In the Weeds: Why ActiveCare might be on the verge of a big, big problem

In the Weeds is a new feature in which we veer off the beaten path to try to demystify complex issues. In this edition, we’ll explain why a District of Innovation loophole is costing the state’s school health insurance plan — and you — big bucks.

What do Districts of Innovation have to do with health insurance?

So far, 145 school districts have used their DOI status and a loophole in the law to compete with TRS-ActiveCare, and it’s increasing costs for everyone in the plan. Depending on whether/how the legislature reacts, and whether more districts take advantage of the loophole, employees may end up paying considerably higher premiums for ActiveCare next year.

When the Legislature approved Districts of Innovation in 2015, TCTA warned against allowing districts to exempt themselves from most provisions of the Education Code. We knew even then that the results were far less likely to be “innovative” and much more likely to be “convenient.” Time has proved us right – more than 95% of the 916 districts who sought the DOI designation did so not to provide an exciting new educational program, but (at least in part) to get out of the state uniform start date.

In the last few years, districts began to consider leaving ActiveCare in the belief that they could offer a cheaper local plan. Current law doesn’t allow districts to leave the plan. It also doesn’t allow districts in ActiveCare to offer a competing plan. And while Districts of Innovation can’t exempt themselves from the main ActiveCare laws, a few districts figured out they could use the DOI process to exempt themselves from the law prohibiting competing local plans.

Why would a district want to offer another plan?

Let’s go back a few years. ActiveCare was created in 2001, largely at the urging of small school districts that found it very difficult to offer affordable, stable health insurance plans to their employees. When a group is small, even one major claim (such as a cancer diagnosis or premature baby) can send premium rates soaring. A larger group can absorb those costs better, because there are more healthy people who aren’t using their insurance to offset the few who have higher claims.

Many of the state’s larger districts were happy with their local plans, so they weren’t required to join ActiveCare, but the smaller districts had no choice. As health care costs have risen over the years, some districts sought ways to provide less expensive options, which has led to the current use of the DOI loophole. These districts are offering both ActiveCare and a local plan.

Why isn’t that OK?

Adverse selection is shorthand for “people make choices based on their own self-interests, and that’s not always good for a health insurance plan.”

When employees are able to choose from more than one health insurance plan, they are going to choose based on their individual needs at the time. If they are generally healthy, they are more likely to choose the least expensive plan, which typically offers the lowest level of benefits. Those who have chronic health conditions or are anticipating major medical procedures will be willing to pay more for better benefits, knowing that it will save them money in the long run.

Health insurance plans need healthy people to balance out the ones who have high claims. If most of the healthy people are in one plan and the high-need people in another, the plan with the high costs will continue to get more expensive, to the point that it will become unaffordable.

If you were around when there was an “ActiveCare 3” you may remember that it originally offered benefits similar to the state employees’ plan. As premium rates rose over time (without corresponding increases in state contributions), healthier employees migrated to the cheaper plans. With the high-need people concentrated in ActiveCare 3, costs rose exponentially to the point where TRS had to eliminate that plan due to unaffordability and low participation.

When a DOI offers a competing plan, it is generally doing so because an insurance broker has provided a lower cost option to ActiveCare. District employees are then given the choice between a more expensive plan with better benefits and a cheaper plan with (typically) lower benefits. The result: adverse selection.

How this affects you

• If you’re in a large district that doesn’t participate in ActiveCare… You might think that this situation doesn’t involve your district, but that’s not necessarily the case. Some large districts are reportedly considering entering ActiveCare for the specific purpose of offering it against their local plan through the DOI exemption. The idea is to siphon off their more expensive employees to the higher-benefit ActiveCare, making the local plan healthier by retaining the lower-cost employees.
• If you’re in a district offering ActiveCare and a competing plan… Choose carefully when enrolling in a plan. TRS reports that many local plans may look the same (or better) in obvious areas such as deductibles or co-pays. But some do not cover specialty drugs – these tend to be the expensive but life-saving medications, those that can cure cancers or treat genetic disorders in children. Some plans don’t utilize a hospital network. This may not sound important, but due to recent legislative changes it can mean that you are more likely to get an unexpected bill for uncovered costs after an expensive procedure, with little recourse under the law.
  Also, be aware that your local plan may only be cheaper for a year or two. Remember, the whole reason TRS ActiveCare was created was because of the instability of small local plans.
• If you’re in an ActiveCare district that doesn’t offer a competing local plan… Get ready for higher insurance premiums. The 145 districts that are skimming the healthier employees out of ActiveCare are already costing the plan around $41 million that will have to be made up with higher premiums. TRS says that if it were to set next year’s premium rates now, the increase due just to rising medical costs would be around 2%. But the increase needed to make up for the costs from the DOI exemptions will add another 3%-4%, and if the number of districts offering competing plans grows, we could be looking at 2% or more beyond that.

There is a chance that legislation could be passed to address the issue. TRS has informed legislators about the possibility of rising ActiveCare costs and has suggested that closing the loophole by disallowing competing plans would resolve that problem. However, many legislators also represent districts that are either already using the exemption or hope to in the future and may not want to vote for a bill to eliminate that option. It is difficult to oppose options that give some employees a break on insurance costs, even if it is to the detriment of other employees.

Of course, the real solution (short of a complete nationwide health care overhaul) is for the state to contribute significantly more money toward school employee health insurance. ActiveCare has been limping along for years in the absence of higher state funding. TRS has been forced to reduce plan benefits to ensure employees have affordable options, as medical costs grow at a faster rate than salaries. When employees can afford their health insurance premiums, districts don’t have to look for exemptions from the law to try to provide a competitive benefit package.

We’re keeping an eye on this issue. At this time, there is no legislation that would either shut down or expand the ability of districts to offer competing plans, but an amendment could be added to other bills moving through the process. The TRS Board of Trustees is waiting until July to set ActiveCare rates for the next school year, in part to see whether any relevant new laws are passed. We urge concerned teachers to contact legislators to let them know your thoughts and to tell them that the key to keeping the plan affordable for all school employees is a higher state contribution for health insurance.

UPDATE: During the 2021 legislative session, lawmakers approved a bill that will prevent DOIs from offering competing coverage. It also allows districts to withdraw from ActiveCare and offer a local plan - but they cannot also offer ActiveCare. See SB 1444 in our final bill summaries for more information.