Harvard Reveals Healthcare Costs

The University responds to faculty criticism of health-insurance changes.

In the wake of faculty members’ sharp objections to Harvard’s imposition of coinsurance and deductibles on nonunion employees’ health insurance, announced last September, President Drew Faust promised to provide data on the University’s healthcare spending (and to buffer the effect of the changes on lower-compensated employees during 2015, among other measures). The data were made available on Friday, February 6—ironically, on the same day The Harvard Campaign announced it had attained $5 billion in gifts and pledges during the fundraising drive. The healthcare-spending information shows the growth of Harvard’s medical-benefits budget, the share of premiums borne by the University and employees, and some of the marketplace conditions that may be shifting health-related costs to Harvard from other local employers—likely an important factor in shaping administrators’ decisions on the benefits package offered to faculty and staff members.

The Numbers, Please

Highlights of the data provided to employees include:

• Growth in costs. Harvard spent $52.9 million on medical and dental benefits for active employees and early retirees (those not yet eligible for Medicare) in fiscal year 2001 (about 30.6 percent of total employee- benefit expenses reported for that year, and 2.6 percent of total University operating expenses). In fiscal 2014, Harvard spent $165.9 million for those benefits (about 31.3 percent of total employee-benefit expenses, and slightly less than 3.8 percent of total operating expenses; but excluding a one-time, $46-million adjustment in pension expense, those figures rise to 34.3 percent and 3.8 percent, respectively). From fiscal 2001 to fiscal 2014, these medical and dental expenses more than tripled; for medical care alone, University costs rose from $48.3 million to $155.7 million: up 322 percent. During the same period, salaries and wages rose from $842.8 million to $1.64 billion: up 195 percent, or slightly less than doubling. (All these figures include unionized and nonunion Harvard employees; but the changes in health benefits announced last September and effective in calendar 2015 apply only to nonunion faculty and staff members.)

• The shifting share of costs. As University spending for medical benefits has risen from $48.3 million in fiscal 2001 to $155.7 million in fiscal 2014, the employee share of those premium costs (which exclude any out-of-pocket expenses, such as copayments and deductibles) has risen from $11.8 million to $45.7 million: up 387 percent, or nearly quadrupling. Thus, for premiums alone, Harvard’s share has declined from a peak of 81.2 percent, in fiscal 2004, to 77.3 percent in fiscal 2014, while employees’ share has risen from 18.8 percent to 22.7 percent.

That shift reflects a couple of factors. First, Harvard’s health benefits are progressive, with the University contributing a larger share of premiums for employees who earn less than $70,000; a lesser share for those who earn $70,000 to $95,000; and still less for those who earn more than $95,000. Those tiers, set in 2007, have not been adjusted since; as employees’ compensation has risen, they have shifted into higher-income tiers, where they pay a higher percentage of the premium. Second, in 2013, the University reduced its premium subsidy by 2 percentage points for the two highest salary tiers (for nonunion employees only).

It should be noted that the overall data blend nonunion employees, whose benefits are not subject to bargaining, and those covered by union contracts; the latter have negotiated to maintain health benefits, and so the two cohorts’ plans are now different. The University is, in effect, dealing with rising relative costs in the negotiated, union plans in part by achieving budgetary savings in the nonnegotiated benefit package offered to nonunion faculty and staff members.

Before the recent introduction of individual and family coinsurance and deductibles into the nonunion medical-benefits package, covered employees’ out-of-pocket expenses had been increased via higher copayments for doctor-office visits, emergency-room use, and prescription drugs in 2007, and for doctor visits and emergency-room use again in 2012. The University also self-insured, rebid its medical plans and pharmacy contracts, and took other steps to restrain program costs during the past decade.

• The changing insured population. The University’s data show continued growth in the percentage of eligible employees who are enrolling in Harvard’s medical plan: from 84.5 percent in fiscal 2007 and 84.6 percent in fiscal 2008, before the national financial crisis and recession, rising nearly continuously to 88.2 percent in fiscal 2014. At the same time, the share of employees electing family, as opposed to less expensive individual, coverage, has risen continuously, from 45.8 percent in fiscal 2007 to 51.7 percent in fiscal 2014.

It is conceivable, to a minor extent, that the latter change reflects changes in Harvard’s demographics: perhaps, after layoffs and early retirements in the wake of the financial crisis, and following a decade of growth in the faculty ranks, there are some more, young families.

