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A health insurance company affiliated with the state's largest teachers union is refusing to release hundreds of thousands of dollars in federal money to school districts that recently dropped the company in favor of less expensive providers.

The federal money, which the nonprofit WEA Trust applied for on behalf of individual school districts, is intended to offset high-cost medical claims for early retirees ages 55 and older who are not yet eligible for Medicare. WEA Trust is affiliated with the Wisconsin Education Association Council.

School officials argue that WEA Trust applied for the federal money during the 2010-'11 fiscal year, which ended Thursday, so the money should be credited to the same year. WEA Trust officials contend the money should be carried forward as 2011-'12 insurance premium credits.

So far, there's no definitive answer at the federal level - at least not one they can agree on.

School districts forfeited the money if they switched providers because federal rules dictate it must be disbursed to current plan participants, according to WEA Trust. The forfeited money will be divided among plan participants in school districts that remain with WEA Trust, company officials told the Journal Sentinel.

Some school officials whose districts stand to lose the federal money are seeing red, while others are focusing on the savings they still will achieve by switching to other insurance providers.

WEA Trust declined to reveal the total amount of federal money being withheld from school districts that left the trust. But one official said the trust collected a total of $9 million on behalf of school districts in its plan.

Hartland-Lakeside Superintendent Glenn Schilling accused WEA Trust of telling school districts in March that they would receive the federal money as a premium credit for fiscal 2011-'12 "because they wanted to retain their business" - not because federal rules required it.

"We believe that your method of connecting this credit to an insurance renewal with WEA is unethical," the superintendent wrote last week in a letter to Kathryn Otto, director of sales for WEA Trust.

In a March letter to Schilling, Otto wrote that the WEA Trust had applied for and received funds from the federal government on the district's behalf, "which we will be passing on to you." The letter said the Hartland-Lakeside district was "eligible to receive $46,103 in the form of a premium credit to be used during your 2011-'12 WEA Trust plan year."

The Hartland-Lakeside district now stands to lose that money because the School Board voted Thursday to drop WEA Trust. But by switching to United HealthCare, the district still expects to save $690,000 in the new fiscal year, which started Friday, Schilling said.

"If WEA Trust is a nonprofit, why are they so expensive?" Schilling added.

The Hartland-Lakeside district serves the village of Hartland and the towns of Delafield, Merton and Pewaukee.

The Pewaukee School District could lose nearly $60,000 because its School Board voted Friday to switch from WEA Trust to United Healthcare. The switch still will offer the district $378,000 in savings for next year, said Assistant Superintendent John Gahan.

Pewaukee's request for the federal money to be paid in a lump sum the final month of its contract with WEA Trust was denied, according to the district.

The Hartland-Lakeside and Pewaukee districts were able to switch insurance providers because their teachers union contracts expired Thursday. School districts no longer have to bargain over health insurance under the state's new collective bargaining law, and many shopped for less expensive plans because they faced deep state funding cuts.

The Menomonee Falls School District is losing more than $100,000 in federal money because its teachers union agreed last month to a switch from WEA Trust to Humana. But the provider change otherwise will save the district $1.3 million in the new fiscal year, according to school officials.

"We'll have a long-term savings with Humana," said Superintendent Keith Marty, who left Menomonee Falls last week to become superintendent of a Missouri school district. "WEA Trust served the district very well," he said. "But we needed to make sure we had the best bang for our buck, given that we were going to face significant (state aid) cuts."

WEA Trust followed federal rules that apply to the early retiree insurance program, said WEA Trust spokesman Steve Lyons.

"Federal law prohibits the dollars to go with school districts that leave the plan," Lyons said. "It's not school district money. It belongs to plan participants."

WEA Trust did not provide federal program documentation to support its position. But company officials said distributing the money to nonparticipating school districts now could prompt penalties.

It's a year-to-year program, said Vaughn Vance, an attorney for WEA Trust.

"You can only use the funds to offset future premium increases, so you can't use it until after you renew," Vance said.

Schilling, the Hartland-Lakeside superintendent, wants proof.

"Show me the language that says it has to be a credit for next year," he said.

Schilling and others have been trying to nail down the federal rules.

WEA Trust never informed Schilling that it was applying for the federal money on the school district's behalf, or that the district could have applied for the money on its own, Schilling said.

"A lot of school districts are irritated by the way WEA handled this," he said. "There was no communication. We had insurance consultants look at this, and even they were shrugging their shoulders."

At the start of 2011, WEA Trust provided health insurance coverage for more than 250 of Wisconsin's 424 school districts, according to Otto. A number of districts switched providers this spring and in recent weeks. Otto declined to reveal how many districts dropped WEA Trust, but said other districts joined WEA Trust because it offered competitive rates.

The window has now closed for districts to apply for the federal money in the future if they didn't apply in the 2010-'11 fiscal year, she said.

Affordable Care Act

The temporary program, called the Early Retiree Reinsurance Program, was created by the federal Affordable Care Act in June 2010. It's due to expire the end of 2013, when other provisions of the Affordable Care Act go into effect, and it theoretically will be easier for early retirees to obtain coverage through new state health insurance exchanges.

The program's intent was to encourage employers to maintain health insurance coverage for early retirees, as the percentage of large employers providing workers with retiree health coverage dropped from 66% in 1988 to 29% in 2009. The program pays 80% of each insurance claim for an early retiree that exceeds $15,000, up to $90,000.

As part of the program, the federal government set aside $5 billion in financial assistance to employers and unions to help reduce the total cost of the plan or the costs paid by retirees.

The federal assistance funds may be used to reduce the share of premiums paid by early retirees, or to reduce deductibles or co-pays. If the plan's total premiums go up year to year, the funds could be used to offset increases. However, the law specifies that the federal payments may not be used by employers as "general revenue."

As a plan sponsor, the WEA Trust could legally apply for and receive the federal funds on behalf of school districts it represented. Schilling, of Hartland-Lakeside, does not dispute that.

The Lake Country School District in Hartland is among the school districts that stand to cash in on the federal money because it stuck with WEA Trust.

"Had we switched, we would have explored going after (the federal money) like some districts are doing," said Lake Country Superintendent Mark Lichte, whose district expects to collect $12,000 in premium credits in the new fiscal year.

"My understanding was it was supposed to be a credit for 2010-'11," Lichte said.