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Without an infusion of cash and a structural overhaul, the Arkansas public school employee health insurance plan won't survive

On Jan. 1, rates are scheduled to rise about 50 percent.

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In January, the cost for Scott Wahlquist to insure his three children and wife will rise to nearly 40 percent of the gross income he makes teaching in Conway.

Wahlquist and his family moved to Arkansas 13 years ago to help his aging father-in-law run the family poultry farm in Drasco, a small community in Cleburne County. Since 2006, he's taught German at Conway High School and a Conway middle school while tending to the chickens in the evenings and on the weekends. Each of the Wahlquists' three boys has suffered a different major medical condition since childhood. The oldest son, who is now a student at Arkansas Tech, must take regular insulin injections and other medication to cope with Type 1 diabetes. The middle son has Asperger's. The youngest, 16, suffers from ulcerative colitis, a painful and sometimes devastating auto-immune disorder of the bowels. Similar to Crohn's disease, ulcerative colitis can require extended hospital stays, a lifetime regimen of medication, and eventual surgical removal of the colon, which the family finally was forced to resort to after years of struggle.

"It's fortunate the hospital stays have been spread out over so many years," Wahlquist said of his youngest son, "but we counted it up and if you stacked them on top of each other day by day, he spent eight months of his life in the hospital before he turned 9 years old."

All three of the boys are now managing their conditions reasonably well, but at a sizeable cost. Prescriptions alone would run over a thousand dollars each month if the family had no insurance. "We're all relatively healthy within our own little chronic illness realms," Wahlquist said with a slight smile. However, one member of Wahlquist's family is not insured: his wife, Michelle.

Last year, the public school employees' plan that covers Wahlquist and his sons raised its rates by about 20 percent. Wahlquist said the cost to cover both his wife and his children just didn't work with their household budget. "It was either pay for insurance for Michelle or put food on the table." They now pay for Michelle's basic care and prescription drugs out of pocket and hope for the best. Wahlquist's current premium for himself and his children is about $580 per month. If his wife were included as well, the monthly premium would be $1,030.

But that's a bargain compared to what's scheduled to happen in three months.

In August, the Employee Benefits Division (EBD), the arm of the state revenue department that manages both the teacher insurance pool and a similar plan for state workers, announced a massive increase in premiums for public school employees. As of Jan. 1, Scott Wahlquist will begin paying $870 per month in premiums to insure himself and his children. If Michelle were to rejoin her husband's plan — and soon she must buy insurance of some kind somewhere or pay a penalty, as required of all citizens by the Affordable Care Act — the total premium would rise to an incredible $1,540 every month. Wahlquist earns about $4,100 per month as a veteran teacher in the Conway Public School district, pre-tax; this means that to insure his wife and kids in 2014 on his current plan he will have to contribute 37 percent of his gross income for the cost of premiums alone.

***

Wahlquist has plenty of company. Out of the nearly 70,000 public school employees in Arkansas, about 48,000 are insured by their employer and will face insurance hikes of up to 50 percent as of Jan. 1. Most of the rest get cheaper insurance elsewhere, such as through a spouse — a fact that is of crucial importance in understanding the crisis. Since the beginning of the summer, teacher insurance actuaries have been warning that insufficient funding in the school employees' plan, combined with an unusually high claims year in 2012, threatened the system with insolvency. More money is required either from public coffers or teachers' pockets. Because the Employee Benefits Division has no power to appropriate more funding — that is the job of the legislature — school employees are the ones who will have to pay more. If the numbers above sound daunting on an Arkansas teacher's salary, bear in mind they also apply to non-teaching staff as well: cafeteria workers, janitors, bus drivers and the other "classified" support staff who toil for low hourly wages to keep school facilities functional.

The price tag also depends on the kind of insurance the employee chooses. The choice ranges between buying an expensive "Gold" policy that is extraordinarily generous — no deductible, small co-pays — or a cheaper "Bronze" policy that is much stingier — high deductible, generally higher co-pays. A second-tier "Silver" plan is somewhere in between the two in terms of price and benefit quality, but attracts few participants. The Gold is intended primarily for families with long-term health needs, like the Wahlquists, or older individuals at greater risk of illness, while Bronze is a good option for younger, healthier people unlikely to rack up high medical bills in the near future. But as premiums rise, more and more families that desperately need good insurance coverage feel they have no choice but to shift to Bronze.

