President's message explains health care benefits changes at Penn State

President Rodney Erickson sent the following letter to University employees on Friday, Aug. 9, regarding recently announced changes to health care at the University.

Dear Penn State Faculty and Staff Members,

First of all, let me thank you for the outstanding job you continue to do in support of our students, our research endeavors, and our outreach mission.  As you have no doubt seen in recent weeks, Penn State is recognized in many publications and rankings as one of the top universities in the nation and indeed the world, and there is much to be justifiably proud of what is being accomplished.  As we embark on the next 150 years as the Commonwealth’s land-grant university, I know that all of us want to make certain that Penn State continues to be a leader in higher education, but there are big challenges that we must confront.  Likewise, opportunity is often the other side of that coin.

As you are aware, based on a recent announcement, the University is implementing a significant set of changes to allow us to better control the currently unmanageable increases in healthcare costs for our benefits-enrolled faculty and staff. It is my hope that this message can help explain our urgent need for action in this area.

Higher education, like many parts of the so-called service sector, is faced with a specific kind of cost and revenue structure as a “people-based” enterprise.  Salaries, wages and benefits make up roughly 70 percent of our annual expenditures.  Our revenues come from tuition and the other services we provide, such as medical care, housing and research grants, among others; and as a publicly supported university, we also receive an annual appropriation from the Commonwealth.  The state’s contribution this fiscal year accounts for just over 6 percent of our total budget and 11.2 percent of the Educational & General (E&G) budget, our core instructional budget.  Tuition now makes up more than 81 percent of the E&G budget.

The reality is that Penn State and other colleges and universities can no longer increase tuition at rates significantly exceeding inflation.  Real or inflation-adjusted incomes in the United States are at 2008 levels, five years after the start of the Great Recession.  Student debt has crossed the trillion dollar threshold and exceeds total credit card debt in the country, while students face the prospects of higher interest rates on their loans in the midst of a difficult labor market in many fields.  College attendance rates have stagnated and appear to be falling.  The University operates in a competitive environment that is becoming more intense every year.

We are at serious crossroads with respect to our responsibilities for greater cost control and, in addition to the many actions that have already been taken to tighten our collective belt, I also charged our leadership in Human Resources to take decisive action and hold annual health care cost increases— which are soaring — to the Consumer Price Index plus 2 percent. 

Our health care spend is projected to be $217 million in 2013-2014.  Without intervention, this is a growth of approximately 13 percent over the previous year. Passing large increases year after year onto employees or our students is not a sustainable strategy.  The bold initiative that is being rolled out this year is part of a long-term effort that ensures we remain competitive AND maintain the existing quality of health care options, while easing pressures on tuition increases that face our students and their families.

Please allow me to provide some perspective on these figures.  A 10 percent cost increase in health care at our current level of spending is approximately $22 million.  That is roughly equivalent to a 2 percent increase in salaries, wages and associated costs like Social Security employer contributions.  It is equivalent to a 2 percent increase in tuition for our students.  It is also equivalent to a 3 percent central recycling on E&G budgets.  If we can substantially curb these runaway costs, these are funds that can be used for tuition relief, salary enhancements, or the pursuit of new strategic initiatives for the University.

Since Penn State is self-insured, we are providing health care benefits to eligible employees with our own funds. This is very different from fully insured plans where an employer contracts with an insurance company to cover employees and their dependents.  Because of this self-insured arrangement, we assume the direct risk, but we also can reap substantial rewards when our medical and pharmacy bills (claims) are low.  On our behalf, Highmark is the "third party administrator" that processes our claims.

The message communicated in the University’s Strategic Plan (Priorities for Excellence: The Penn State Strategic Plan 2009-2014) is clear:

The University must be creative in the design of its health care programs of the future.  Integrating additional wellness education and incentives must be a strategic initiative in the University’s planning.  Other options such as health reimbursement accounts and changes to deductibles and co-pays should be considered, along with differential rates for employees who continue to engage in higher health-risk behaviors, and for those who utilize “in system” providers as opposed to other health care professionals. Strategic Priority 7.3

The recently announced initiative meets the objectives outlined in the University’s strategic plan.  Our strategy is a deliberate and aggressive attempt to reduce the rate of health care cost increases—something that we have been unable to do previously.  Despite several million dollars in University expenditures over the past decade in support of voluntary programs for health and wellness, only a very small percentage of faculty and staff have participated.  If we can improve the health of our participants through increased awareness and engagement in their own health, the rates of our health insurance can be maintained at current levels or even reduced. This opportunity is too great to ignore, and we know from the experience of our employees at the Hershey Medical Center that substantial reductions in the rate of cost increases have been achieved with a similar program over the past eight years. The modest investment we are making in employee engagement to help mitigate their own health risks will ensure the long-term stability of our ongoing benefits plan.

In order to increase everyone’s level of awareness, resources and tools are being made available to you and your spouse/same-sex domestic partner.  I can appreciate that these on-line tools raise concerns about security and privacy of information, and I want to assure you that included in Highmark’s contract with WebMD, one of the leading health and wellness authorities in the country, are specific terms and provisions that require strict compliance with federal laws and regulations applicable to privacy and information security.  They are required by law to fully comply with all relevant HIPAA privacy and security standards.  All information at Highmark or WebMD must be maintained on secure servers.  Any breach subjects them to significant financial penalties and possible prosecution.  More detailed information about this can be found at Highmark and WebMD Health Services.

In addition, the University does not have access to this information and will not be using any information for research purposes. This initiative does not meet the definition of Human Participant Research, as defined by federal regulations and is, therefore, in full compliance.

In the coming weeks, a comprehensive recorded webinar will be posted on the OHR website.  Also, additional details will be shared in other communications, including face-to-face Open Enrollment meetings that will take place beginning Sept. 16.  I encourage you to avail yourself of any and all information that is being provided. Please know that I have heard and understand the concerns, but I am calling upon you as a valued member of our Penn State community to make decisions based on factual information.

I want to thank the more than 5,100 faculty and staff who have scheduled an appointment for a biometric screening and the more than 4,200 who have already completed a wellness profile. Your participation in managing your health is a vital component of this plan.

We are embarking upon a new era in higher education.  While I recognize these changes are unsettling and have raised concerns, the magnitude of our challenges leaves us no choice but to move ahead as planned.  For the University, it is better to control our health care costs and have additional latitude for reducing the rate of tuition increase, keeping our salaries competitive, and funding new initiatives than not meeting our critical imperative to reduce the rate of health care expenditures.  As individuals and families, we also will have choices to make about our participation and how we allocate our personal health care dollars.

Please excuse the length of this communication, but I believe it is extremely important that everyone understands the scale of the issues we face with respect to higher education and health care — and our need to move forward.   Thank you for your time.

Sincerely,

 

Rodney A. Erickson

President

Employees who are a part of the University’s Teamsters’ collective bargaining agreement will not see any health care benefit changes during the current contract term, which expires June 30, 2014.

Last Updated August 22, 2013