Cadillac Coverage: The High Cost of Public Employee Health Benefits

In light of budget deficits and the need to identify ways to reduce spending in states across the U.S., increasing public discussion has focused on health-care costs for public employees. Much of that discussion has focused on the relatively low share of insurance premiums paid by government workers, when compared with their private-sector counterparts. Although this is a real phenomenon, it is not the only, or even the most important, reason for high health-insurance costs.

This report explores the reasons that government-employee benefits cost more, and it makes concrete recommendations for how costs can be brought into line with those of the private sector.

Among the reasons identified for the cost differences are:

• 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.

Realigning government-employee contributions to match those of the private sector could save taxpayers millions of dollars a year. However, this simple approach does not bend the cost curve over time—benefits will still continue to grow astronomically—and further, it will understandably upset workers by reducing their take-home pay.

We recommend instead that governments work more broadly to reduce their spending on health benefits—including by reducing the overall cost of plans offered to employees. We detail, in particular, how Indiana has achieved significant savings since shifting to consumer-directed health plans in 2006. Consumer-directed plans are designed so that, except for catastrophic expenses, employees bear the responsibility of paying their own health-care costs. This sharply reduces the cost of insurance because a smaller percentage of an employee's medical bills are paid by the insurer and because employees have a strong incentive to consume care more judiciously.

Characteristics of successful consumer-directed health plans include:

• A generous Health Savings Account (HSA), funded by the employer and employee, which is used to pay day-to-day medical expenses and which can be rolled over into future years and even drawn on for other expenses after retirement.
• A high-deductible, low-premium catastrophic insurance policy to cover large expenses.

In Indiana, this reform is saving the state $17–$23 million each year, while employees are saving $7–$8 million because of lower utilization. When designed properly, consumer-directed health care benefits employers and employees alike and can result in significant savings for taxpayers if implemented at the state and local level nationwide.

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