Opinion ID: 2513922
Heading Depth: 3
Heading Rank: 4

Heading: Whether Health Insurance Benefits Have on Balance Been Diminished or Impaired Must Be Measured from a Group Rather than an Individual Standpoint.

Text: As already noted, in Hammond v. Hoffbeck we held that the prohibition on diminishment or impairment of retirement benefits does not mean that retirement benefits are unchangeable. Instead, benefits can be modified so long as the modifications are reasonable, and one condition of reasonableness is that disadvantageous changes must be offset by comparable new beneficial changes. [26] In Hoffbeck we held that determinations of whether detrimental and beneficial changes are sufficiently in balance should be made on a member-by-member basis, rather than collectively. [27] The state challenges the application of an individualized approach in the context of health insurance, arguing that such an approach is unworkable: With a health insurance plan, it makes no sense to balance advantages and disadvantages to an individual at a particular moment in time, because one never knows what one's health will be from one moment to the next.... The retirees' approach as set out in affidavits is that if a member isn't presently using an offered benefit, that benefit cannot be considered an enhancement of the plan, and can't offset a disadvantage. This is anathema to the concept of major medical coverage. The purpose of a group plan is to spread risk among individuals both healthy and sick, and over the course of time, for an individual and ... family both when they are sick and when they are well. [28] The retirees do not directly respond to the state's argument that taking an individualized approach to balancing benefits and detriments is unworkable. But the retirees do offer examples of a number of individuals who claim to have been harmed by the changes to the plan. We refer to one as an example. R.D., a retired teacher, who is in his early fifties, has had his maximum co-pay amount increased from $690 to $800 per year, an increase of $110. Whereas he paid $4 each for brand name prescriptions under the old plan, he now must pay $8 and refuses the mail-order prescription service because he prefers a face-to-face relationship with his pharmacist. He is skeptical of the value of the improvements personally to him since he has never needed reimbursement for travel, feels that he is unlikely ever to reach a lifetime maximum of over $1 million, and will not qualify for Medicare (at age sixty-five) for a long time, and thus he feels that the most significant benefit of the new system, 100% of covered expenses not paid by Medicare, will be of questionable benefit to him. R.D.'s affidavit well illustrates the state's point. For reasons of personal choice, R.D. chooses not to avail himself of the mail-order service savings; because he does not now have a condition that requires him to travel to obtain medical treatment, he believes that the new travel benefit will be of no benefit to him; because his treatment costs are not now approaching a maximum of $1 million, he believes that the increased cap of $2 million will not be of help to him; and because he is in his early fifties he has difficulty appreciating the value of increased Medicare coordination benefit. R.D.'s judgment that the benefits of this new system are of little value to him are subjective and rooted in the present. The benefits will have value to him, for example, if he chooses to use the mail-order drug service; if the conditions of his health change so that he must travel to receive treatment or receives treatment costing more than $1 million; or if he reaches the age of sixty-five. R.D.'s opinion that the detriments of the new plan exceed its benefits to him are incapable of objective verification [29] and review of his affidavit seems to illustrate the truth of the state's point that using an individualized approach in evaluating changes to health insurance plans is unworkable. In Hoffbeck we applied the individualized approach to PERS changes that reduced occupational disability benefits and occupational death benefits. As to the reduction in death benefits, there was no offsetting advantage. [30] As to the reduction in disability benefits, the reduction was substantial, from two-thirds to two-fifths of monthly salary. [31] The claimed offsetting advantages were that workers' compensation awards recovered by disabled employees were previously setoff against disability benefits whereas under the new system there was no setoff. [32] We noted, however, that more than half of the employees disabled prior to the change received no workers' compensation benefits. [33] Two of the affiants had suffered disabling injuries. We stated that in these cases serious hardship has resulted from application of the new system and ... no corresponding advantages have reduced that hardship. [34] Hoffbeck relied principally upon Betts v. Board of Administration of the Public Employees' Retirement System. [35] Betts involved a change in the formula for calculating pension payments. The plaintiff in that case was a retired state employee who was disadvantaged by the change. [36] It was possible to determine with certainty that he received no offsetting comparable advantage. The difference was substantial since the controversy was whether his pension should be calculated on the basis of his highest salary while in office, $21,499, or on the basis of the current salary for the office in question, which was $35,000. [37] Hoffbeck and Betts are distinguishable from the current case. Changes to fixed streams of income such as occupational disability and pension payments can be much more readily evaluated on an individual basis to determine whether they result in a net benefit than can changes to