Wahlquist said he's considering downgrading plans. "I've played with the numbers a little bit, and if everything stays status quo with my family's health, knock on wood, the [Bronze] plan will require about $4,000 or $5,000 more out of pocket than the Gold did. Now, my premiums will go down, that's true. But that also means at the beginning of the year, in January and February, I'd have to come up with $5,000 myself over a two-month pay period just to meet our monthly medical bills before the deductible."

A looming crisis

If you know someone who works in an Arkansas public school, there's a good chance they've mentioned their insurance crisis in conversation or on social media. Working in a school is a difficult, frustrating, and often thankless job, and school employees everywhere are seriously wondering if they should change professions — or move. From Paragould to Texarkana, they've been meeting with superintendents, elected officials, and union representatives. "They're upset," said E.C. Walker, interim director at the Arkansas Education Association. "And it's understandable. They're hurting because of this."

"I've never dealt with an issue that's generated this much comment," said Rep. James McLean (D-Batesville), chairman of the House Insurance and Commerce Committee and a third-term representative. McLean says that immediate action to address the problem is necessary. "If we keep on heading down this track, we can't get quality people to teach."

Shelly Smith, a veteran teacher in the tiny Stone County community of Fox, has a ready laugh and a solid grasp of the intricacies of insurance. Motivated by personal frustration and her colleagues' stories of medical hardships, she has been thrust into the role of activist over the past year. Last fall, she wrote a column in the Arkansas Democrat-Gazette about the untenable premiums faced by school employees; she received responses from dozens of teachers around the state.

"Then someone suggested we start a petition," said Smith, "so I said, 'I could do that' and the next thing I knew I was sending out petitions, and sheets were coming back in the mail. We took it to the education committee with almost 6,000 signatures asking for a change. And this was a year ago, when the rates increased 20 percent — long before we knew about this new jump."

"I started a Facebook group and started going to EBD meetings over the summer, which was just a barrel of fun. And I watched these people in the meetings and I thought, 'Oh my God, it's gonna get worse.' " When it did get worse — when the new rate hikes were announced in late August — Smith said she floated the idea of a rally with her online group. "Within an hour, people were saying 'I'll bring this! Or, 'Oh, I'll do that!' and the next thing I knew I was filling out paperwork and sending it in." School employees are planning to assemble on the Capitol steps on the morning of Oct. 12. Smith said she has no idea how many people will show up, but the Facebook group she started, which is called "AR School Employees Health Insurance," now has over 9,000 members.

"Most of us don't know each other," Smith said. "We're all over the state. If it wasn't for the Internet, none of this would have happened. We just don't see each other, we're kind of isolated, but thanks to social media we're able to connect. It's not AEA, it's not any particular group, it's just that I came up with the petition and this Facebook group and everything kind of grew out of there. We don't even have a name — we're not an organized group, we're just a grassroots thing."

Legislators are listening, but the General Assembly is not in session. Sen. Johnny Key (R-Mountain Home), the chair of the Senate Education Committee, has been sounding the alarm about teacher insurance underfunding for years, but during a joint interim meeting of Education and Insurance and Commerce on Sept. 9 he reminded the room that "we have little power — well, no power — to enact new laws." The ability to re-convene the legislature rests solely with Gov. Mike Beebe, and he has taken that extraordinary action only once during his seven years as chief executive, in 2007. The Senate chair of Insurance and Commerce, Sen. Jason Rapert (R-Bigelow), has written a letter to Beebe urging him to do just that. McLean agrees that it is a necessity. "I'd be shocked if we don't have a special session," he said. But Beebe has said repeatedly that he will call a special session if and only if lawmakers first "reach a majority consensus on solutions for both the short-term funding problems and long-term systemic issues with the Public School Employee Plan."

A short-term solution is easy to visualize: Inject a substantial amount of money into the fund and teachers' premiums no longer have to rise by 50 percent. To keep rates at current 2013 levels, EBD would need $54 million from the legislature. That sounds massive, but the sum is actually feasible at the moment because Arkansas accumulated a large surplus in fiscal year 2013. Thanks to some one-time tax events this spring, we currently have about $150 million burning a hole in our collective pocket. A draft legislative memo released on Oct. 4 suggests pairing a $35- to-$45-million infusion from the surplus with a smaller rate hike for employees of 10 to 18 percent.

But such a surplus is not likely to happen again in future fiscal years. And there's also a bigger problem — the cash infusion would merely stabilize the current rates for 2014, not prevent future hikes from happening. Almost everyone agrees with Beebe that a short term bailout without a structural fix would be foolish. "Nobody in their right mind is going to do that," said Sen. Uvalde Lindsey (D-Fayetteville). "The bucket's got a leak in it, and you can pour water in it all you want to, but it's not going to do any good. So before you do anything, you need at least some idea about how to patch the bucket." Finding a consensus on the patch is what's currently at stake.

