School District Alert: Beware of Health Insurance Cooperatives

Dozens of school districts left scrambling to pay $11.6 million in debts, a financial shipwreck that raises concerns about such ventures, which are virtually unregulated……

Illinois, like most states, allows counties, villages, park districts, schools and other governmental entities to form cooperatives to buy insurance, equipment, even to provide special-education services.

Cooperative’s crash is costly to schools

Sean D. Hamill, Tribune staff reporter  – CHICAGO TRIBUNE – 6 Sept. 2001

When Illinois’ second-largest school health insurance cooperative shut down last week, dozens of school districts were left scrambling to pay $11.6 million in debts, a financial shipwreck that has raised concerns about such ventures, which are virtually unregulated.

The casualties of the defunct Western Illinois School Benefits Association include Lake Bluff District 65 in Lake County, which had to sell bonds to pay its $247,000 share of the unpaid bills. Plano School District 88 near Aurora will have to dip into its cash reserve to raise $190,000.

“We were already in a financial crunch, so this really hurt,” said Donna Henningsen, superintendent of the Plano district, one of 86 school districts left holding the financial bag for the cooperative, which was providing insurance for about 6,600 employees of school districts when it folded Friday.

In its heyday in the late 1990s, the cooperative was processing $20 million in annual claims from 130 public school districts and their 10,000 employees. About a dozen districts were in the Chicago area, including southwest suburban Bremen Community District 228, North Shore School District 112 and Prairie Grove Consolidated School District 46.

What went wrong involves business decisions that included not raising rates aggressively enough to cover the costs associated with an unprecedented three straight years of high claims, according to some participants.

All the schools have found new insurers, but the organization’s collapse is a signal that Illinois needs to better track such so-called intergovernmental insurance cooperatives, said state Rep. Frank Mautino (D-Spring Valley), chairman of the House Insurance Committee.

Illinois, like most states, allows counties, villages, park districts, schools and other governmental entities to form cooperatives to buy insurance, equipment, even to provide special-education services.

In the Chicago area about 50 percent of schools get health, dental and life insurance through a cooperative, industry watchers say.

The state Department of Insurance lists 37 intergovernmental cooperatives, but given the state’s failure to monitor their activities, industry observers believe there probably are many more and that hundreds of thousands of people are affected.

Western Illinois School Benefits Association was formed in 1985 by seven western Illinois school districts to create a mainly self-funded insurance pool for teachers, administrators and support staff.

Although it is the first such cooperative known to have disbanded in Illinois because of financial trouble, others could face similar problems, Mautino said.

Illinois places few requirements on cooperatives, which are governed through bylaws set by members. The state does require cooperatives to file an annual form listing a contact and address and that they submit a copy of their annual audit, but there is no penalty if they don’t comply.

“We don’t even open the audits because we don’t regulate them,” said Etta Credi, a deputy director of the state Insurance Department.

The regulations are so loose that the state’s largest school insurance cooperative, the Egyptian Trust, which represents 137 schools, most of them Downstate, doesn’t even file its forms or audit, an official said.

“We just never seemed to have to,” said Ruth Hays, Egyptian Trust’s attorney. “Every now and then someone from the Department of Insurance calls us and asks a few questions, and that’s it.”

The first members who joined Western Illinois School Benefits Association “really believed in the cooperative ideal: You had a bad year this year but I had a good year, and it balances out over time,” said Charles Zbrozek , the association’s executive director and the former superintendent of one of its member schools. He was the cooperative’s only paid employee, earning up to $90,000 a year.

Benefits Administrative Systems of Homewood was responsible for the day-to-day operations and paperwork the cooperative generated, getting paid $10.75 per claim. It also made recommendations to the cooperative’s unpaid eight-member board.

Though rates and claims remained manageable into the late 1990s, both started to climb quickly in 1997 following the national trend, according to Marty Joseph, president of Benefits Administrative Systems.

A few members left the cooperative in 1997 and 1998 as its deficit doubled to $4.4 million.

But when the deficit nearly doubled again in 1999 to $8 million and then jumped to $10.3 million in 2000, the cooperative raised rates by 37 percent, prompting many newer members to leave, Zbrozek said.

By the time members gathered for their annual meeting last June 14 in Bloomington, the situation was so bleak that those who remained voted to disband.

The group’s demise was caused by all those years of high claims coming at the same time that medical costs started rising, according to some members.

Others, such as District 65 business manager Paul Hain, questioned some of the group’s business decisions and point out that similar cooperatives have survived.

“I don’t know why the warning bells weren’t going off for these people,” Hain said.

The Egyptian Trust also saw high claims and rising medical costs, but that cooperative had an $11 million reserve that helped it get over the rough spots–compared with Western Illinois School Benefits Association, which chose early on to not build up a large reserve to keep costs low, Joseph said.

Hain said his school district asked its attorney to examine whether anyone from Benefits Administrative Systems may have violated their fiduciary responsibility or broken the law.

“But the guidance from the attorney was that … what was happening wasn’t outside the rules [and] that there wasn’t something there to blow the whistle on,” he said.

Dan Anders, a spokesman for the Illinois Attorney General, said his office had not been contacted about Western Illinois School Benefits Association problems and no investigation was planned.

Mautino said he hopes to sponsor legislation next year to expand the authority of the Insurance Department over cooperatives.

Under his proposal the department would carefully review intergovernmental cooperatives’ audits and regular financial reports to make sure they have minimum reserves on hand to cover losses and handle claims.