The Case Against Tapping the Health Insurance Premium Stabilization Fund
The Mayor, City Council members and labor leaders are actively discussing ways to prevent the layoffs and cuts proposed to balance the budget in fiscal year 2012. One option under consideration is diverting money from the Health Insurance Premium Stabilization Fund. Tapping this fund may seem harmless, but it is a fiscal gimmick that only postpones the tough decisions needed to address the underlying causes of the City’s financial predicament. Furthermore, it may ultimately hurt the most medically needy City employees. City and labor leaders should focus their cooperative efforts on meaningful reforms of health insurance instead.
New York City offers its employees and retirees a choice among several comprehensive health insurance plans. More than 90 percent of employees enroll in one of two plans - Group Health Incorporated (GHI) or Health Insurance Plan (HIP). The two plans merged under an umbrella organization, Emblem Health, last year, and the new entity plans to convert to for-profit status in the near future.
GHI and HIP are the most popular plans for municipal employees because in each case the City pays the full cost of comprehensive coverage with no premium cost for the employee; in contrast, the other plans offered typically require a significant contribution from the worker’s paycheck. This arrangement stems from a 1983 agreement among the City and municipal labor unions that the City’s cost for health insurance would be the HIP premium rate approved by the State Insurance Department, with employees bearing any cost exceeding the HIP rate. In 1984, the cost of GHI began to exceed the HIP rate; in response, the City and the municipal labor coalition agreed to create the Health Insurance Premium Stabilization Fund (HISF) to prevent employees enrolled in GHI from having to pay part of their premium out of their paychecks. Instead the HISF would give money to GHI to cover the difference between its costs and the HIP rate. The fund was established as part of a collective bargaining agreement with $30 million in City funds, and the City agreed to future annual deposits of $30 million (later increased to $35 million). Funds have been periodically used to stabilize GHI’s finances, but the HISF has accumulated over $500 million.
Tapping the HISF now may be tempting, but it does not solve the City’s financial problem. The City Council has placed a priority on preventing 4,300 teacher layoffs, 20 fire company closures and other unpopular reductions slated for 2012.Funds from the HISF may allow for the restoration of these cuts, but only for one year; this “one-shot” will merely postpone – not eliminate – the need for tough choices in the budget. The City will be faced with the same predicament next year, when it faces a $4.7 billion gap for fiscal year 2013.
The proposal to use the HISF is being characterized as a contribution or concession from the municipal workforce to help the City in difficult times. But neither the union welfare funds nor worker paychecks are actually affected. The HISF consists entirely of money provided from City taxpayers; it is contributed as part of a collective bargaining agreement, but it does not replace or reduce the substantial taxpayer contributions (about $1 billion annually) to the separate union welfare funds. And the workers enrolled in HIP and GHI will continue to get their benefits without any contribution from them toward the premium.
What will happen if the drained HISF cannot cover rising GHI costs? History suggests that the most medically needy City employees will ultimately bear the burden. When the excess costs of GHI began to exceed $30 million in 1989, benefits were redesigned to shift costs onto users: deductibles were increased for some services and new deductibles were imposed for emergency room visits and other services. The practice of increasing deductibles for services used by those with medical needs – rather than by implementing premium-sharing for all employees – has continued. Most recently, in 2009, $117 million was transferred from the HISF to the union welfare funds, separate union-controlled funds that offer vision, dental and prescription drug benefits. In return, the City implemented $150 million in savings, mostly from increased deductibles for hospital emergency room visits, in-patient facility admissions, and ambulatory surgery.
Preventing layoffs and service cuts is a noble goal, but to do so effectively, City leaders must understand the cuts as symptoms of a more severe problem: the structural imbalance of the budget, in which its expenses grow more quickly than revenues, leading to perennial budget gaps. The challenge is not scrambling together sufficient funds to restore the services in one year; rather, the City’s elected and union leaders should seek large-scale savings that reduce the need for these tough choices in the future. One such reform is cost sharing for health insurance premiums. Following the example of State employees, who contribute 10 percent of the premium for individual coverage and 25 percent for family coverage, would provide annual savings of $625 million – enough to prevent the cuts, keep the budget balanced, and place the City on firmer long-term footing.