Brief State Employee Health Benefits, Insurance and Costs

With state and local governments employing over 7.4 million full-time workers throughout the U.S., public employee benefits like health insurance coverage are of great importance to the state policymakers All 50 states provide health insurance coverage for their state employees, however, the extent of coverage, who is eligible to enroll, and employer versus employee premium contributions vary from state to state.

State employee health plans have attracted attention among state legislators, governors and policymakers because:

• Rapidly rising commercial health plan premiums for state employee health plans are effecting state budgets; and
• Co-payments, deductibles and out-of-pocket costs are on the rise in many states, separate from premiums.

State lawmakers—who may also receive coverage through state employee health plans in certain states—have various policy options for controlling rising health care costs and maintaining quality coverage options for the state employee workforce. Additionally, legislators can pilot innovative strategies for controlling public employee health care costs to demonstrate a policy’s effectiveness on a smaller scale. 

State Employee Health Plan Costs

Behind Medicaid, state and local employer contributions to public employee health insurance premiums represent the second largest cost driver for state health care expenditures. The Pew Charitable Trust published a comprehensive report in 2014 highlighting state employee health care costs and found that:

• States and their employees spent $30.7 billion on insurance premiums in 2013; states paid $25.1 billion (nearly 82 percent) of this total. 
• While health insurance premiums varied greatly across the states, the average per-employee per-month premium was $959; states paid an average of $805 (nearly 84 percent) toward premium contributions.  
• Plan richness—or the relative cost-sharing between a health plan and an enrollee based on required deductibles, copayments or coinsurance—affected premium variations state-to-state. State health plans were considered generally rich with health plans covering an average of 92 percent of employee health care costs.

Additionally, most states provide some level of health care coverage to retired state employees as part of their employee benefits package. According to a 2016 Pew Charitable Trust report, states spent approximately $18.4 billion in 2013 funding retiree benefits beyond employee pensions—referred to as other post-employment benefits programs.

State Strategies for Controlling Costs

As state employee health care costs continue to impact state budgets, state policymakers are leveraging several strategies to curb growing health care expenditures. Certain strategies include pooling state employee benefits with local government or university employees; adopting value-based purchasing models; and initiating consumer-driven health care strategies.

Pooling State Employee Health Benefits

More than half of the states allow, and in a few cases require, state employee health plans to cover local or regional government employees. By "pooling" insurance benefits across multiple employers, government entities can spread risk across a greater number of individuals and increase their purchasing power with a larger purchasing pool. As of 2018:

• Pooling with city, town and county government employees is allowed in at least 22 states.
• Pooling with public school employees is allowed in at least 19 states.
• Pooling with university and college employees is allowed in at least 16 states.
• Other local districts or units—such as fire or recreation districts—may be included in some states.

Adopting Alternative Payment Models

Some states are transitioning away from traditional fee-for-service payments, which provide payments for each individual service and procedure, and instead adopting alternative payment models (APMs) for their state employee health plans. APMs aim to increase the value and quality of health care services while lowering overall costs through financial incentives. States can leverage various APMs to test the effectiveness of such models in reducing state health care expenditures. The following are two examples of states adopting APMs for state employee health plans:

• Tennessee incorporated bundled payments, also referred to as episodes of care, for its State Group Insurance Program (SGIP) for five separate services and procedures, including maternity care and hip and knee replacements. As part of the Tennessee Health Care Innovation Initiative, SGIP pays providers on a fee-for-service basis. Following the procedure and recovery period, providers may receive additional payments if the average cost per episode remains below an agreed upon threshold for that particular procedure or service. However, providers may have to pay SGIP if the average cost per episode is above the threshold. After the program showed modest costs savings and improvements in the overall quality of care, SGIP announced plans to roll out additional episodes of care.
• In 2014, the Washington Legislature directed the Washington Health Care Authority (HCA)—which administers health care coverage for the state’s public employees, higher education employees, Medicaid beneficiaries and retirees—to increase its use of value-based purchasing models. As the largest purchaser of health care in the state, HCA implemented an accountable care organization (ACO) model, which establishes networks of providers with shared financial and medical responsibility for an entire population. Through improved care coordination and communication across the continuum of care, each ACO provider network aims to meet certain quality and financial targets. According to a 2016 Catalyst for Payment report, HCA spent $2.7 million less on ACO members compared to enrollees in the Public Employee Benefits Board self-insured plan.

Initiating Consumer-Driven Health Care Strategies—Health Savings Accounts and Right to Shop

States are initiating consumer-driven health care strategies to increase health care costs savings. For example, several states are promoting health savings accounts (HSAs) as a way to lower state employee health care spending. HSAs are a type of savings account allowing consumers to set aside money for certain health care services on a pre-tax basis. HSAs are linked to high deductible health plans (HDHPs), which require plan enrollees to pay out-of-pocket for medical expenses until their deductible is met. HDHP enrollees can use HSA funds for certain qualified medical expenses not fully covered by their insurers, such as doctor’s visits, drug prescriptions and dental care. HDHPs are commonly referred to as "consumer-driven health plans." As the name suggest, consumer-driven health plans aim to bolster the role of consumers in seeking necessary, more affordable care—and avoid costly care and over-utilization of services.

According to a 2017 Segal Consulting report, 30 states offered HDHPs as an option for state employees. However, the report noted that HDHPs coupled with HSAs may be unaffordable for certain segments of the state employee workforce due increased out-of-pocket costs and recommends greater investment in participant health consumer education programs.

States are also establishing Right to Shop programs for state employees, which provide financial incentives for patients to seek lower cost, high quality providers and health services. Through right to shop programs, insurers typically share a portion of their cost-savings with health plan enrollees to offset any pre-deductible or out-of-pocket expenses.

New Hampshire, Kentucky and Utah are examples of states that have established right to shop programs as part of their state employee health plans to curb growing health care costs to state budgets. New Hampshire was the first state to establish a shared incentive program with 90 percent of enrollees using the right-to-shop program within the first three years of the program.