The Corner

Cadillac Coverage: The High Cost of Public Employee Health Benefits

Now that we can pretend for a few weeks that we are done with the federal debt deal, it’s time to look at the looming debt crisis in the states: public employees’ health costs. That’s the focus of a new study by Josh Barro of the Manhattan Institute looking at that health-care costs for local and state governments, which have tripled in 15 years, outpacing the growth in private insurance premiums by about 20 percent.

In his paper, Barro explores the reasons that government-employee benefits cost more than private-sector ones. Here is a non-exhaustive list:

  • Public employees contribute less to their premiums—an average of about 15 percent of the overall premium, compared with about 25 percent in the private sector.

  • Public-employee plans offer more generous benefits, including lower deductibles and lower co-payments.Governments require shorter enrollment waiting periods for new employees than in the private sector.

  • Public employees have higher opt-in rates for employer-provided coverage: 26 percent of private-sector workers choose not to participate in available employer health plans, while just 16 percent of government workers chose not to.

Barro aslo makes some suggestions about ways to address this problem, such as consumer-driven plans that encourage workers to use health resources more judiciously since they must pay higher out-of-pocket expenses.

As the Wall Street Journal writes this morning:

Such plans are becoming more common in business because they yield huge cost savings to both employers and employees. Whole Foods CEO John Mackey wrote in these pages in 2009 that his company’s high-deductible plans, which include a lump-sum contribution to a health savings account (HSA), have held down his company’s health-care costs.

In 2006 Indiana Governor Mitch Daniels introduced consumer-driven options and increased employee cost-sharing for managed-care plans. Employee premium contributions to the consumer-driven plans average about $260 per year versus $6,000 for managed care. It’s no shocker that 70% of workers have opted for consumer-driven plans.

A study by Mercer Consulting found that the consumer-driven plans saved Hoosier taxpayers as much as $23 million and employees as much as $8 million last year. According to Mr. Barro, governments nationwide could cut $20 billion from their $130 billion health-care bills by adding HSAs to their plan options.

Read the whole paper here.

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