HR Advisor February 2004

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HR Advisor

MRSC has joined with Janice Corbin and Janet May, Partners, Sound Employment Solutions, Rhonda Hilyer, President, Agreement Dynamics,and Bruce Schroeder, Employment/Litigation Attorney, Summit Law Group, to bring you the "HR Advisor" article series on employment and labor law issues affecting Washington local governments. The "HR Advisor" will feature a new article each month with timely HR management information and advice you can use.*

Handling Medical Premium Increases Without Running Afoul of Contract and Bargaining Obligations

February 2004

Bruce Schroeder
Employment/Litigation Attorney
and
Shannon Phillips
Employment/Litigation Attorney
Summit Law Group

One of the most controversial issues in labor relations today is who will bear the burden of the rapidly rising cost of medical insurance. It's not news that premiums have skyrocketed in recent years. Public employers faced with limited revenue are ill-positioned to absorb all of the increases. Employees are reluctant to take on a greater share of the costs. It all adds up to contentious bargaining and ripe ground for unfair labor practice charges and grievances. This Article reports on a recent grievance arbitration decision involving an employer faced with a change in prescription drug benefits mid-contract, and offers guidance that can be gleaned from that opinion for employers faced with changes in benefits. In addition, the Article summarizes current Public Employment Relations Commission decisions regarding lawful and unlawful actions taken by employers with respect to premium increases.

City of Lynnwood Arbitration Decision Gives Guidance Regarding Changes in Benefit Levels and Contract Obligations

In a January 12, 2004 arbitration opinion, Arbitrator Jane Wilkinson considered a grievance filed by the Guild alleging that the City had violated provisions of two collective bargaining agreements when it refused to maintain the existing prescription drug benefit enjoyed by employees after the City's insurance carrier, the Association of Washington Cities ("AWC") Insurance Trust, reduced the prescription benefits available under the plan to which the City subscribed. Obviously, with the large number of employers who obtain insurance for their employees through the AWC, hundreds of employers likely faced the same situation. Although she described it as a "close call," the Arbitrator ultimately decided that the City had not violated the applicable contract provision. The Arbitrator's rationale may provide guidance to other employers regarding changes in benefit levels that may be passed along mid-contract without violating the terms of a bargaining agreement.

Factual Background

The City of Lynnwood purchases medical insurance for its employees through the AWC Insurance Trust. The City pays the full cost of employee premiums for medical benefits, and 90% of the cost for dependent medical premiums. The insured individual is responsible for co-pays for prescription drugs.

In fall 2002, the AWC advised the City that the prescription drug benefits in the plan to which the City subscribed would be reduced. There would be no change for participant co-pays for generic drugs. The co-pays for name-brand drugs would increase from $7 to $15 if purchased from approved pharmacies; and from $14 to $30 if purchased from a mail-order service. In addition, if purchased from a pharmacy, the duration/supply of drugs would change from the larger of a 34-day supply or 100 units, to a 34-day supply. There would be no change in duration/supply if the drugs were purchased via the mail-order service. The AWC testified that the prescription drug co-pay resulted in a 4% savings in the cost of dependent premiums. The proposed changes were approved in October 2002, and subscribers were notified in late October or early November 2002.

The City refused to compensate employees for the additional out-of-pocket costs that they might incur as a result of the AWC plan benefit change. The Guild contended that the City's refusal violated the following provision of the parties' collective bargaining agreement:

the City shall not reduce the present insurance benefits for the duration of this Agreement

The language pledging not to reduce benefits had been in all collective bargaining agreements since 1992. The language allowing the City to change carriers first appeared in the contract immediately preceding the current one.

Arbitrator Concludes that Minor Plan Changes do not Violate the Contract

In analyzing the contract language, the Arbitrator considered whether it should be interpreted to mean (1) the City will not cause the present insurance benefits to be reduced or (2) the City will not offer reduced insurance benefits. The Arbitrator chose the first interpretation, as urged by the City, reasoning that if the parties had intended the latter view, they could have chosen language like that used in previous agreements: "present insurance benefits shall not be reduced."

