Brief Strategies for Containing Costs in State Employee Health Plans

As health care costs continue to outpace inflation and strain state budgets nationwide, many states are exploring ways to reduce costs in their Medicaid programs, which constitute an average of 30% of state expenditures. State employee health plans (SEHPs) are another significant driver of state health care spending. These plans have emerged as a topic of conversation as state lawmakers consider cost-containment strategies and continue to look to balance their budgets.

With more than 5.4 million people employed by state governments nationwide in 2023, SEHPs are a key benefit provided to public employees in all 50 states. Who can enroll in a SEHP varies, with most covering legislative and executive branch employees. Some states extend eligibility to city, state university and school district employees.

Most states offer multiple plans for public employees with varying benefit designs, such as preferred provider organizations and health maintenance organizations. Many states also fund their own SEHPs and pay employee claims directly, rather than contracting with an insurer. These plans are known as self-funded plans, rather than fully insured plans, and may allow states more control over plan customization. All but three states (North Dakota, Idaho and Wisconsin) and Washington, D.C., offer at least one self-funded plan for state employees.

This article explores a menu of cost-containment measures that lawmakers may consider for their SEHPs as they navigate providing adequate coverage for state employees and balancing their budgets, from pricing initiatives to alternative payment models and more.

Pricing Initiatives

Several states have passed legislation or promulgated regulations to implement reference-based pricing in their SEHPs, which ties state health plan reimbursement for providers to a reference point, often a certain percentage of what Medicare pays. Montana implemented reference-based pricing for its SEHP, limiting reimbursements to 220%-225% of Medicare rates for inpatient services and 230%-250% for outpatient services. An analysis conducted by the actuarial firm Milliman found that Montana saved $47.8 million between 2017 and 2019 with the pricing initiative in place. Oregon also implemented reference-based pricing in its SEHP, tying its reimbursement for in-network hospital services to 200% of the Medicare rate and out-of-network hospital services to 185% of the Medicare rate. Over the plan year, this resulted in $81 million in savings. A tool created by Brown University allows states to estimate the impact of capping payments to hospitals in their SEHPs, which researchers at Brown estimate could have saved SEHPs $7.1 billion nationally in 2022.

Another approach states may take is site-neutral pricing, which involves plans reimbursing the same amount for a service regardless of the setting it is provided in. South Carolina’s SEHP implemented a site-neutral pricing initiative in 2016 that began by moving reimbursement rates for radiology, lab and endoscopy services performed in a hospital toward non-hospital setting rates. The initiative has since expanded to require site-neutral pricing for ambulatory surgical center services and physician-administered medications. Additionally, a number of states have passed laws to address facility fees, which are additional charges for services provided in a hospital setting that are increasingly being charged to patients in non-hospital environments, such as hospital-acquired physician practices

Some states have chosen to curb SEHP expenditures by considering prescription drug pricing strategies, specifically through opening their prescription drug-purchasing pools to various types of public employees, leveraging increased purchasing power to negotiate better rates. In 2010, Connecticut passed legislation allowing municipalities to buy prescription drugs through their SEHP. The state had previously permitted the Teachers Retirement Board to purchase drugs under the state employee plan and reported a cost savings of $3 million to the state shortly afterward. States may also address budgetary pressures by ending coverage for emerging high-cost drugs like GLP-1s in their state employee health plans.

Benefit and Plan Design Initiatives

Many SEHPs extend enrollment eligibility to other categories of public employees, spreading risk across a larger group of individuals and creating plans with more market power to negotiate with providers. This practice is known as pooling. According to the Georgetown Center on Health Insurance Reforms, as of 2023, at least 24 states allow local, county and/or city employees to enroll in the SEHP. At least 27 states allow public school employees, and at least 33 states allow state university employees to enroll in SEHPs. California’s SEHP, CalPERS, reported saving $40 million in premium costs each year after allowing local government employees to enroll. In 2022, Idaho passed legislation creating a dedicated fund for public school employees to buy into the state’s medical and dental group insurance plan.

At least eight SEHPs employ tiered networks, which are select sets of providers sorted into levels based on their ability to meet certain quality or cost metrics. Minnesota’s SEHP contains four different tiers from which enrollees can choose, with deductibles ranging from a $35 co-pay for office visits to a $90 co-pay in the highest-cost tier. The more cost-effective a provider can be, the more likely it is to be sorted into a tier with lower out-of-pocket costs for patients. According to-their website, almost 90% of Minnesota SEHP enrollees choose providers in the two lowest-cost tiers.

Third-Party Administrator Oversight

Every state that self-funds its SEHP contracts with at least one third-party administrator (TPA) to administer plan benefits, process claims, negotiate contracts with providers and provide customer service. TPAs are responsible for benefit design and can play a key role in cost containment for SEHPs.

Some states have considered how TPA contracts can be leveraged to contain costs, specifically by incorporating accountability metrics, requiring them to meet certain financial goals as they contract with providers. The Georgetown Center for Health Insurance Reform survey found that at least 32 SEHPs report that their TPA contracts include accountability mechanisms if TPAs do not reduce costs as expected. In January, Indiana’s governor signed an executive order requiring a comprehensive audit of TPAs that contract with the state Medicaid program and SEHP while also directing the SEHP to explore prescription-drug reforms to ensure value for taxpayers.

Alternative Payment Models

As states explore innovative ways to reduce costs, some have implemented alternative payments, shifting away from traditional fee-for-service payments. Though the evidence on quality and spending results for alternative payment models is mixed, with outcomes varying depending on the type and the design of the model, states are leveraging certain models within SEHPs as a potential tool for cost savings.

Alternative payment models can incentivize providers to meet certain quality or cost metrics when delivering care, aligning their goals with SEHPs to reduce costs. Tennessee’s state employee health plan utilized the episodes of care approach, which set a total budget for services delivered to a patient over a period of time for five specific procedures or conditions, including joint replacement and perinatal care. The program launched in 2017, and according to a 2018 evaluation report, most quality metrics showed year-over-year improvements.

A number of SEHPs have chosen to collaborate with other public or private purchasers on alternative payment models known as multi-payer initiatives. According to this Georgetown survey, SEHPs in Washington, New Mexico and California all reported collaborating with either the state Medicaid or ACA marketplace programs, while Maine and Colorado worked with private sector payers. In 2012, Arkansas launched the Arkansas Health Care Payment Improvement Initiative, a statewide multi-payer payment and delivery system leveraging episode-based payments and shared savings via patient-centered medical homes (PCMHs). The initiative is led by the state Medicaid agency with commercial insurer participation, including the Arkansas state employee health plan.

Additionally, the Washington Multi-Payer Collaborative is a primary care reform initiative between the Washington Health Care Authority, which operates the SEHP and Medicaid program, and eight private insurers in the state. The program will implement alternative payment models, establish quality incentives, standardize quality metrics across the participating insurers and implement a uniform approach to provider outreach. A July 2024 memorandum of understanding signed by all participants further outlines the goals of the initiative.

By exploring cost-containment measures through a variety of strategies, states have many opportunities to maintain quality of care in their state employee health plans while also remaining cognizant of budgetary constraints.

NCSL acknowledges Arnold Ventures for its support of this resource.