Response to the Ad Hoc Committee Report on Benefits Redesign

by Barbara J. Lowery, Associate Provost, and Michael L. Wachter, Deputy Provost

We are pleased to have the opportunity to respond to the report of the Ad Hoc Faculty Senate Committee on Benefits Redesign . We are also pleased to acknowledge the substantial commitment of time and energy of those Faculty Senate designees who worked on this issue through their membership on the Benefits Redesign Committee and the Academic Planning and Budget Committee.

The starting point for our response to the Ad Hoc Committee's report is with their starting point. The Committee states that they were given the "limited task of reviewing and analyzing recommendations made by the Benefits Advisory Committee for changes...that impact directly on the welfare of members of Penn's Faculty Senate." The University Benefits Advisory Committee had the broader focus of all University employees, and that Committee included representatives of the A-1 and A-3 communities. The Academic Planning and Budget Committee, which is a faculty dominated committee, also had a broader focus than the Ad Hoc Committee, since AP&B is the designated University committee to deal with a full range of academic planning and budgetary issues facing the University.

We organize our response following the outline of the Ad Hoc Committee's report:

Health Care Insurance

The Ad Hoc Committee questions the pricing rationale adopted by the Benefits Redesign Committee. They argue that the recommended payroll contributions for FY 1998 fall unevenly: with only a slight increase for those in Plan 100, virtually no change for the HMO population, once the effect of the new prescription plan is included, and a substantial increase for those in PENNCare.

The Ad Hoc Committee seems to be confusing price changes with price levels in analyzing changes in the contribution for Plan 100. It is the case that Plan 100 participants will experience only a small increase in cost-sharing under these recommendations. However, they will still have a greater cost-sharing percentage than in other plans. It is also the case, as the committee suggests, that Plan 100 participants are higher paid because there more faculty in that plan than in any of the others. But, the participants in this plan since 1989 have borne the largest relative share of their health insurance costs while individuals in the other plans experienced a decrease in cost-sharing so dramatic that there was no sharing for the past two fiscal years.

The idea of subsidizing the HMO's more heavily than other plans was discussed at length by both committees. The explanation for the cost-sharing strategy for the HMO's was based on the principle that the University should offer a low cost plan option that would be affordable to all employees. There was considerable concern that the individuals in those plans, most of whom are lowered salaried employees, would experience hardship if the cost-sharing was too great. That concern resulted in the recommended single and family rates in those plans. Although this principle seems not to be shared by the Ad Hoc Committee of the Faculty Senate, it was strongly supported by most faculty members in the Benefits Redesign and Academic Planning and Budget Committees.

The Ad Hoc Committee recommends increasing the contributions for Plan 100 and for the HMO's in order to reduce the cost sharing proposed for the PENNCare plan. The fact that the Penn Care preferred provider organization has the highest payroll contribution increase is that the plan, as we have discussed elsewhere, was introduced at a time when no plans, other than Plan 100 had a positive payroll contribution. Since that plan option was new, the University did not know its actual cost experience, With data now available, it is the judgment of the consultants, Towers Perrin, that PENNCare operates as a high-cost plan, almost as high as Plan 100. The reason is that PENNCare has a very liberal out-of-network benefit, which makes PENNCare work like Plan 100.

The Ad Hoc Committee acknowledges that the pricing formula in use over the past few years was flawed, but are concerned that the cost of fixing the flaw is not evenly spread, with the Plan 100 population unfairly favored. But the benefit of the flaw was not enjoyed by participants in Plan 100. Hence the burden of fixing the flaw is distributed to those who primarily benefited from it.

A second issue raised by the Ad Hoc Committee concerns the rate normalization of the plans. The Benefits Advisory committee rejected the process of pricing each plan as a separate entity, a process that led to the malfunctioning formula and the drastic reductions in cost sharing that accompanied it. Such pricing violates the basic principle of group insurance which is to spread insurance risk across an entire population.