Understanding the problem

To understand what's happening with school employee insurance, it's helpful to consider it alongside the other group plan managed by EBD that exists in parallel: the Arkansas state employees' (ASE) plan, which covers anyone who works directly for the state. Aren't teachers also state employees, one might ask? Not in the eyes of the law. Funding for their salaries originates from the state treasury, but they're still considered employees of their individual school districts. The distinction seems arbitrary, but it's the basis of the difference between how the two groups are treated. (It's also worth mentioning that there are many times when districts, and teachers, are vocal advocates of local control of schools rather than state control, so the distinction is not entirely unreasonable.)

Both the school employees plan and the ASE plan offer the same three coverage options of Gold, Silver, and Bronze. Both are overseen by a single board at EBD. Both have a similar pool of employees with similar rates of illness and utilization of insurance. They should be the same. But a state employee who covers her family with the Gold plan will pay $419.62 per month in 2014, compared to $1,500 for an average teacher or school janitor. Why?

The short answer is that the employer contribution for school employees is too small. This creates a phenomenon called adverse selection. When buying insurance costs a great deal, the only people who will purchase it are the ones who need it the most and are therefore the most medically expensive. Over time, this pattern will make an insurance system crash and burn.

Arkansas state law obligates the government to pay for the bulk of its employees' insurance costs, which works out to about $410 per month per state employee. A similar statutory requirement for school districts sets a flat employer contribution rate of $131 per month per school employee. This spring, legislators increased that amount to $151, an uptick that barely puts a dent in a problem of this magnitude.

The discrepancy is further compounded by the fact that the state allocates money to the state employee plan per budgeted position and money to the teachers plan per participating employee. Let's say a hypothetical school district has 100 employees, and 15 percent of them choose not to buy insurance at all. The state pays its $151 subsidy only for the 85 people insured. Not so for a hypothetical state office with 100 positions but 85 employees participating; the state would pay the obligated $410 into the state employee fund for all 100 slots.

The net result is that school employees face much higher employee contributions for health insurance than other state employees.

Everything hinges on this detail, because the stability of an insurance plan is all about participation levels. At the moment, less than 65 percent of Arkansas school employees choose to participate at all in the group plan. Again, many teachers have spouses with employers that offer better insurance than the school provides and so they choose to join that policy instead. Others who are healthy and young may choose to go without insurance at all (remember, low-wage classified employees are included in this pool, who may be earning little over the poverty line). Over the years, more and more employees have left the system, creating an ever-smaller and ever-unhealthier pool and driving premiums upwards.

So, say there's a moderate rate increase — and periodic rate increases are simply a fact of life, since health care costs in general have risen each year for decades — in our hypothetical school district. The employer contribution stays flat at $151, and employees have to contribute more. That 15 percent of people opting out might rise to 20 percent. The people who opt out tend to be the healthiest and youngest and therefore the cream of the crop, from an insurer's point of view — they're most likely to pay into the system without incurring hefty medical bills. Those left behind in the pool are the employees more likely to need health care — those with children, those who are older, those who are sick. Actuaries will then determine the new, smaller pool is riskier and will raise premiums to cover the increased risk. When the next year rolls around and the higher premiums hit, the percentage of employees who decide it's time to opt out in our hypothetical district might climb to 25 percent. The pool shrinks, and the rates climb higher.

***

Out of the nearly 70,000 public school employees in Arkansas, only 48,000 currently participate in the plan. When the new rate hikes hit this January, thousands more will head for the exit, leaving behind only those employees who most desperately need insurance.  This vulnerable pool will be even riskier to insure than before, which means rates in 2015 would therefore shoot even above the high figures put forth for 2014. This is the endgame of adverse selection, a crisis situation that health care experts call a "death spiral." It is the danger of this very scenario that explains many of the key provisions of the Affordable Care Act, or Obamacare (see sidebar).

Meanwhile, almost 90 percent of state employees choose to participate in their plan. And why wouldn't they? It's a great deal. Some school employees are tempted to blame their state counterparts for getting better coverage. But that would be a mistake, said Walker, the AEA head. "We don't want to pick a fight with the state employees. We would hate for the solution to involve reducing benefits to state employees...that's a bad solution." Still, that may be part of the package that lawmakers develop. The draft memo released on Oct. 4 suggested a decrease in the contribution to state employees from $410 to $390, which would free up about $5 million to put towards school employees.