The Arbitrator then responded to the parties' "worst-case scenario" arguments. The Guild argued that if the AWC's reduction in benefits does not put the City in breach, bargaining unit members would have no benefit protection if the AWC (or any other insurer) decided to impose a large cost-shifting measure in order to keep premiums low. The City, in turn, said it should not be left with the total responsibility for providing the same benefits if, for example, the AWC decided to stop offering the current plan, or imposed a major modification in benefits. The Arbitrator responded that neither situation was very likely to occur. She noted that the AWC is a municipal organization composed of members who are all parties to collective bargaining agreements, so any significant change should have a sufficiently long phase-in period to accommodate the terms of existing agreements. Moreover, the Arbitrator said that under general contract law principles, she believed that a substantial reduction by the AWC could be considered a "failure of presupposed conditions," and cause for reopening of contract negotiations on the health benefit issue.

The Arbitrator also placed value on the reasons for the changes imposed by the AWC. She described the changes as "modest and reasonable," and explained how they may create incentives for users to ask for more economical generic equivalents to brand-name drugs and prevent waste of unused drugs. She stated that AWC's reason "possesses some relevancy because it goes to refining the parties' probably mutual intent, presuming both parties are reasonable in their views."

The Arbitrator concluded that minor plan changes do not violate the obligation to maintain the present benefits, "when the net effect of changes over the term of the agreement has not produced a significant reduction in benefits." In reaching this conclusion, the Arbitrator reviewed various changes in the AWC plan benefits over the relevant contract period, and noted that some of the changes were clearly enhancements, while others might be reductions or enhancements depending on a particular employee's situation and use of benefits. She concluded, "My review of the past annual plan changes leads me to conclude that it was unlikely that the parties intended to ban individual benefit reductions, regardless of other benefit enhancements."

Bottom Line

The precise language of the collective bargaining agreement may determine whether an employer is obligated to shoulder the entire burden of health benefit changes. The applicable language in the City of Lynnwood case provides, "[t]he City shall not reduce the present insurance benefits for the duration of this Agreement." As detailed above, the Arbitrator interpreted the language to allow for a review of the benefit changes throughout the Agreement period, and not to prohibit minor reductions. The following language in a management rights or health insurance clause likely would give the employer even more flexibility:

Any changes required by the provider of insurance coverage shall be implemented. These include, but are not limited to, changes in required co-pays, deductibles and plan administration procedures.

This suggested language most likely provides the specificity necessary to constitute a waiver and avoids the argument by the union that the clause subjects employees to arbitrary and capricious actions by their employer.

The next section provides additional guidance regarding an employer's duties if it is faced with a change in benefits that does not appear to be "minor" or "insubstantial."

Duty to Bargain Premium and Co-Pay Increases

More than Insignificant Change Can Trigger Duty to Bargain

It is well settled that health care coverage is an alternative form of wages and, thus, a mandatory subject of bargaining. City of Kalama, Decision 6741 (PECB, 1999); Cowlitz County, Decision 7007 (PECB, 2000). A switch in insurance carriers or elimination of a plan option may be a mandatory subject of bargaining, depending on the effect of the switch on benefit options. Compare, City of Dayton, Decision 1990-A (PECB, 1984) (switch in insurance carriers was not a mandatory subject of bargaining since the union had not demonstrated that the change "omits one or more significant insurance benefits, and thereby causes an adverse impact on the employees' previously negotiated benefits") with Spokane County, Decision 2167-A (PECB, 1985) (county had a duty to bargain its decision to drop a particular plan); see also, Adams County, Decision 6907 (PECB, 1999) (no duty to bargain where "the union did not prove that the benefits provided under the PEBB plans were substantially changed from those provided under the MSC plans"). These cases remain good law and are still cited today for the principle that (as suggested by the Arbitrator in the City of Lynnwood arbitration decision) a significant change in health care benefits is a mandatory subject of bargaining.

