Last fiscal year was a difficult one for the Montana University System Benefits Program. Our long-term Director, Dave Evenson, resigned in September of 1998 and the Commissioner's Office scrambled to replace him. Rod Sundsted, the Director of Finances for the OCHE was imposed upon to take over the Director's duties temporarily until a replacement could be found. He ended up serving for most of the 1998-1999 fiscal year. Considering the fact that these duties were added to his regular responsibilities, Rod did an admirable job during what proved to be a very difficult interim period. Glen Leavitt, the former long-term Director of Fiscal Affairs at Western Montana College and recently retired from that position, was then appointed Interim Director of Benefits and assumed his duties on July 1, 1999. Glen has served on the InterUnits Benefits Committee for a number of years and was its Chair last year. He brings years of financial management experience to this position and knows our plan well. Most would agree that the rudder of our Benefits Program is presently in very good hands.
Last year was a financial disaster for the program. With little warning the Legislature imposed an additional $1 million reserve requirement on the program but provided no additional funding to meet this mandate. This $1 million was an unforeseen and unbudgeted expense. Our consultants, Mercer and Company, projected that our medical claims would increase at the same rate as the previous year or 7% and we budgeted accordingly. In reality, medical claims inflated at a 10% rate. Our pharmacy costs alone increased at an astounding 21%. The bottom line to all of these adverse realities was that on July 1, 1998 we faced a $2.7 million shortfall.
It is easy enough when something like this happens to scream mismanagement but I honestly feel that this was not the case. The causes are multiple and complex. The shortfall followed years of anemic increases in funding from an increasingly parsimonious Legislature. Our once healthy reserve funds fell below mandated minimums as a result of this inadequate funding. Medical inflation has, for the last decade, been double the rate of the economy as a whole. Last year was typical: a general inflation rate of under 4% and a medical inflation rate of over 8%. Needless to say, the Legislature did not allocate an 8% increases for our Benefits Program during the period. Moreover, the savings enjoyed nationwide as a result managed care were simply not available in Montana. Until very recently, there were no true HMO's in the State and the savings provided by preferred provider plans such as our own, while significant, are far smaller.
We are an expensive group to insure. For one thing, we tend to stay in our jobs longer and we are, on average, growing older as a group. As we age, alas, we tend to suffer more from illness and disease. Over 50% of our total lifetime medical costs will occur in the last year of our life. We are also better educated than the national norm. Better educated people tend to be more knowledgeable and concerned about health issues and, therefore, heavier utilizers of medical services. Our current experts, Buck Consultants, estimate that MUS employees have an eight percent higher utilization rate than our counterparts in the State Benefits Plan.
Where should we point the finger? Should we blame ourselves for monitoring our own health and seeking services when needed? Should we feel guilty for having birthdays, living longer, or growing older? Should we be blamed for using that new but expensive drug therapy that has so dramatically improved our life? Of course, not. Yet all of these things add expenses to our Benefits Plan, and as a self-insured program, we struggle to pay the bill.
The InterUnits Committee had to face the grim reality at their Spring 1998 meeting that, if no changes were made, the plan would come up $2.7 million short of the mandated reserves by June 30 of this year. As a self-insured plan we really had but two options: reduce benefits or increase premiums. We settled on a combination of the two. The vision coverage was eliminated and the funding for the Wellness Programs was reduced by 45%. We put a $100 deductible and a 25% co-payment on the pharmacy program and increased the co-insurance payment on the medical plan from 20% to 25%. We also increased the deductibles on our retirees. The premiums increased from approximately $7 for individual coverage to $38 a month for family coverage. The net results were grim--greater out-of-pocket costs for less coverage. In fact, some of our classified staff, suffering under a less than 1% pay increase, found that their actual take-home pay decreased this year.
No one on the InterUnits Committee took these changes lightly. We were faced with a whole series of Sophie's choices: do we slash here or do we burn there? As difficult and as painful as these decisions were, they were not done without good rationale nor thoughtful consideration of all of our options. The pharmacy plan was bleeding us to death and something had to be done to contain costs and shift some of the expenses to the patient. The vision plan covered limited regular expenses that could be budgeted for ahead of time. The increased deductibles and co-payments impact only those who file claims; the 50% of us who never file a single claim in any given year remain unaffected. The same unlimited and uncapped catastrophic coverage remains as it has always been. The greatest financial threat for most of us face is a major medical crisis. Once the deductibles and co-payments are met, the plan covers us 100% be it $10,000 or $10 million. There are no per-incident nor life-time caps on the coverage at all.