health insurance. Pension and occupational disability payments are, for the most part, predictable and fixed, while health insurance benefits change according to the unpredictable, changing medical needs of each individual. This difference suggests that the Hoffbeck individual assessment approach may be generally inappropriate with respect to health insurance. A Michigan circuit court opinion has recognized the special problems that would result if health insurance benefits could not be changed: Plaintiffs seek a legal bulwark against any diminution of any portion of their current health benefits.... [T]his implies a set of health benefits frozen in time.... .... It is self-evident that such an outcome would produce a huge chilling effect on the State's willingness to grant any health benefits to future retirees, because the costs of any such benefits are likely to increase over time, yet the State would have no authority to impose new cost containment measures, as it has sought to do here. And even the existing retirees would have earned a Pyrrhic victory, as their frozen health benefits become more obsolescent with each passing year. [38] In view of the ever changing nature of medical care, the Michigan court observed that [t]he idea of a specific bundle of medical benefits, unchanging over time, ... is probably illusory. [39] Yet the court held that the state was not free to radically change the nature of health benefits that had vested in the employee group in question. The court concluded: [T]he rights which have vested in Plaintiffs are not rights to receive exactly the same package of health benefits which were offered [at vesting] but rather a right to a reasonable health benefit package, one which is in keeping with the mainstream of such packages, as they are negotiated and implemented for similarly situated active employees over time. Thisnot a frozen package of benefits and cost containment measuresis the meaning of hospital, medical-surgical, and sick care benefits mandated by the Legislature. This is the central undertaking to which Plaintiffs could reasonably believe they have entitlement, based on the State's promise. [40] Like the Michigan circuit court, we believe that health insurance benefits must be allowed to change as health care evolves. We also believe that the economic realities of administering health care coverage would prevent making such changes if an individualized equivalency analysis were used. We reach this conclusion reluctantly in light of Hoffbeck's holding that changes in other retirement benefits must be analyzed on an individual basis, a result that is implied by article XII, section 7, which equates retirement benefits with contract rights. Recognizing that analysis of health insurance changes from a group standpoint is necessary, but in some degree inconsistent with analogous constitutionally based precedent, we believe that it is advisable to express a number of cautions that may help to guide any equivalency analysis of health coverage changes. At the outset, we reiterate Hoffbeck's admonition that equivalent value must be proven by reliable evidence. Just as with an individual comparative analysis, offsetting advantages and disadvantages should be established under the group approach by solid, statistical data drawn from actual experienceincluding accepted actuarial sources rather than by unsupported hypothetical projections. [41] We also believe that, apart from the individualized approach, the other guidelines concerning equivalency analysis set out in Hoffbeck should continue to be generally applicable. [42] Further, we reiterate that equivalent value must be proven by a comparison of benefits providedmerely comparing old and new premium costs does not establish equivalency. [43] Where there is an individual showing that a change results in a serious hardship that is not offset by comparable advantages, the affected individual should be allowed to retain existing coverage. This is suggested by a distinction between Hoffbeck and the present case. In Hoffbeck the detrimental change resulted in clear and specific serious hardship to certain individuals. [44] By contrast, the examples that have been offered in the present case amount to detriments of at most several hundred dollars a year, without consideration of benefits. We believe that if there were an individual showing that substantial detriments were not offset by comparable advantages and that this resulted in a serious hardship, the affected individual should be protected from the change by article XII, section 7. Further, our opinion in this case should not be interpreted as approving major deletions in the types of coverage offered during an employee's term. Coverage of a particular disease or condition should not be deleted, even though other coverage might be improved, if the deletion would result in serious hardship to those who suffer from the disease or condition in question. Moreover, if there should be changes that will predictably cause hardship to a significant number of beneficiaries who cannot at the time of the change be specifically identified, we believe that the option of providing an election to beneficiaries to retain existing coverage should be available, at least in the absence of a showing by the state of a compelling need for the change and the impracticability of providing for an election. Finally, changes that substantially reconfigure the mix of benefits to beneficiaries should be approved only upon a strong showing of justification. Unusual gaps in coverage should be avoided. Like the Michigan court in Studier, we believe that the coverage that is offered should generally be in keeping with the mainstream of health insurance packages offered to active public employees in terms of scope and balance.