It is the Union's Obligation to Request Bargaining, After Notice of the Change

Even though an employer faced with a significant premium or co-pay increase must be willing to bargain with unions, the obligation to request bargaining is on the union rather than the employer. The employer's duty is to notify the union of the proposed change. The period of notice must be sufficient to allow an opportunity for intelligent evaluation of the merits of the proposal, and formulation of response. Cowlitz County, Decision 7007 (PECB, 2000). The following is an example of language that could be used to notify the collective bargaining representative of changes like those at issue in the City of Lynnwood:

Dear ______:

We have been informed by the administrators of the AWC health care plan that they intend to make some changes to the prescription benefits. Effective January 1, 2006, the co-pay for name-brand drugs has increased from seven ($7) to fifteen ($15) dollars, and will be required for each 34-day supply of prescription drugs. The $4 co-pay for generic drugs has not been changed. We understand that the purpose of this change is to enable AWC to help keep overall insurance costs down. The increase in premium costs for this year alone will be reduced by four percent (4%) due to these changes. Needless to say, that benefits us all. Please contact me right away if you wish to discuss this issue.

If the employer has provided such notice, and the union fails or refuses to request bargaining in a timely manner the employer may then have a "waiver by inaction" defense to a charge that it unlawfully changed benefits. See, City of Kalama, 6741 (PECB, 1999).

If the union requests bargaining, the employer does not have an automatic obligation to reimburse the employees in some manner for the additional out-of-pocket expense caused by the increase in co-pays. As with any issue that is subject to bargaining, the employer has a duty to meet in good faith and at reasonable times in an effort to reach an agreement. The employer does not have an obligation to agree to a specific union proposal.

The Employer may not be Obligated to Pay for Increased Premium Costs While Contract Negotiations are Underway

Another difficult situation faced by employers is how to respond to an increase in the cost of health care benefits that occurs while the parties are negotiating the terms of a new agreement. On the one hand, if the employer unilaterally agrees to pay the increased cost, employee representatives have little incentive to agree to proposals involving sharing of the burden with employees. But if the employer does nothing, employees must deal with a sudden increase alone. The discussion in this and the next subsection provides guidance regarding an employer's obligation in such situations, and pitfalls to avoid.

PERC opinions support the position that in certain circumstances an employer is not obligated to assume any additional cost pending negotiations of a successor agreement, and, therefore, may pass on the entire premium increase to its employees, provided that the employer or union proposed changes to the health care cost provisions during negotiations. PERC has summarized its holdings on the subject as follows:

Snohomish County

Accordingly, that employer was not obligated to pay additional costs while bargaining was underway for a complete agreement for a "uniformed personnel" bargaining unit, and the Examiner in that case pointed out that implementation of an increase (albeit, most likely looked upon with favor by the union) could well be an unlawful unilateral change

Cowlitz County, Decision 7007 (2000) (emphasis added). Before taking too much comfort in the guidance from PERC as supporting the argument that the employer can maintain the "status quo" of whatever they have been paying toward insurance pending an agreement, employers should look carefully at the contract language. In Snohomish County, the contract language provided that the employer would maintain full payment of premiums for the life of the contract, and the record indicated that the medical premium issue was a subject of bargaining for a new contract. The expired contract language in Cowlitz County called for the employer to pay for a fixed amount per month for insurance benefits. In such situations, it makes sense for the employer to assert that maintaining the status quo means not paying for an increase in premiums. But if a contract said that an employer would pay the entire cost for premiums, with no time limitation, it is conceivable that PERC would conclude that maintaining the status quo means continuing to pay everything pending a new contract, notwithstanding the increased premium cost.

