The Biggest Drivers of Public Employees’ Rising Health Costs

A new survey examines the main reasons most government workers' health-care costs are increasing and how municipalities are responding.
by | December 3, 2014

If you work in local government, chances are that health costs covered by either you or your employer climbed in recent years.

Results of a new survey by the Center for State and Local Government Excellence and the International Public Management Association for Human Resources (IPMA-HR) detail the main reasons for higher employee health costs and how municipalities are responding.

Most of the 252 local governments surveyed experienced modest employer health care cost increases. Over the past five years, 61 percent reported increases between 6 and 15 percent, while 11 percent reported larger hikes.

Many factors pushed up health costs. Of governments recording increases, nearly two-thirds identified higher claims expenses as a “major cost driver.” Prescription drugs (57 percent) and an aging workforce (46 percent) were other leading causes. While it’s difficult to gauge the extent to which the Affordable Care Act resulted in additional spending, 45 percent of respondents also attributed cost increases to federal health care policy.

Rising costs led some governments to make significant health benefit changes. The most common adjustment for current employees was to move participants to high-deductible plans with health savings accounts, with 19 percent of local governments reporting such a change during the past five years. Health reimbursement arrangements (HRAs) and shifting from fully insured to self-funded plans were also two of the more frequent responses.

“It’s a huge challenge,” said Elizabeth Kellar, the center’s executive director. “Local governments are really eager to find ways they can cut costs without reducing benefits significantly.”

Higher costs are often passed on to employees in the form of higher co-pays and premiums. The following table from the report outlines how surveyed local governments were containing costs:

Municipal governments employed a variety of approaches to try to keep health costs down. Kellar noted that not all measures localities are pursuing, such as wellness programs and on-site health clinics, necessarily result in higher employee costs or fewer benefits.

One of the more promising developments, Kellar said, is that some governments say they are engaging employees in the decision-making process. The report discussed how the city of Montgomery, Ohio, formed a health benefits committee with representatives from each department to discuss rising costs. The committee helped implement several changes, such as a program incentivizing employees to complete health-risk assessments and participate in wellness activities.

Similar employee committees aren’t in place in most municipal governments, but they are becoming more common, Kellar said.

Rising health costs, along with continually increasing retirement benefit expenses, mean that wages are accounting for smaller and smaller shares of total employee compensation. The latest Labor Department figures indicate wages and salaries make up about 64 percent of state and local government employee compensation, down from between 68 and 69 percent a decade ago. Heath insurance accounts for about 12 percent of total employee costs, compared to 10 percent in 2004.

Most private employers have seen similar changes, although shifts in employee costs might not be quite as apparent as they are in the public sector. The Labor Department estimates that health insurance accounts for 7.8 percent of total private sector employee compensation, up slightly from 6.6 percent 10 years ago.