On July 1, 2020, Gov. Phil Murphy signed into law P.L.2020, c.44 (“Chapter 44”), which overhauls health benefits plans offered to school employees.
Chapter 44, which applies to boards of education participating in the School Employee Health Benefits Program (SEHBP), as well as non-participating districts, was passed with the goal of reducing costs for districts and employees by encouraging a shift to lower-cost insurance plans and reestablishing cost-sharing requirements. Because the Chapter 44 took effect immediately, with benefit plan changes to be in place as soon as Jan. 1, 2021, board members should be aware of how the changes will impact their district, including in the labor negotiations context.
How Did We Get Here? By way of background, as board members know, employee health benefits are one of the largest expenses for local boards of education, and boards are continually balancing the need to offer benefits that will attract and retain employees against the district’s obligation to keep up with the rising costs of such benefits. The landmark health benefits reform law known as “Chapter 78” (P.L. 2011, c.78), passed in 2011, provided cost containment measures, including requiring employees to pay a portion of health insurance premiums. Under Chapter 78, employee contributions ranged from 3%-35% of the premium and was never less than 1.5% of the employee’s salary, depending on the employee’s salary and plan choice.
The Chapter 78 employee contribution requirement was phased in over a four-year period, with the statutorily required contribution levels remaining in place only until: (1) the full amount of the contribution was implemented for an entire year, and (2) the contract during which the full phase-in occurred expired. At that end of this period, districts and unions could negotiate over the contribution requirements, with the full Chapter 78 contribution level being the starting point for negotiations. By the time the bill that eventually became Chapter 44 was introduced, the Chapter 78 requirements had sunset in virtually all New Jersey districts. Following the sunset of these requirements, boards inevitably faced union proposals to reduce employee contributions, with unions generally taking the position that the contributions significantly reduced employees’ take home pay. Approximately one-third of New Jersey districts had already negotiated away from the full Chapter 78 contribution requirements when Chapter 44 was passed. In general, districts were challenged in finding creative ways to manage increasing benefit costs.
New legislation to replace Chapter 78 was hotly debated in the legislature and the education community. From the school district perspective, even with the cost containment measures provided by Chapter 78, school districts still struggled to contain the rising costs of health care. Public sector unions argued that overall employee take-home pay was negatively impacted by the required cost-sharing of healthcare premiums and they advocated for what they called “relief” from Chapter 78. Notably, Gov. Murphy also advocated for Chapter 78 relief during his 2017 campaign.
In March of this year, New Jersey’s largest teacher’s union, the New Jersey Education Association (NJEA), and state Senate President Steve Sweeney reached an agreement for legislation that would include lower cost health plans in exchange for the sought-after Chapter 78 “relief.” Bill number S-2273/A-20 was introduced in the Senate on March 16, and was passed by both houses of the legislature and signed into law by early July. In early September, the New Jersey Department of the Treasury, Department of Pensions and Benefits released further guidance on implementing Chapter 44 in the form of frequently asked questions.
What Health Care Benefits Must Districts Offer Now? Chapter 44 makes significant changes to employee healthcare benefits not only for SEHBP-participating districts, but also for non-participating districts.
For districts offering benefits through the SEHBP, starting in the plan year that begins on Jan. 1, 2021, the SEHBP will offer only three medical and prescription drug benefit plans to non-Medicare-eligible employees and retirees and their dependents. These three plans will include the two most popular plans offered, the NJ Direct 10 and Direct 15 plans, and a new plan that will be called the New Jersey Educators Health Plan (NJEHP). Starting July 1, 2021, the SEHBP will also offer a plan called the Garden State Health Plan (GSHP), and this plan will provide medical and prescription drug benefits at an equivalent level to the NJEHP, except the benefits will only be available from New Jersey providers. Whether an employee can enroll in the GSHP as of July 1, 2021 or, instead, during the open enrollment period held in 2021 depends on an employee’s hire date as well as whether an employee has a qualifying event in July 2021 or later, and boards may wish to consult the recent Treasury guidance for more information on this issue. Both the NJEHP and GSHP incentivize the utilization of generic prescription drugs and in-network health care providers. All plans offering chiropractic, physical therapy, and acupuncture benefits will be subject to the same out-of-network limits in effect for the SEHBP on June 1, 2020, though districts may wish to review the aforementioned Treasury guidance for changes to out-of-network reimbursements.
