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BACKGROUND

“Health care costs are increasing more rapidly than any other item in the University’s budget. Coupled with University contributions to the retirement savings plan, the cost of those benefits was $422 million last fiscal year. Without a change of direction, the cost would continue to grow as high as $2.2 billion within 20 year.”

— Timothy P. Slottow
Executive Vice President & Chief Financial Officer


Health Care Cost Sharing

Retirement Savings


High-Value Benefit Plans
High-quality health care plans and a generous matching contribution retirement savings plan comprise vital components of the University’s benefit package. These two areas also represent the University’s greatest areas of benefit expenditure. At U-M, health care costs are rising at a rate averaging as high as 10 percent annually. Because this level of growth in spending is unsustainable, we must take steps to help ensure the longevity of our outstanding health care benefit.

U-M contributions to employee retirement savings accounts represent another enormous area of expenditure and one where we contribute a significantly greater proportion than our peer institutions. In FY 2007, U-M employees received almost $186 million in U-M contributions to retirement savings accounts. This figure is expected to increase exponentially in the years ahead, with projected annual contributions of over $700 million by 2027 (see figure below).

In an analysis conducted by Hewitt and Associates, U-M was compared to 27 peer institutions (public and private) in higher education and health care. Hewitt’s benchmarking shows that U-M contributes a substantially greater proportion than our peer institutions toward these benefits, and that we can remain highly competitive even if we adjust some of our expenditures by changing the total aggregate for health insurance premiums and employee out-of-pocket expenses.

U-M Annual Benefit Contributions graph

U-M benefit spending is rising at an unsustainable rate. At the current rate of increase, U-M’s employer paid benefit costs would be almost $2.4 billion by 2027.

 

U-M Annual Benefit Contributions graph

Between FY 1997 and FY 2007, the University contribution for benefits increased from 7.5% to 9.3% of the total operating budget. Most of this increase is attributable to increases in health care costs. If left unchecked, these costs are projected to rise to 15 percent of the University’s total operating budget by 2027.


HEALTH CARE COST SHARING

The Committee on Sustainable Health Benefits

Focus
The Committee on Sustainable Health Benefits (COSHB) was charged to develop specific methodologies to meet the University’s goals for health care cost-sharing. Currently, when we consider health care premiums and out-of-pocket co-pays and deductibles, employees contribute an aggregate of 20% toward health care costs, and the University contributes an aggregate of 80%. To respond to the challenge of balancing increasing costs with the needs of our community, COSHB carefully studied the ways we could adjust our cost-sharing ratio over time to 70% aggregate University contribution and 30% employee contribution toward the total cost of health care premiums and out-of-pocket expenses. This cost-sharing ratio brings us closer to that of our peers. While some organizations reduce plan quality to control costs, we do not intend for any changes we undertake to diminish the quality of the plans offered by the University. We recognize their importance to the health and welfare of our faculty and staff and their families as indisputable, and our benefits will remain an asset in our ability to recruit and retain the highest quality faculty and staff.

The committee worked from September through December 2008 and issued recommendations to the University's executive vice presidents at the end of 2008. COSHB utilized faculty and staff expertise to recommend cost-sharing mechanisms (premiums, co-pays, and deductibles) to achieve an aggregate 70/30 cost share. The committee also investigated ways to consider an employee's salary in setting the monthly premium (e.g., lower premium when salary falls below specified thresholds).

View the Charge to the Committee on Sustainable Health Benefits


Managing the Cost of Care
Like most U.S. employers, the University of Michigan faces 8-10 percent or more annual increases in health care costs, resulting in larger amounts of resources being devoted to health care insurance. This creates upward pressure on student tuition and makes resources less available for salaries and other important priorities. Institutions that better balance the ratio of health care costs between the university and their faculty and staff are better positioned to make strategic, long-term investments and curb their rate of tuition increase.

Our Contribution Ratio
When out-of-pocket co-pays and deductibles are included, our current aggregate ratio is 80% University contribution and 20% employee contribution. Our faculty and staff premium contributions and out-of-pocket costs are below our university and health system peers, and are well below the general employer average (see figure below).

U-M Health Plan Financial Efficiency chart

Financial efficiency is a measure of how effectively an organization delivers health care to its employees. U-M’s efficiency is significantly higher than peer institutions and the Fortune 500 average. (Source: Hewitt and Associates, 2008)


Total Health Costs Per Active Employee chart

U-M employees’ out of pocket costs and co-pay costs are both substantially lower than those of our peer institutions’ employees. U-M’s premium contribution is 9.5 percent higher than our institutional peers. (Source: Hewitt and Associates, 2008)

 


RETIREMENT SAVINGS

Committee to Study Vesting Options for the Retirement Savings Plan

Focus
The Committee to Study Vesting Options for the Retirement Savings Plan studied and evaluated the potential cost savings of vesting options and/or waiting periods for the U-M Retirement Savings Plan for future hires and recommended alternative options to protect the long-range viability of retirement benefits for our community. Changes that are adopted apply only to future employees coming into the U-M community after the changes are implemented. Current employees will not be affected.  

The options that were studied included:

  • 5-year cliff vesting, in which an employee forfeits the U-M contributions from the first 5 years of employment if s/he ends employment before completion of that time period
  • 6-month waiting period before employee is eligible to receive U-M contributions
  • 1-year wait to receive U-M contribution

The committee worked from September through December 2008 and issued recommendations to the University's executive vice presidents at the end of 2008.

View the Charge to the Committee to Study Vesting Options


U-M Retirement Savings Plan: A Valued Benefit and Important Source of Retirement Income
The University provides employees with an important source of retirement income through the U-M Retirement Savings Plan. In calendar year 2007, almost 90 percent of eligible faculty and staff were enrolled in the retirement savings plan receiving approximately $191 million in University of Michigan contributions toward their retirement. To receive the 10 percent University retirement contribution, plan participants must contribute 5 percent of their eligible gross salary to their retirement savings account. 

U-M’s 10 percent retirement saving plan contribution is slightly above market average when compared with peers in higher education and much higher when compared with health system peer markets. However, the 10 percent contribution amount will not be affected by the waiting period recommended by the Committee.