The Newport-Mesa Unified School District is bracing for rising healthcare costs, including an anticipated $2.3-million tax increase, as part of the federal Affordable Care Act.
That price tag has created a disagreement between the district's teachers union and its head administrator about how to cover the costs.
Five years ahead of full implementation of President Obama's healthcare reform, employee unions are brainstorming money-saving methods to avoid cuts, but the superintendent has said the increases will affect employee compensation.
"The more I learn, the more anxious I get as it is apparent to me that our benefits, as we know them, are going to be significantly altered," Supt. Fred Navarro wrote in a routine districtwide communication this month.
District employees' medical benefits are considered generous enough to fall under what's known as the "Cadillac tax," scheduled to kick in in five years.
"We have enjoyed a tremendous benefit package for many years, superior to most in Orange County," Navarro wrote.
Starting in 2018, the Cadillac tax provision would charge an excise tax on the total cost of medical premiums above a certain threshold — regardless of whether they're paid by the employee or employer.
Essentially, employers would pay a 40% tax on any amount of a premium that exceeds $10,200 for an individual or $27,500 for a family.
This year, Newport-Mesa's medical premiums were $7,035 for individuals and $21,103.92 for families, according to district officials.
They project those costs will rise by 5.6% each year, a reasonable calculation according to UC Irvine professor Paul Feldstein, a renowned expert and author on the economics and politics of healthcare.
Assuming its benefits plan remains unchanged over the next few years, Newport-Mesa projects its premiums will reach $12,603 for individuals and $32,971 for families in 2018.
That means the district would be taxed an extra $961 on each individual premium and $2,188 on each family premium, adding up to the $2.3 million tax.
In his districtwide communication, Navarro said the $2.3 million tax penalty is the monetary equivalent of a 1.3% raise for employees.
"We will have to come to terms that one way or another, our costs will dramatically increase and no matter how you look at it, it's going to hit everyone's pocket book," he wrote.
More than 300 part-time employees could also become eligible for benefits under the Affordable Care Act, costing the district an additional $5 million under the current medical plan, Navarro said.
Newport-Mesa already spends $33.4 million out of its $230-million budget to cover medical benefits for its 2,301 eligible employees, said John Caldecott, executive director of human resources.
Newport-Mesa Federation of Teachers is in the middle of negotiations with the district for next year's contract, and at a May 14 school board meeting, the union's leadership objected to Navarro's email.
The superintendent was too quick to place the burden of increased costs on employees, NMFT Executive Director Nicholas Dix said in an interview.
"People were very anxious," he said. "They were alarmed. They were kind of upset by the communication that Dr. Navarro sent out. It was a little frustrating because the communication basically seemed to concede the point that we're going to have to pay more increased cost no matter what we do."
A committee of employee representatives is exploring ways to keep premiums below the Cadillac threshold while maintaining benefits, Dix said.
"It is an amazing [medical] plan," he said. "This is one of the great benefits of coming to work here in the Newport-Mesa school district."
Dix believes educating teachers on how to use their benefits effectively — including wellness plans that encourage employees to exercise or use preventive care — could keep costs down.
For instance, telling teachers they can use a 24-hour urgent-care facility instead of an emergency room could help control premiums, he said.
After the committee hashes out options, it will make recommendations for negotiators in the teachers union or classified employees union to take to the district.
"We want to really focus on improving the health of our employees and changing behaviors of how the plan is accessed," Dix said.
But that may not be enough, UCI's Feldstein said.
Higher co-pays and deductibles are a more effective way to drive costs down compared to wellness plans and education that must be targeted to high-risk individuals to make a difference, he said.
"The main thing is if people had to pay more out of pocket, they would pick plans based on cost and value and more competition," Feldstein said.
That, in essence, is the point of the Cadillac tax, he explained.
"Economists have generally said that very generous healthcare benefits make people immune to the price they pay," he said. "Therefore, they use more services than if they had to make some cost-benefit analysis."
Newport-Mesa employees have no deductible, Caldecott said. They do pay a $20 to $200 or percentage-based co-pay depending on the medical service.
Employees began contributing to their premiums in 2010. This year, individuals paid $860 of their annual premium and families paid $1,890.
But the teachers' union plans to ask the district to cover more of those costs next year while unions search for cost-cutting tools, Dix said.
"Long term, it is our goal that we have a lot more time to deal with the implications of the Affordable Care Act," the NMFT executive director said.
That goal can be undermined if the district says employees must simply pay more, he said.
"We all have a vested interest in working together," he said. "And what prevents us, and what becomes an obstacle to working together, is when there's a different dialogue coming from the superintendent that resigns itself to, 'Well, you guys are going to have to pay more.'"
That statement was purely informational, Navarro said, noting that during his career as a teacher he often felt cut out or unaware of the budget process.
"I just think that I need to be transparent with the information," he said.
Navarro said he would welcome cost savings to preserve benefits if that's possible, but how the district thinks of its benefits must change.
"I think healthcare is now being looked at as part of our overall compensation package, and that's a big mind shift for us," Navarro said. "Business sees this as part of the whole compensation package, and we need to also start looking at it like that."
If that $2.3-million tax does come to bear, the money has to come from somewhere, and wages are on the table.
"If the benefits go up under the Affordable Care Act as they're proposed to," Navarro said, "it will impact our ability to offer increases in other places."