Tuesday, September 9, 2014

The $48,000 Question

by Jeff Baldani
Department of Economics
Chair, AAUP Committee on Compensation

In Monday’s faculty meeting, Jeff Herbst, in response to a question about the corporatization of the university and outsourcing, referred to a $48,000 figure in regards to the health care verification process.  I didn’t write down the president’s exact words, but I have no doubt that most faculty left with the impression that the program saved the university $48,000 that could now be spent elsewhere.  As far as I can tell, the $48,000 figure is only the top line in calculating budget savings.  The university should be providing the number for the bottom line.

Coverage of an ineligible dependent certainly adds risks to the insurance pool (such as if there is a major health event with high expenses during a given year) but adds net costs to the university only to the extent that the employee-paid part of the premium fails to cover claims.  The actuarial budget cost of insurance coverage for a family member is the difference between expected (average) claims for the covered family member and the premium that an employee pays for the coverage.  The realized budget cost to the insurance pool in any year is the difference between actual claims paid out and the premiums that employees were paying for covered family members.  Employee-paid premiums are complicated because there are different categories of coverage and a salary-based university subsidy with employee contribution ranging from 25%-100% of the premium.  As an example, at the starting tenure-stream salary, a faculty member who insures a spouse/partner would pay about $400/month, which is about two-thirds of the total premium.  There would be an actual cost to the insurance pool if health expenses for the year exceeded those premiums for the year.

The $48,000 figure seems to be an initial estimate of claims paid on behalf of family members who may turn out to be ineligible for insurance through Colgate.  It is neither the actuarial nor realized budget savings and should not be publicly cited without proper caveats.  There may well be sound business reasons for dependent verification regardless of whether verification creates budget savings.  Nevertheless, if the administration wants to justify the program based on the budget numbers then they need to do the math properly by netting out the premiums that employees paid for dependents who were declared ineligible and also publicly disclosing how that net number compares to the $15,000 fee that was paid to the outside firm that conducted the audit. 

1 comment:

M Johnston said...

Thanks, Jeff -- I learned a great deal from reading your posting --