When it came time to increase premiums, we did everything possible to keep the plan affordable and to minimize the increases for children and families. We wanted no one to be forced to drop coverage for his or her family because of costs. Our health insurance is certainly not the deluxe program that it once was. We can afford the Cadillac plan no longer. But the MUS program still remains a very good plan with unbeatable catastrophic coverage. It is good value as well. One would be had put to find better coverage in the marketplace for the price we pay. MUS still provides a great deal of benefit for the $265 per month allocated to us by the State. This is hardly mismanagement.
It is only human nature when in crisis to seek simple solutions. There was much talk last year about a merger with the State Plan as a possible answer to all of our problems. This has proven to be a false hope. A subcommittee of InterUnits and our experts, Buck Consultants, studied the realities of a possible merger carefully and concluded that it was not in our best interests to join forces with the State Plan. We are large enough so that the economies of scale are already in place. Our administrative costs are actually lower than the State plan's. In order to normalize the differences in our reserve amounts, we would face substantial buy-in costs. Even after we were in the State Plan, we would certainly be rated separately and our premiums would not necessarily go down. In the process, we would loose our autonomy and a great deal of control over our program. Buck Consultants suggested that we would likely be farther ahead if we added an HMO option to our existing choices. InterUnits is in the process of studying the available HMO plans and may well add such a program in the next biennium.
The immediate future of the Benefits Program seems secure. We were forced to swallow a bitter pill last Spring but the medicine seems to be working. Medical claims cost have leveled off and pharmacy claims, due in large part to the required deductibles, actually went down somewhat. We only have six months of data under the new plan, too little information with which to make completely accurate projections. However, if these trends hold, we should easily meet our reserve requirements by June 30,1999, the end of the current fiscal year.
The bargaining units and the Commissioner's Office have tentatively agreed to an increase in the State contribution to the Benefits Program of $15 in the first year of the biennium and an additional $10 in the second year. This would mean that the current $265 per month would increase to $280 in 1999/2000 and to $290 in 2000/1. The enabling legislation is in House Bill 13 - the State Pay Plan. If the Legislature allocates these funds, as we expect that they will, we anticipate that there will be no need to increase the out-of-pocket premium costs for MUS employees next year. After years of rate increases and benefits reductions, this will be very good news indeed.
The long-term prognosis is not nearly as hopeful. Medical costs continue to increase at an 8% rate per year, more than double the inflation rate of the economy as a whole. It does not take a genius to realize that this cannot be sustained forever. Employers everywhere are struggling to find the means to help pay the medical costs of their employees. Our total medical bill is now is now approaching 15% of our Gross Domestic Product. Most Western democracies spend about 10% of their economies on health care and cover all of their citizens. We spend 15% of our GDP and 40 million people are, this very day, without health care insurance. On the face of it, our health care system is grossly inefficient and increasingly unaffordable. We might add that for the richest nation on earth to limit access to health care for its working poor and its children or to anyone, for that matter, in need of care is fundamentally immoral besides.
The irrationality of the present health care system almost belies description and belief. Fee-for-service plans like our own give providers economic incentives to do more than is needed and to charge more than required. Managed care plans or HMO's give insurance companies economic incentives to withhold needed services. Both are hopeless strategies. The first has enriched the pockets of the providers, the drug companies, and the stockholders. Managed care seems to have only "managed" to enrich the managers themselves. Both have failed the consumer.
Despite the fact that the health care system is seriously broken, nobody seems much in the mood to fix it these days. When the Clinton administration first took office six years ago, health care reform was placed high on the agenda. The insurance industry, the drug companies, and the providers themselves responded by engaging in the most expensive lobbying and public relations campaign in the history of the country. The net result was a public totally befuddled and for the most part believing that if government were to do anything at all about reform, they would get it wrong. What these lobbyists failed to tell the public is that the medical industry was making record profits at the public's expense and that the government programs such as Medicare and Medicaid cost seven cents out of every health care dollar to administer while, at the same time, insurance companies administrative costs were averaging 14 cents on the dollar. So much for market efficiencies.
Things have not improved in these last six years; if anything, they have gotten worse. The uninsured have grown from 35 million people to the current 40 million; the total costs have risen from 12% of GDP to 15%. And if you think that we are not being taxed to pay for these irrationalities, consider this: about 35 cents of every claims dollar in the MUS plan goes to pay for "cost shifting." We who maintain a good insurance program are being overcharged to pay for those who cannot or do not pay their bills. It is, in reality, a 35% tax on our medical bills; it is just hidden. We cannot afford much longer the duct tape to put temporary patches on this absurd system. We need major structural health care reform to sustain the long-term viability of our Benefits Program and we need it soon.