The case for competitive bidding
By James Miller, Scott Niederjohn, Ph.D. and Chad Cotti
The health insurance market for public school teachers in Wisconsin is dominated by the Wisconsin Education Association (WEA) Insurance Corporation, an affiliate of the state’s largest teachers union. The WEA Insurance Corporation writes the health insurance coverage on teachers in roughly 85% of the school districts in the state. The fact that the union representing the teachers in contract negotiations also operates the health insurer that completely dominates this niche market raises a troubling question: does the dual role of health insurer and union permit WEA to stifle competition from other health insurers in this market? This study provides evidence that relative to other insurers in the market for teachers’ health insurance, the premium charged by the WEA Insurance Corporation is high. Further, the authors estimate that if public school teachers were included in the state employee health insurance pool, the savings on health insurance would exceed $50,000,000 per year.
In addition to the unusual role played by WEA Insurance Corporation, several other anomalies characterize the teachers’ health insurance market. The insurance policies the districts provide are known for their depth and breadth of coverage. For instance, teachers in many school districts receive indemnity insurance. Unlike the HMO and PPO coverage that many Wisconsin workers receive from their employers, indemnity insurance typically does not restrict the hospitals or health professionals from whom the insured can receive reimbursable care. While indemnity insurance usually contains cost-sharing provisions, the policies provided by many school districts contain deductible and coinsurance rates that are low. Whether the level of coverage generosity is a result of the WEA Insurance Corporation’s presence in the market or a reflection of the preferences of teachers to tradeoff wages for increased fringe benefits is beyond the scope of this study. Worth noting is that WEA Insurance Corporation has a reputation as a company that provides extensive coverage through its insuring agreement and that does provide a very high level of service to its customers. The high premiums that the WEA Insurance Corporation charges relative to other insurers may result from a higher cost structure.
The cost of the teachers’ health insurance varies considerably from district to district. For instance, the monthly annual premium for family coverage during the 1998-1999 academic year was $414.50 in Beloit and $735.22 in Glendale–River Hills. Differences in premiums paid by school districts for health insurance for teachers is likely due in large part to the health profile of the teachers in different districts and variations in the costs of medical care in different parts of the state. In all districts the cost of health insurance is a significant expense. To the extent the premiums are higher because the WEAInsurance Corporation uses its position at the contract negotiation table to monopolize the market, the expenditures on insurance may not be a good value for Wisconsin taxpayers.
This study examines whether the market for health insurance for public school teachers is operating in a competitive manner. The huge market share held by the WEAInsurance Corporation and its favored position in the contract negotiation process raise the concern that it exercises market power. Section II provides a discussion of the roles played by the school districts, unions, and health insurers in determining health insurance coverage. The empirical analysis that is presented in Section III provides evidence that WEAInsurance Corporation charges districts more for its health insurance policies than other health insurers. Section IV includes a discussion of the financial implications of school districts participating in the state employee health insurance pool. A summary of the major results of this study and their implications are contained in Section V.