Health-Care Costs Surge
Insurance premiums jump 9 percent for family coverage.
As state and municipal revenues stagnate and public employers cut payrolls, the latest news on health-care costs keeps getting worse. Insurance costs have risen another 9 percent in 2011 and the annual family coverage premium has now crossed the $15,000 level nationally, according to Kaiser Foundation and American Hospital Association surveys. About 1.5 percent of that increase is attributable to expanded access to health care for dependents under age 26 and other features of the federal health care law; the remainder reflects rising costs and perhaps an effort by insurers to front-run future premium controls.
For public employers that provide retiree medical care benefits pegged to the benefits and premiums for current workers, these cost trends are scary. Actuarial assumptions are clobbered when medical inflation keeps rising like this. Meanwhile, returns on investments are lagging. Paying for a lifetime of medical benefits payments that increased 9 percent is a much larger hit to the balance sheet than the current premium. That makes it all the more important for public employers to assert control of their runaway medical benefits costs and cap their future costs with a fixed or CPI-limited stipend.
According to the survey reports, private-sector employees now pay about 28 percent of the premium costs. The average public sector employee contributes significantly less, usually in the range of 15 to 20 percent. Fewer and fewer private employers offer retiree medical benefits of any kind. For public-sector employers who offer their retirees medical insurance (OPEB or other post-employment benefits), the escalating costs are a concern. Municipal labor negotiators will surely find themselves demanding higher employee contribution rates, co-pays and deductibles. Half of private employers have reportedly moved to high-deductible plans, which are increasingly used by smaller employers. That's a 200 percent increase in five years.
The employers that most need to wake up and take action are those who continue to finance their retiree medical benefits on a pay-as-you-go basis while paying full insurance premiums. They need to (1) reform their benefits structure along the lines suggested in my previous columns, (2) begin funding actuarially to avoid having their budgetary cost curves "turn vertical," and (3) require employees to contribute to their retiree medical benefits plan. This obviously can't happen overnight, but employers need to put a transition plan into place soon that will achieve these objectives before it's too late. Unfortunately, another recent survey of local governments shows that fewer of them than are bothering to advance-fund their retiree medical liabilities, largely because of budgetary pressures and, even worse, fewer are even planning to do so next year. Most would say they are caught between a rock and a hard place. But they still need to get beyond their policy paralysis and take actions to protect the future. Hope is not a strategy.