The teachers' plan has been headed towards a crisis for years, but it's come to a boil at the moment partly because of an anomaly in 2012. Last year, eight school employees statewide incurred catastrophic claims of well over a million dollars each due to situations ranging from premature births to terminal cancer. A fiscally sound plan could absorb such a shock without a problem — that's the point of insurance, after all — but in its fragile state, the teachers plan could not. Thus the rate hike, without which it would simply go bankrupt.

At the committee meeting on Sept. 9, Sen. Lindsey asked EBD official Doug Shackelford if the plan could limp along without the 50 percent hike until the legislature convened for its scheduled fiscal session in February 2014. No, Shackelford replied; actuarial projections say that the plan will have only a few hundred thousand dollars in reserves by the end of the year. How long would it take to reach insolvency at that point? asked Lindsey. "With a pool of 48,000 subscribers," said Shackelford, "we'd have hours left."

Tragedies of the commons

There is another, similar set of perverse incentives at play here as well, this time resulting from the way school districts are funded. How much exactly an employee pays for insurance depends on the district that employs the worker. Every district runs on a garbled mishmash of funds from state, federal and local sources. The vast bulk of the money comes from the state in the form of "foundation funding" — a certain amount allocated per student in the district. Other state monies cover particular programs, like special education, and federal grants such as the National School Lunch Act are geared towards helping students living in poverty. Finally, districts levy local property taxes in the form of millages. While the district is the entity that actually employs a teacher, funds mostly originate from the state. Again, state law requires districts to pay an employer contribution towards insurance of at least $151 per participating employee. But about 20 or 25 districts in the state chip in extra, with Little Rock contributing the most, at $358. Others contribute nothing above the base $151, including some well-off districts with high-performing schools such as Conway and Fayetteville.

This is not merely a case of stinginess, Jerry Guess, superintendent of the Pulaski County Special School District, explained.

"When the state sends new money to districts, there's a lot of things you can do with it. You can use it to improve operations. You can buy new buses. You can put in a new roof. But most superintendents try to use that money to give raises. You can put that into either a bigger insurance contribution or an increase in take-home pay. I used to be superintendent in Camden. The participation rate in the insurance plan in Camden was 50 percent. Now, because 50 percent of the people in Camden are on insurance and 50 percent are not, if you put it on insurance you're not helping the other 50 percent who don't have insurance. So in a lot of those cases, school boards will agree to use it as a raise — that way everyone gets the additional take home pay. There's been the perception that schools just deliberately don't use it on insurance, but the politics of the thing on a local level is that you try to help the most people that you can with the money that you get."

But, as Guess points out, the choices districts make on what to contribute vary. Pulaski County puts in $142 above the minimum $151. In part, this is a matter of employees exercising their political will in a more intentional way. Brenda Robinson, the current president of AEA and an employee of the PCSSD, said when the teachers union was still intact in the PCSSD, it always bargained for greater insurance contributions.

Accusations and solutions

With an issue this complicated, there are plenty of opportunities to spread blame. State employees are resented for their stellar insurance. Districts are suspected of misappropriating funds. Legislators are reviled as hypocrites. Teachers are accused of being greedy. Everyone wants to blame Obamacare, although that's simply untrue; the most salient accusation one can level at the ACA is that it's not as helpful as it should be (see sidebar). One point that just about everyone can agree upon is that EBD itself has made some questionable choices in its management of the policies. The Gold option offered to both teachers and state employees is among the most generous policies in the state, private insurance included. It contains no deductible. "There's no denying it's an incredibly rich benefit," the EBD's Shackelford told the Times. "We have actuaries right now trying to get data on restructuring our plans, looking at different options." But why has this not happened already, before the dam began to burst?

Walker said that teachers would be willing to consider a reduction in the Gold plan and other benefit adjustments. Most school employees interviewed by the Times agreed; in fact, some are discovering now that the Bronze plan is genuinely a better option for their families than is the Gold. There are other options as well that would not require extra cash. The state could accept bids to privatize the insurance pool — maybe BlueCross could do a better job of managing the plan. Some workers or their families may be able to buy insurance on the new ACA exchange eventually. But Walker also argued that the root of the issue is money and the root of the responsibility lies with the state.

"In our view, the problem is caused by underfunding by an employer, whether you want to say the state's responsible for the extra funding or the school districts are. As far as I'm concerned, the school district is a creature of the state and it's the state's responsibility to provide public education. That includes salary and benefits for employees. The fact that they've chosen to meet that responsibility by establishing school districts and giving [the districts] tax authority does not relieve [the state] of its constitutional responsibility to provide an adequate and equitable education."