Opinions of the National Labor Relations Board regarding a private employer's obligations (which PERC often looks to for guidance) support taking a careful, nuanced look at the contract language. For example, in Brooke Meade Health Care Acquirors, Inc., 330 NLRB 121 (2000), the employer unilaterally increased the amount of employee contribution to address rate increases while negotiating the parties' first contract. The Board rejected the employer's argument that it was actually maintaining the status quo because it has a policy of contributing to the premium on a fixed percentage and had paid that percentage here. In fact, the Board found that there was no evidence of any understanding by the parties as to what each would pay. The Board distinguished this from cases in which passing on a premium increase would not constitute an unfair labor practice:

Thus, if an employer had a practice of paying, for example, 80 percent of the premiums and the employees 20 percent, no change in the statue quo ante would be found if both the employer and the employees, continued, after the increase to pay the same percentages of the larger total. Or, if the employer's practice was to pay a specified amount for each employee's health insurance, and for the employees to pay the rest, the employer could lawfully require the employees to bear the entire weight of the premium increase. On the other hand, if an employer's practice was for employees to pay a set amount of the premium and the employer to pay the rest, the employer could not lawfully impose any part of the increase on the employees without first bargaining to agreement or impasse with the union.

Dynatron, 323 NLRB 1263 (2000). See also, Intermountain Rural Electric Ass'n, 984 F.2d 1562 (10th Cir. 1993) (employer required to pay 100% of any increase in health care cost during contract hiatus because contract itself provided that the employer would pay, not a fixed dollar amount, but 100% of the premiums). In sum, although current PERC law indicates that an employer is not obligated to pay premium increases, the employer should carefully examine the current language to determine whether an argument can be made that maintaining the status quo requires the employer to pay some or all or the increase.

Unilaterally Paying the Increased Cost Can Come Back to Bite the Employer

In several PERC cases, employers were found to have committed an unfair labor practice when they rescinded an increase in the employer contribution that they implemented unilaterally to help temporarily cushion the impact on employees of premium increases. The law is clear that even changes that are favorable to employees cannot be unilaterally made � of course, the union is unlikely to contest changes that are beneficial to its membership. For example, in City of Seattle, Decision 651 (PECB, 1979), the City voluntarily assumed the increased cost of health care for the employees. Due to the increase in benefits, the union did not grieve the unilateral change. The PERC, however, noted that it could have because such a change, although advantageous to the employees, was done in violation of the duty to bargain. Subsequently, the City unilaterally stopped paying the increased cost, noting that it did not have to do so initially and, therefore, should not be required to continue to do so. The PERC disagreed and held that having voluntarily assumed the increased cost, the City had established a new status quo and any effort to revert to the original plan without bargaining was illegal. See also, Snohomish County, Decision 1868 (PECB 1984) (same); City of Kalama, Decision 6741 (employer who provided coverage to bridge the difference in plans offered created a new status quo and was thus barred from discontinuing that coverage without engaging in bargaining).

Conclusion

Over the last few years, health insurance has become a road block for settling numerous collective bargaining agreements in the public sector. Cities who historically have paid 100% of the health insurance benefit are struggling with year after year of double-digit premium increases. Employees, on the other hand, who were asked to pay increasing amounts towards health insurance, see any cost-of-living adjustments eaten up on medical insurance. With no attractive solution to the health insurance crisis readily at hand, employers can expect to continue the struggle in an attempt to be fair to employees while recognizing fiscal reality. Careful attention to contract language and bargaining obligations won't eliminate this stressful issue, but it may avoid adding to the headache.

Bruce Schroeder is an employment / litigation attorney with Summit Law Group, Seattle. Bruce's practice is concentrated on representing management in the entire range of employment law matters. More.

Janice Corbin is a partner with Sound Employment Solutions, LLC, Seattle. Janice has over 15 years of human resources experience with the Seattle Police Department and the International Harvester Truck Company and has worked in the law enforcement field for over 22 years. More.

Janet May is a partner and attorney with Sound Employment Solutions, LLC, Seattle. Janet has over ten years of experience in the labor and employment law field, and has represented both management and labor. More.

Rhonda Hilyer, President and Founder of Agreement Dynamics, is an international consultant with a reputation for helping convert traditional, conflict-based environments into productive, collaborative ones. More.

*The Articles appearing in the "HR Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.