Already facing an endowment loss of 8 percent in the past year, Northwestern administrators, will now need to consider soaring health, property and medical malpractice insurance rates in formulating next year’s budget, which will be finalized in the next few weeks.
“People sometimes say, ‘Why is tuition going up by almost (5) percent when inflation is going up by 2 percent?'” said Eugene Sunshine, senior vice president for business and finance. “This is one reason why. There are others, but insurance is one of the big problems. When you’re talking about Northwestern, you’re talking about millions and millions of dollars in premiums and insurance policies.”
NU’s $26.7 million insurance payments total about 3.2 percent of the school’s budget. Although not much of the total pie, expected insurance increases of more than $3 million over the next few years could take a sizable bite out of any new revenues that come NU’s way.
Every year, NU receives about $15 million in added revenue from increased tuition and endowment withdrawals. That incremental revenue increase goes to pay for incremental cost increases, such as faculty and staff salaries, which rose about 3.8 percent nationally last year, according to a report by the American Association of University Professors.
Leftover money can be put toward new academic programs or student initiatives, such as the new Weinberg academic advising programs.
Increasingly, that leftover money is being used to pay soaring insurance rates. Insurance costs are expected to increase by more than $3 million next year, and even more the year after.
Administrators are trying to dam the swelling costs by experimenting with new payment methods and insurance companies. But regardless of their success, the school is going to have to tighten its belt for the next few years, possibly cutting back on new programs.
SOARING HEALTH COSTS
Until about a year ago, NU didn’t have to worry about insurance increases. Rates stayed at the same level or dropped for nearly a decade as fierce competition between companies led to serious rate cuts. Then, in January 2001, companies began to raise their rates.
Insurance costs rose again after Sept. 11, as the insurance industry’s near-$35 billion payout severely depleted companies’ funds.
After ten years of increases of less than 10 percent in health insurance, costs nationwide have risen between 8 and 30 percent for NU’s five providers, said Tom Evans, NU director of benefits.
NU paid $19.5 million for faculty and staff health insurance, and $5.6 million for undergraduate and graduate students last year, said Jim Elsass, budget director. Those costs are expected to rise 10 percent for undergraduates to $21.95 million, and 20 percent for graduates to $6.72 million, he said.
NU’s older faculty and staff population, whose average age in the mid-40s, also is a factor in increasing insurance, Evans said.
The cost of prescription drugs, growing between 18 and 20 percent a year, is the main reason for the increases, Evans said.
“Some of the new drugs are drugs in place of hospitalization,” Evans said. “The hospital cost may decrease, but the prescription increased.”
Elsass said that unlike some other universities and companies, NU isn’t shifting more of the health cost burden to its employees but instead is maintaining the same proportions of payment. NU did shift student payments last year, asking for a 45 percent increase.
OTHER LIABILITIES
Chris Johnson, NU’s director of risk management, said the “dismal, awful” insurance market stems from the Sept. 11 attacks and their increasing lawsuit awards. Insurance companies lost more money that day than ever before, he said.
Property insurance is increasing nationwide, by margins of 60 to 200 percent, Johnson said. NU spends $440,000 a year on property insurance and is contracted through September 2003, Elsass said.
Elsass said that although NU won’t have to worry about a property insurance increase until then, he expects the rates might double after that.
The same could be said about malpractice insurance. NU pays only $94,000 a year, but in addition the Feinberg Medical School pays about $15 million a year, Elsass said.
“If the doctors have to pay a lot more money for their insurance, and that’s less money that’s available to support research, or teaching, or other operations we care about that,” Sunshine said.
Cook County has particularly high insurance rates for medical malpractice because of the unlimited awards patients can win, with one recent case topping $55 million, Johnson said.
Elsass lumps medical malpractice and property insurance with $1.07 million general liability insurance into a $1.6 million cost. That could double in the 2003-04 budget year, further cramping the budget, Elsass said.
easing the burden
One option NU has not taken to obtain more money for the university would be to charge all faculty and staff a higher rate for their insurance, Sunshine said.
“Some schools have done that – we have not,” Sunshine said.
But NU will take other measures to lessen the impending budget crunch, said Controller Ingrid Stafford, such as increasing the amount the university would pay for damages.
NU also hopes to investigate new companies with the help of an insurance broker and search for ways to reduce NU’s risk of damages.
For example, last year the university eliminated 15-passenger vans because a National Transportation and Safety Association study found that students cannot drive them as easily, which causes more accidents.
The university also has some money reserved for budgetary purposes. Elsass said NU actually spent less money on insurance than it budgeted for the last several years.
The money probably will be used for the next two years, but Elsass warned that it will not last forever.
“Internally, it stabilized the unstable world around us,” he said. “(But) if insurance costs keep going up, we’re going to have problems. It’ll be gone … we’ll be exhausted.”
Stafford said she does not expect insurance rates to continue to skyrocket.
“The insurance market works cyclically,” she said. “We’re not expecting this to be a five-year trend. But it certainly is a this-year trend.”