Broadly speaking, there are three actors that are being called upon to make sacrifices: the state, the districts and the teachers. Beebe has made it clear that his preferred solution would ask for a third of the pain to be borne by each. Meanwhile, the governor announced that EBD would be pushing back its open enrollment date for 2014 from Oct. 1 to Nov. 1. Lawmakers, superintendents and teacher groups are now scrambling to reach a draft consensus by Oct. 15.

"That's the drop dead time," said Key, the Senate education committee chair. "That's the timeline we've been tasked with by Speaker [Davy] Carter and Sen. [Michael] Lamoureux [the Senate majority leader] and I know they've been talking to the governor. And it has to be more than just concepts — we have to have these ideas valued by actuaries. That takes time. Four or five of us could run out there with draft bills, but until we get actuaries to look at it, it doesn't mean much. We need something put into people's hands soon, in order for EBD to run calculations to get everything in place and up on their website for Nov. 1. So we don't have any wiggle room at all, really."

At first, it makes sense to imagine an equal three-way compromise between the state, the district, and the employees. As stated above, legislators are discussing a premium increase between 10 percent and 18 percent. But questions of fairness aside, there is a fundamental problem with this proposal: adverse selection. If only 65 percent of teachers are participating in the plan right now at current 2013 premium rates, and if that diminished participation feedback loop causes premiums to spiral upward, won't any increase in out-of-pocket costs for teachers only drive more employees away and make matters worse?

"It's hard to know where that's going to land," said Key in response.  "There's also uncertainty because of the ACA, and the mandate that everyone have insurance. We can also incentivize participation in other ways, by some combination of state and district contributions to health savings accounts. But that's a legitimate concern."

Shelley Smith said that proposal won't fly with teachers. "If the governor gets his way with that thing where the state pays a third, employees pay a third, and local districts pay a third? Then you're going to hear people really start to scream about going on strike. Because that's means we're going to be paying more than we already are, and we can't pay at [2013] rates. That's not going to solve the problem at all. Participation will keep going down. It's just throwing money towards something that's desperately broken and needs to be fixed."

Smith said emphatically that she herself has no intention of ever striking or advocating for a strike. But, she continued, an increasing number of threads on the Arkansas Public School Employee Health Insurance Facebook group were rumbling in that vein.

"I'm certainly not their leader. I'm not going to tell them what to do. ... People have to be able to feed their families, and pay their student loans, and have a place to live. The longer this goes, the more testy things get, the more people talk about leaving — either striking, or just finding another job."

As for the contribution from the state and the districts, there are a variety of proposals for shaving off a few million in extra cash here and there: a set-aside for operations and utilities, the windfall a handful of districts get from the 25-mill local property tax requirement, professional development funds for teachers, even school poverty money intended to close the achievement gap. (Most legislators are not a fan of that idea, nor are teachers or superintendents.)

"There's not one silver bullet out there we're going to find. It's going to be a pieced-together package," said Key. Most of those possibilities come from within the money already allocated for public schools; what about going outside of the education budget instead? What about, for example, repealing some of the regressive tax cuts passed in the 2013 session, as Beebe initially suggested? When those cuts are in full effect in 2016, they will cost the state $161 million annually — and they tend to benefit Arkansans with higher incomes and investments.

"I don't see that as realistic," Key responded. "The General Assembly won't go back on that." Almost everyone agrees that that's the case. There might well be a wave of new local millage proposals, though, as districts struggle to come up with their own piece of the solution. The fact is that someone has to pay.

There's great disagreement today about what's needed in the public schools — charters, vouchers, school choice, Common Core standards — but everyone proclaims a belief that education should be a top priority. It's equally accepted that attracting and retaining good teachers must be at the heart of any decent education system. Arkansas has made tremendous gains in public education in the past decade; the state can't afford to lose sight of that now as it considers how much of a health benefit it should be offering its educators. Each of those three actors — state, districts, and employees — has to make concessions, but not necessarily equally. As Scott Wahlquist pointed out to the Times, there's a lot more at stake here than the 48,000 employees on the insurance plan.

"I'm going to throw in a fourth player. That's the public, that's the taxpayers. They're going to benefit from having good schools. If they're going to get all those statistical things — relatively lower crime rates, better job opportunities, all those things that go along with better schools — they're the fourth player that has to consider the possibility of putting in a little extra. Because if we chase away a lot of good teachers who can't afford decent insurance, how good are those schools going to stay?"

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