Opportunities to Save Cost (sic) on Public Sector
Health Care Benefits.” A very slightly revised paper was released on July 27, 2009, still bearing the original title
and preliminary draft identification, with the use of the singular “cost,” but adding another title and subtitle: “The
Dillon Prescription for Public Sector Healthcare Reform: How consolidating healthcare plans can save the State of
Michigan $900 million a year.” For ease of reference, this analysis will simply refer to this as the “original white
paper.”
2 Original white paper draft, p. 2. The second White Paper released in mid-September suggests additional savings
could be obtained by adding dental and vision insurance to the pool structure.