Most public employees will also take a hit in their take-home pay as higher premiums show up on their pay stubs. The upcoming open enrollment period is destined to be a somewhat snarly process once again. It’s too late to do anything now to change insurance practices and premiums for 2026, but to begin breaking out of this repetitive Groundhog Day syndrome, states and local governments must start acting cohesively from the same page.
It’s not a challenge to identify the root causes of these premium increases: Health-care costs keep rising at rates that outpace general inflation and public employers’ tax revenues. New medical treatments and devices often improve the quality of health care but at higher costs. The life sciences industry has again ushered in dozens of new therapies, with cheery TV commercials promoting new drugs with contrived names and ever-higher price tags. This year it’s the GLP-1 weight-loss drugs — Ozempic, Wegovy and their ilk — that take center stage. Perhaps the benefits of lower obesity will eventually reduce chronic-care costs, but those results won’t arrive soon enough to impact today’s rising premiums and co-pays.
Many states and localities will likely hire benefits consultants to help them navigate insurance cost increases, but those are micro rather than macro solutions. Where the consultants should be playing a greater role is to help the key state, municipal and professional associations develop a collective agenda for long-term cost containment by working together to present a common front before their respective legislative bodies as well as their insurance carriers.
State and local government employers have mostly been spectators in the never-ending game of political football that Americans keep playing over health care. To get into the game, they need to start first with their insurance companies and bargain for more options in coverage levels, including more ways to cover certain risks using medical savings accounts and employer self-insurance pools, along with caps on what insurance will cover for high-cost drugs like GLP-1. In many cases, that will require collective bargaining to allow more options without contractual mandates for high-cost coverage on the assumption that it’s always better.
Municipal leagues and county and school associations all need to join forces to press harder for greater employer flexibility and less of a one-size-fits-all mentality in their states. At least for now, the concept of universal, uniform coverage is a pipe dream, so it’s smarter to focus on feasible and achievable strategies to better match costs with benefits.
Prescription drug costs are a good place to start. As it happens, Colorado just took dramatic action to put a Medicare-level price cap on a widely used arthritis drug, and Maryland, Minnesota and Washington state have each passed legislation authorizing state officials to place price caps on selected drugs. Courts have yet to rule on thorny issues like interstate commerce vs. states’ rights, but these strategies are directionally correct.
Beyond such state-by-state initiatives, negotiations with both insurance companies and labor unions could take a new turn as a result of a recent White House announcement of a pharmaceutical pricing deal. The concepts of “most favored nation” (MFN) and “direct to consumer” (DTC) pricing (reportedly with a TrumpRx brand) are starting to take shape in the Oval Office. The end result is that consumers might someday get better deals at the pharmacy counter or online than their current insurance co-payment.
The concepts of MFN and DTC could go a long way toward lower insurance premiums and benefits costs, if Washington politicians actually come through with negotiations and durable legislation to put American consumers on an equal footing with patients in other developed countries. That in turn could open a pathway for employees and consumers to reduce the cost of prescription insurance coverage.
Clearly, the national policy groups representing state and local governments will share an interest with private-sector managers in seeking an expansion of MFN drug pricing and the concept of a nationalized DTC facility. Benefits consulting firms should help out their study groups pro bono. Looking ahead, where labor agreements now require certain favored insurance policies and pricing tiers, a reopener clause to secure employers’ flexibility to achieve mutually beneficial cost savings is worth inserting at the bargaining table.
A Role for Public Pensions
One outside-the-box idea worth exploring is the possibility of public pension funds joining forces with several of the dozen experienced, successful med-tech venture capital funds that could provide scarce funding to clinic-stage drug discovery and med-tech device companies. Federal grant funding is drying up, and early-stage venture capital remains sparse after the Silicon Valley Bank debacle. Consequently, many promising startups with viable science in the labs are increasingly unable to raise capital to work their products through the costly required Phase 2b and Phase 3 clinical trials. It’s a fundraising desert known as the “valley of death.”
Therein lies a timely opportunity for public pensions to step in. The entire life sciences industry is now starving for R&D venture capital. Those companies’ trials-stage funding rounds are too small and too early for the bigger venture funds that pension boards typically prefer: Institutional private equity funds typically provide the “growth stage” funding only after regulatory trials are successful or near completion.
Arguably this entire industry niche is now a buyers’ market. A half-billion dollars of public pension capital — about 1/5,000 of just the top 10 public funds’ combined assets — deployed expertly each year in diversified med-tech innovation venture portfolios could reshape the market. A pension consortium could secure widespread contractual commitments by clinical-stage companies that their intellectual property carries a restriction on pricing when their products become commercial, requiring MFN and DTC terms in their states as an indirect ancillary benefit for their stakeholder-citizens.
Arguably this sounds like “social investing,” but it’s far less interventionist than what the White House is doing nowadays. The pensions’ return on these diversified multi-company funds should actually be better than most other asset classes even with the inevitable duds, because this funding stage still enjoys extraordinary exit price multiples when successful.
Most of the med-tech entrepreneurs and their angel counterparts who underwrite the very early preclinical stages will celebrate this concept because the availability of pension capital reduces the risk of their good product ideas dying on the vine for lack of capital. Of course, Big Pharma and med-tech corporations will gripe a little because it shaves a bit off their product sales revenue, but they will ultimately have more winners, so it’s a bigger pie for all.
It’s certainly worth the effort for a handful of pension fund staff teams to issue a joint med-tech venture RFP with these terms laid out as an option for the future once they achieve critical mass as a profit-seeking consortium providing scarce capital. Other funds and managers will follow quickly if the concept is substantiated. That alone could help drive the industry toward more favorable consumer pricing.
"Medicare at Cost" for Younger Retirees?
Even though the Governmental Accounting Standards Board raised the visibility of unfunded retiree health-care liabilities two decades ago, many governments have declined to prefund those costs actuarially the way they do pensions. The result is ever-increased unfunded liabilities and a “phantom payroll” expense for employers who pay health insurance premiums or stipends to their baby boomer retirees as well as their active workforce.
Although it’s viewed as cruel to yank promised benefits from retirees, some employers will find themselves approaching the point where they simply need to trim or put a cap on their endlessly escalating costs. Some will shift to defined contribution alternatives. Many local politicians of the liberal persuasion have continued to believe “Medicare for All” or some similar federal bailout of these commitments would solve their budgetary dilemmas, but it’s now obvious that’s wishful thinking in the foreseeable future.
For those still inclined to believe that the nation must inevitably expand rather than restrict medical benefits programs for retirees, a more realistic political target would be “Medicare at Cost” for retirees at the age of 60 to 64, before earned benefits commence at 65. Because many public employees, particularly public safety workers, can receive full pensions at age 60, this could be a cost-saver for employers in several ways. Even so, that kind of national policy shift still requires realistic actuarial costs for their demographic cohort to be paid by the retirees, with perhaps a stipend from employers. And to be realistic, such an outcome couldn’t arrive any sooner than 2029, even if partisan power in Washington shifts leftward in the next presidential election.
The point here is not to predict or advocate a glorious solution to state and local budget headaches but rather to emphasize the importance of national organizing around a common theme in order to be more effective. This scenario again underscores the need for collective bargaining agreements to include language to reopen such benefits any time national policy unlocks employer cost-saving opportunities.
Alas, there are no magic potions to ease the pain of the sticker shocks coming with this year’s open enrollment period. But for the longer term, doing nothing should not be an option. The Big Seven public policy groups that devise and promote leadership themes and strategies for elected and administrative officials need to step up and devise a game plan for collective actions that address achievable outcomes.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management. Nothing herein should be construed as investment advice.
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