But the larger factor would seem to be a result of America’s employer-based system of providing health insurance. As costs in the expensive Massachusetts medical marketplace have risen and employers have struggled to maintain coverage while restructuring insurance benefits (typically by imposing larger coinsurance and deductibles), employees have, where possible, migrated to plans that offer lower relative cost or better benefits for their families. It would appear that Harvard’s plans have become more attractive to its workforce during the past several years. The University estimated that if the rate of enrollment and the share of employees electing family coverage had remained stable from fiscal 2007, Harvard’s medical spending would have been $48 million less from that date through fiscal 2014—and $14.2 million less in fiscal 2014 alone.

• The 2015 benefit changes. To put that sum in context, the University estimates that the gross premium savings from the newly imposed coinsurance and deductibles will total $8.5 million this year: $6.6 million in out-of-pocket costs shifted to employees; and, as a preliminary estimate, $1.9 million in savings from behavioral changes, as employees—newly exposed to higher expenses—presumably shift to lower-cost providers and services (out-of-hospital MRI scans, for instance, or use of a community hospital, versus a more expensive academic medical center, for less complex procedures).

Of the gross savings, an estimated $6.4 million would accrue to Harvard. (It would spend $1.5 million to buffer the cost-shift for employees in various ways, but would also realize an offsetting $1.5 million in savings from the change to a new prescription-drug vendor.) Employees’ $6.6 million in higher out-of-pocket costs would, in the aggregate, be reduced by their $2.1 million in savings from the 2.7 percent reduction in premiums realized through the cost-shift; by those $1.5 million in reimbursement payments from Harvard; and from their $0.5-million share of the savings from the new prescription-drug vendor—exposing employees, in the aggregate, to $2.5 million in higher costs. Of course, for individuals and families who incur the higher coinsurance and deductibles for imaging, hospital, and other services, the incidence of the costs will be higher.

Implications

Harvard’s medical-benefit expenses have grown at a compound annual rate of 9.4 percent from fiscal 2001 through fiscal 2014. But that experience is heavily influenced by high medical inflation during the earlier years. Since fiscal 2009, the growth rate has been 6.1 percent annually—higher than the 3.4 percent growth rate for salaries and wages (which of course do not accrue to early retirees, who are in the figure for medical spending). Medical-care costs have persistently inflated more rapidly than general costs. But as noted, Harvard’s insured population has shifted, too, with more eligible employees enrolling, and more electing bigger-ticket family coverage.

These factors help to explain administrators’ interests in curbing medical-expense cost growth. Some faculty members who have criticized the new coinsurance and deductibles said that they would prefer simply to pay higher premiums, and President Faust said that the University Benefits Committee would examine that option anew this year.

But the nature of Harvard’s medical-cost dilemma suggests that option may not achieve the University’s desired results:

  • Higher coinsurance and deductibles are intended, immediately, to shift costs from the institution to its employees (with the University, which pays about three-quarters of premium costs, reaping the larger share of the savings).
  • In the medium term, the changed benefit design is meant to affect employee behavior: to get users of healthcare services to shop around (the $1.9 million of savings estimated during 2015).
  • But in the longer term, higher coinsurance and deductibles are presumably meant to make employees and their families recalculate what coverage to elect: Harvard’s or a spouse’s plan; individual or family coverage. No estimate is made for such savings, and indeed, other employers’ benefit changes in coming years will alter the competitive calculus. But it is unlikely that employees’ share of higher premiums for continuing full coverage from Harvard—a few tens of dollars per family per month—would have as focusing an effect on their decisions as the potential exposure to $1,500 per person and $4,500 per family out-of-pocket expenses for the new coinsurance and deductibles within the University benefit design.

It also seems likely that the University will raise anew with its unionized employees changes in their health coverage, so that all of the savings it wishes to realize, and the behavioral changes it wishes to effect, do not fall on nonunion faculty and staff members. It is unclear why union members would want to accept such changes, and so the protracted, difficult negotiations on benefits during the past few years may, if anything, become even more intense.

You might also like

Harvard College Admits Class of 2028

A smaller undergraduate applicant cohort—the first since Supreme Court ended affirmative action 

Studying ChatGPT Like a Psychologist

Cognitive science helps penetrate the AI “black box”

Reparations as Public Health

A Harvard forum on the racial health gap

Most popular

Harvard College Admits Class of 2028

A smaller undergraduate applicant cohort—the first since Supreme Court ended affirmative action 

Diagnosis by Fiction

The “Healing Quartet,” by “Samuel Shem,” probes medicine—and life.

AWOL from Academics

Behind students' increasing pull toward extracurriculars

More to explore

Darker Days

The current disquiets compared to Harvard’s Vietnam-era traumas

Making Space

The natural history of Junko Yamamoto’s art and architecture

Spellbound on Stage

Actor and young adult novelist Aislinn Brophy