Under the "normalized" approach, total premium rates are "normalized" to spread the health insurance risk across the entire Penn population. Another way of stating this is that each plan is rated as if the entire Penn population (good risks and bad) were in that plan, thereby removing from the rates of each plan the underlying health care utilization of that plan's specific enrollees. This eliminates adverse selection effects. Total plan cost "budget rates" are then set to reflect the expected value of each plan in terms of both its benefit levels and managed care features (e.g., provider discounts, restrictions on choice). In this way the total cost for each plan more closely reflects the true value of that plan irrespective of the health status of its enrollees. It was the opinion of the Towers Perrin Consulting firm that the "normalized" approach is more accurate from a technical perspective than the pricing strategies that have been employed in the past.

Finally, the Ad Hoc Committee was concerned about faculty being asked to bear more of the cost of their benefits without receiving any increase in money wages as an offset in FY 1998. They justify this concern by arguing that the high increases in University contributions to health care in past years were likely offset by lower increases in money wages, so that a wage offset for benefits increases in the next fiscal year will not redress the balance in lost compensation. It is argued, alternatively, that wages might not have been reduced in an offsetting fashion leading to a conclusion that Penn faculty are currently overcompensated in total relative to the labor market.

The first argument is contradicted by the Faculty Senate's own work. In January, 1996, the Committee on the Economic Status of the Faculty reported that on the AAUP weighted index (which adjusts the salary structures of each of the other universities to Penn's mix of Assistant, Associate and Full Professors) in 1994-95 Penn ranked fourth moving up from sixth ten years ago. The committee also reported that "...Penn's relative dollar gain on the index over the ten year period was larger than nine of the other eleven institutions." In their discussion of total compensation, they report that "Penn's ratio of total compensation to salary of 127.6% was the highest among the comparable schools, between 3.4 and 6.8% higher than others of the top five [Harvard 124.2, MIT 124.1, Chicago 123.9, Stanford 120.8]." That report goes on to discuss concerns about differences in salaries across schools. But, in the aggregate, the Senate report suggests that, at least with respect to the faculty, salary increases were not being reduced to offset the health care insurance pricing problem that emerged after 1989.

Graduate Tuition for Spouses and Children

The Ad Hoc Committee advocates grand-fathering, for current employees, the graduate tuition benefit for spouses and children. The original recommendation to eliminate this benefit was based on the fact that the benefit is highly unusual among Ivy Plus institutions, is one of those discretionary items that makes Penn's employee benefit rate relatively high, and is enjoyed by relatively few employees. Tuition reimbursement was also mentioned prominently in the recent Time magazine article, "Why Colleges Cost Too Much," which featured Penn in its discussion of the high cost of education.

Although most faculty and staff understand and appreciate the recommendation to eliminate this benefit, we have heard considerable support in the community for retaining this benefit for current employees. Of all of the recommendations, this was the only one that arose regularly as a source of concern in our meetings with faculties in the different schools.

Life Insurance

The Ad Hoc Committee's primary recommendation with respect to life insurance is that the salary increase resulting from the elimination of flex -dollars be reported separately from the regular annual adjustment. This has been our working assumption and we are studying the mechanics of accomplishing that objective.

The Ad Hoc Committee also suggests "that a more inclusive flexible benefits program be studied for possible implementation." Although it is not our intention to reopen issues resolved this year, the Benefits Redesign report does contain a recommendation that "the benefits package in its entirety should be reviewed annually." In that spirit, the University will continue to analyze the value of implementing other benefits program designs.

Benefits for Regular Part-Time Employees

The Ad Hoc Committee is supportive of the change made to benefits for part-time employees and favors continued consideration of additional benefits for part-time employees.The benefits for part-time employees will continue to be a topic for regular benefits review in the future.


In its conclusion, the Ad Hoc Committee faults Penn for not having a benefits philosophy or more specifically, for not having a total compensation philosophy.

The recommendations for benefits redesign, published in Almanac on February 11, 1997, do contain a set of specific principles. These principles played an integral role in developing the entire set of recommendations.

The issue of a total compensation philosophy is more complex. Benefits are a complex topic, and the Benefits Advisory Committee and the Academic Planning and Budget Committee focused on benefits and did not do a separate and new study of wage trends or trends in other factors that affect Penn's faculty. Both committees, however, were aware of wages of Penn faculty and the high relative standing of those wages, as noted, for example, in the AAUP data cited above. The idea of the development of a total compensation philosophy is a good one and one that should guide future benefits discussions.


Volume 43 Number 27
March 25, 1997

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