All other plans in the SEHBP will be discontinued, regardless of the terms of the current collective negotiations agreement. Employees who do not affirmatively select a plan during the enrollment period will be enrolled in the NJEHP for the 2021 calendar year. New employees, however, will have a more limited selection of benefits. Per the Treasury guidance, employees hired after July 1, 2020 would receive the health benefits options available under the existing collective negotiations agreement during the period between their time of hire and December 31, 2020. Starting Jan. 1, 2021, employees beginning employment on or after July 1, 2020 and before Jan. 1, 2028 who do not elect to waive coverage, along with any dependents, may only enroll in the NJEHP or the GSHP (when the latter plan becomes available to the employee as noted above), in accordance with plan requirements, up through Dec. 31, 2027—after which point the employee may select other plans offered by the SEHBP. Chapter 44 freezes the plan designs for the SEHBP until Dec. 31, 2027, allowing no changes to be made until the plan year starting on Jan. 1, 2028.
The law requires districts that do not participate in the SEHBP to provide employees and any dependents the equivalent of the NJEHP beginning with the Jan. 1, 2021 plan year and, starting July 1, 2021, the equivalent of the GSHP. The two plans must be offered regardless of the terms of any effective collective negotiations agreement. These districts may not offer new health care plans, other than the NJEHP and the GSHP, at any time between Jan. 1, 2021 and Dec. 31, 2027—unless such benefits provisions under a collective negotiations agreement “result in additional premium cost reductions.” In addition, unlike SEHBP districts, non-participating districts are not prevented from continuing to offer healthcare plans that were in existence prior to July 1, 2020.
Similar to SEHBP-participating districts, employees in non-participating districts who began employment before July 1, 2020 and fail to select a plan during the enrollment period will, along with their dependents, be enrolled in the equivalent NJEHP for the plan year beginning Jan. 1, 2021. New employees in these districts will also have a more limited plan selection. Starting on Jan. 1, 2021, employees not waiving coverage and commencing employment on or after July 1, 2020 and before Jan. 1, 2028 will be enrolled in the equivalent NJEHP or, if selected, the equivalent GSHP (when the latter plan becomes available), in accordance with the plan requirements, up until Dec. 31, 2027. Chapter 44 provides that employees commencing employment on July 1, 2020 or later may select any plan offered by the employer, as permitted by the employer, beginning on January 1, 2028. Non-SEHBP districts may not change the level of benefits from the equivalent of the NJEHP and GSHP until Dec. 31, 2027, unless such a change is required by law, after which the level of benefits of the equivalent plans may be modified.
It should also be noted that Chapter 44 also requires that a comprehensive health and wellness plan be provided to all participants in the SEHBP, with the contract also offered to non-participating employers for those employees to access the same services.
How Much Do Employees Contribute? Under the cost-sharing provisions of the law, enrollees in the NJEHP and the GSHP are treated differently from enrollees in other permitted plans. In districts participating in the SEHBP, contributions for employees enrolled in the Direct 10 and Direct 15 plans will be continue to follow the premium sharing requirements at the full phase-in level of Chapter 78 or the contribution arrangement negotiated in the collective bargaining agreement, if different. For districts not participating in the SEHBP, similar provisions apply to employees who are enrolled in plans other than the NJEHP and the GSHP equivalents.
However, instead of requiring employees to contribute a percentage of the premium, Chapter 44 requires employees in SEHBP districts enrolled in the NJEHP or the GSHP, and employees in non-SEHBP districts enrolled in equivalent plans, to contribute an amount equaling a specified percentage of an employee’s annual base salary. For retirees, this would be a percentage of the annual retirement allowance. The percentage to be contributed is specified in the statute, but may not be more than the employee would have been required to contribute under Chapter 78 and employee contribution rates are capped for employees making $125,000 or more. The percentage to be contributed by employees enrolled in the GSHP is one-half of the percentage that must be contributed by employees enrolled in the NJEHP, but must be at least 1.5% of salary as required under the law. The contribution level cannot be negotiated until Jan. 1, 2028.
