On the Economics of the New PSU Health Plan

Thinking About the New Health Plan

Penn State University has adopted a new health initiative. The wellness program requires employees to take a wellness test, schedule a biometric exam, and promise to take a physical or else see their insurance rates go up by $1200 per year. Smokers will see their health care costs rise by $75 per month. The idea, as explained by University President Rodney A. Erickson, is to cut growing health costs. According to Erickson,

“We are implementing a significant set of changes that will help us turn the tide on unmanageable increases in health care costs for our faculty and staff…Higher education is at the crossroads with respect to our responsibilities for greater cost control, and now is the time for decisive action. I have challenged our leadership in human resources to hold annual health care cost increases to the Consumer Price Index plus 2 percent, a goal that will help us to sustain the existing quality of employee health care options while easing pressures on tuition increases that face our students and their families.”

There are many questions about this plan. I am interested in the economics of it, however. Suppose that these wellness initiatives work. How can this plan result in any short-term cuts in health care costs? Penn State is self insured so the only way it saves on health care costs is if the population becomes healthier so fast that expenditures fall in the near term. As Erickson points out:

“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. "

If Penn State purchased insurance then one can see how imposing restrictions may make us a better potential client and give the university leverage to reduce premiums. But if we are self-insured then this channel is not available.

Moreover, Erickson claims that this program is being initiated to cut expenditures by roughly 10%. How is this possible, given that the program relies on behavioral changes, aside from the smokers tax? At $900 per year, this would require 24,000 employees to admit to smoking to earn the required savings. With only 8,800 full and part time faculty this will be a hard target to reach.

It is not even clear that cost will fall at all in the near term. Suppose that I did not see my physician twice a year for physicals and take appropriate medicine and lab tests. Then this plan could lead to new information about my health that could seriously impact my long-term health trajectory. If I began to see a physician and take appropriate medicine now expenditures would rise, they would not fall. How then do we achieve the 10% savings? In the near term expenditures should rise as more health care is consumed due to learning about how sick we are. Moreover, even if wellness plans improve health in the long term it is not clear how much of those benefits PSU will even realize. If it improves health outcomes after age 65 it may be great for Medicare expenditures but its not clear how it helps PSU. At a minimum we would need to have a clearer picture of which segment of the employee population is generating the largest increases and then ask if wellness programs will affect them in the near term.

The only way the plan can cut expenditures in the near term is to induce people to leave the plan. If enough employees are annoyed, and if their spouses have competitive plans, perhaps they will leave our plan. This would reduce total health expenditures for PSU by reducing the size of the employee pool that is covered. This could reduce health expenditures.

Given that we are self-insured an obvious policy to reduce expenditures would be to increase co-pays. Presumably health care costs are rising because we are consuming too much health care. Make us pay a bit more. Then we will be more careful at the margin. This would lead to direct savings for a self-insured group. Why they did not choose this idea is not exactly clear.