The two major federal programs providing health-care benefits, Medicare and Medicaid, are a central but sometimes overlooked component of state and municipal budgets. Medicare comes into play for virtually every public-sector employer that provides retiree health-care benefits, because it provides a cost subsidy for everybody 65 and over, at which point private insurance costs drop significantly below those of active employees under that age. Many public employers’ plans for post-retirement health care stop or sharply curtail benefits at age 65 when Medicare kicks in.
And even governments that don’t provide retiree health benefits will be impacted by any Medicare reforms that lower the eligibility age, as those will affect retirement timing decisions by their older workers, which will in turn impact payroll budgets and pension funding costs as well as group insurance rates.
The ubiquitous problem for public employers is that most government workers who begin careers in their early 20s are eligible to retire with full pensions earlier than age 65, particularly teachers and the public safety, corrections and blue-collar workers whose physical performance is prone to deteriorate with age. Even when their pensions are properly funded, the costs of providing these workers with stipends or group health insurance after retirement are largely unfunded and keep mounting annually. A burgeoning shadow payroll of retirees collecting health-care benefits — at the same time that their younger replacements are receiving group health insurance — is often one of the three or four largest budget problems facing many jurisdictions.
For public employers that do not provide retiree health-care benefits, the reverse problem applies: Their older workers may be eligible for a full pension, but they cannot afford to retire in their late 50s or early 60s because of medical insurance costs that can easily chew up a quarter or a third of their pensions. It is typically the case that those workers are the most expensive for their employers because they occupy the top of the pay scale, and their actuarial cost of health care inflates group insurance rates. For employers who include retirees in their group insurance program, the problem is similar and sometimes even worse. Anything that can reduce the cost of medical insurance for workers who retire before age 65 will take pressure off of public-employer budgets. That could become a backdoor earlier-retirement incentive.
This is where proposals for “Medicare at Cost” — one variant of the “public option” long sought by many Democrats — could be a boon to most state and local governments. For starters, if everybody who attains age 60 were eligible to participate in the Medicare program by paying a premium based on the federal government’s actual actuarial nonprofit cost of providing benefits to that younger demographic group, almost all participants’ health-care costs would be lower than under private and employers’ group insurance — the result of stripping out insurance company overhead and profits while bolstering group purchasing power. Employers can decide (or negotiate with unions) whether to drop group insurance for all workers and retirees over age 60 or keep their existing benefits structures.
Over time, Medicare at Cost could be expanded to include successively lower age groups, each of them subject to groupwide age-based premiums for their respective age cohorts. Public employers could replace retired participants’ group insurance plans with a stipend based on years of service and extract themselves from providing insurance to retirees through their active-employee group policies. As Medicare at Cost becomes available to their older workers, and then potentially their entire workforce, employers or individual employees could opt out of private group insurance if material savings become achievable. This would not happen overnight, but the longer-term savings to state and local governments and their taxpayers would be likely to be substantial.
The bluest bloc of congressional Democrats is seeking to add a purer form of Medicare expansion to Biden’s American Families Plan, reducing the eligibility age to 60 or even 55 without requiring a Medicare-at-Cost-style buy-in from those younger beneficiaries. But those lawmakers have offered no credible plan to pay for it. That is why a Medicare at Cost strategy would be the best way to gain that toehold in 2021 without pouring gasoline on the political fire already raging among fiscal conservatives who are screaming that the entire scheme is oozing in socialism and deficit finance. Let’s not forget that the Medicare trust fund is already going broke, projected to run out of money in just three years, and simple budget math shows that corporations and the rich alone cannot be taxed three times over to pay for infrastructure, the families plan and future health-care reform. Medicare at Cost is low-hanging fruit and the most sensible place to start a bipartisan dialogue.
The other federal program of note here is Medicaid, which is a federal-state problem. The challenge for the states is that under current rules and contracts, any expansion of this program to provide coverage to additional lower-income Americans will cost the states more, and expansion could become a worse problem for state budgets in the future if a conservative or cost-cutting Congress were to reduce the federal share and dump those expenses on the states. What the states need to promote now is a cost shift toward Washington while Democrats have a voting advantage and before a possible midterm shift in congressional majorities.
One of the single most important financial benefits that Congress could give to the states would be federal assumption of all — or at least more — of the cost of Medicaid. As their share, the states presently pay about $200 billion annually, which is about 15 percent of their total budgets. Releasing the states from this Medicaid obligation to make it an entirely federal responsibility would provide enough budget relief for the states to provide a benefit as substantial as two years of free public college tuition for every student. That would go a long way toward achieving Biden’s goal of improving American competitiveness while cutting student debt.
Most voters think of health-care reform as a federal issue with mostly household benefits. But the stakes for state and local governments and their stakeholders are just as high. It’s time for governors and mayors to suit up for their A game, engaging with their congressional representatives and Capitol Hill lobbying associations to steer the new health-care debate in a direction that could yield budget benefits for decades to come.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