Will the Changes Result in Cost Savings for Districts? Although it has been estimated that this bill will result in $1 billion in overall cost savings, with $670 million of this savings projected to benefit districts, as of this writing, there has been no district-by-district comprehensive fiscal analysis identifying the amount of projected savings in each district.
Significantly, the statement released by the Assembly Appropriations Committee for the bill prior to its passage states: “The anticipated net savings associated with plan design changes offset by reductions in employee contributions are indeterminate.”
The cost savings under Chapter 44 will primarily stem from the migration of employees to lower-cost plans, including the new plans created by the law, and the plan design changes included in it. According to the statement, the extent and rate of this migration cannot be determined and it should be further noted that savings will be offset by overall reductions in employee contributions as set out under the law. However, as NJSBA has pointed out, there are concerns about the level of cost savings from the new law. The reality is that premium costs will continue to rise, and, in the newly created plans, employee contributions are tied to employee salaries, not to rising premium costs.
Restrictions on the Use of Savings Chapter 44 includes restrictions on the use of savings accrued by districts as well as requirements to track any savings realized by districts. Under Section 6 of the law, any savings realized by a district resulting from the implementation of Chapter 44 may only be used for the purpose of reducing the amount that must be raised by the local property tax levy, unless the district is spending below adequacy. Additionally, the law requires individual school districts to submit a data sheet each year that shows, for the current as well as the prior year, the total annual cost of active employee health benefits, total cost-sharing contribution, and the net cost to the district for such benefits. Districts should review additional requirements for this submission with their human resources director and/or their board attorney.
Finally, Chapter 44 includes a provision requiring the state to review whether cost savings have been realized, and to make adjustments accordingly. Under the law, by July 31, 2023, the state actuary for the SEHBP “shall issue an actuarial report validating a net annualized savings of at least $300 million comparing plan years 2020, 2021, and 2022,” measuring implementation of the law in SEHBP participatory and non-participatory districts. If the net annualized statewide savings is less than $300 million, then the SEHBP Design Committee, or the New Jersey State Treasurer (where the committee can’t agree) must make plan design changes and/or adjustments to employee contributions in order to make up the shortfall by Dec. 31, 2027.
Can Anything Related to Health Benefits be Negotiated? Section 8 of the law requires districts that have collective negotiations agreements in effect that include health care benefits coverage for district employees, where the net cost of the benefits to the employer is lower than under the NJEHP, to “engage in collective negotiations over the financial impact of the difference.”
Beyond this, what is still open for negotiation depends somewhat on whether the district participates in the SEHBP. For districts participating in the SEHBP, contributions for health care benefits for employees on the NJ Direct 10 and 15 plans are negotiable under section 2 of the law. For these districts, the contributions for employees enrolled in the NJEHP or the GSHP can only be modified through collective negotiations beginning with the plan year beginning on Jan. 1, 2028. At that time the NJEHP and GSHP contributions become negotiable, and the law requires that the negotiations “be conducted as if the contributions…were included in the prior contract.”
Under section 5 of the law, districts not participating in the SEHBP may negotiate the level of benefits in and contributions to the equivalent NJEHP and GSHP starting with the Jan. 1, 2028 plan year, with the contributions to be treated as if they were included in the prior contract as described above.
Additionally, at that time, non-SEHBP districts may negotiate to offer new healthcare benefits plans, other than the NJEHP and the GSHP and any that may meet the premium cost reduction requirement discussed above. Whether there is any room for negotiation of these other plans in the meantime is a question that should be reviewed with your board attorney.
Additionally, because SEHBP districts can still purchase dental and vision benefits outside of the SEHBP program, and dental and vision coverage is not included in “cost of coverage” under the law, districts should consult with their board attorney and insurance benefits advisor regarding the negotiability of these benefits. It should be further noted that though SEHBP-participating boards have the option of whether to offer prescription drug benefits though the SEHBP, a stand-alone prescription drug plan offered by a district must have the same plan design as and offer equivalent coverage to the NJEHP.
School districts should continue to review and ensure that they are in compliance with Chapter 44’s new health benefits requirements, and be aware of what may and may not be negotiable relating to the district’s health benefits programs. For more information about Chapter 44 as well as its impact in the negotiations context, board members should consult with their board attorney or call the New Jersey School Boards Association Legal and Labor Relations Department at (609)278-5254.