On Balance, School Health Insurance Proposal an Improvement

On the left, it has self-interested Michigan Education Association leaders fulminating and issuing fatwas, while Gov. Jennifer Granholm shakes her head gloomily and avers that she'll have to "see the details." On the right, they're looking for a snake in the grass, and muttering suspiciously that it's part of a larger Democratic scheme to engineer a major tax increase.

"It" is the proposal by Michigan House Speaker Andy Dillon to consolidate all government employees in the state, including public school employees, into one central system, with benefits negotiated and managed by the state. Dillon, D-Redford Township, claims that doing so would save $900 million annually.

There are pros and cons, but at first glance, it appears on balance to be a good idea that would save serious money (if less than the Speaker claims). Its boldness is also a refreshing contrast to the pusillanimity that for eight years has characterized the political establishment's response to Michigan's spending problem. This was a gutsy move by Dillon.

Here are some reasons to like the proposal:

Under the current system, every individual school district negotiates its employee health insurance with regional teams from a statewide union. This is a disaster, and has been so for decades. Most school boards are like 98-pound weaklings boxing against a powerful union that's rippling with political muscle. The union uses its muscle to steer business to the Michigan Education Special Services Association, the MEA's third-party administrator that outsources insurance underwriting to Blue Cross Blue Shield and then resells the policies to school districts.

According to the preliminary results of a Mackinac Center survey, at least 438 of 551 school districts use MESSA for at least some of their employees. But even in those districts that escape MESSA's expensive plans, the union has been successful in garnering coverage far more generous than almost anything in the private sector, and even more than what's given to state government employees.

These outcomes are the inevitable result of the asymmetric balance between the union and most school boards at the bargaining table. In short, the union has "captured" the process, and this won't change as long as health insurance benefits are negotiated at the local level.

In contrast, while state employee health benefits are also generous, they are not out of control. In part this is because the players are much more evenly matched at the bargaining table: Powerful unions vs. a powerful state government.

In addition, every dollar that goes to employee benefits is a dollar that 148 individual legislators can't spend on their own pet programs, exerting downward pressure on how rich these benefits become.

Those are the pros; here are the cons: The $900 million savings Dillon promises is probably exaggerated, given evidence I've seen suggesting that school health insurance consumes around $2.6 billion annually. (Better figures will probably become available soon.) The Speaker says a larger pool of employees will allow the state to save $400 to $600 million by squeezing health care providers for concessions. Economies of scale add another $200 million, and the balance comes through administrative and other efficiencies. That is mostly "blue sky," but the political dynamics described above are real, and have the potential to save serious money.

If Dillon wants to add a provision converting the coverage into high-deductible Health Savings Account plans, he plausibly could get $900 million out of it, while simultaneously giving a better deal to employees. But that's another story.

The main objection is this: State employee benefits are not out of control in part because most legislators have few state employees living in their districts. Therefore, the political incentives for them to go along with rich benefits are weak.

With school employees the situation is very different. Every state representative has approximately 1,500 politically active, savvy and self-interested school employees in his or her district. State senators have around triple that number. The danger is real that Dillon's proposal could create a political dynamic for ever richer benefits, and is demonstrated by history.

In 1996, Gov. John Engler proposed moving all new state and school employees to a defined contribution pension plan — a 401(k)-type system. He got it for state employees — a fiscal gift that keeps giving to Michigan taxpayers. He did not get it for school employees, because for weeks the union used its local power bases to melt the phone lines into every legislator's office. The result of this failure is a school employee pension system that imposes ever growing liabilities on taxpayers and consumes ever larger proportions of school budgets.

Balancing this, although not completely, is the fact that legislators also feel pressure from the administrators and boards of 551 local school districts, who know that directly or indirectly, every dollar of additional employee health benefits is one dollar less that they have to spend on other things.

The destructive potential of this dynamic is real, but probably would not be realized in full. As mentioned, the legislators have lots of other things they want to spend money on, and those competing demands still will put constraints on this particular spending.

Also, a centralized system is likely to be no worse for taxpayers than the decentralized status quo. While a few school boards "bulk up" on political will and succeed in giving their union opponent a tougher match in contract negotiations, even in those cases the benefit packages are usually pretty rich. Given the dynamics described above, the overwhelming majority of school districts will always get rolled by the powerful union. Making the world safe for the handful that don't is not sufficient reason to let this overall situation fester.

If benefits are negotiated at the state level, getting rolled by the union is much less likely. The outcome for taxpayers could improve a lot, but probably would not get worse. For this reason, although not without risks, on balance the Dillon proposal looks like a good bet.

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Jack McHugh is senior legislative analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.