Temperature’s rising

Like a bad fever, the cost of providing employee healthcare has steadily risen in recent years, thanks to new technologies and drugs, and to the growing ills resulting from obesity and smoking. Hardly immune to the epidemic rise in healthcare costs, many local and state governments are struggling to find the funds to cope.

According to the White House, healthcare spending has increased from 5 percent of the gross domestic product in 1960 to 16 percent in 2004. Worse, it says spending is expected to rise 18.7 percent by 2014, climbing at a rate several times faster than either personal income or inflation. Not to be left holding the bag, insurance companies have raised their premiums at double-digit rates in recent years.

Governments can be disadvantaged in finding ways to finance the increasing cost of employee healthcare plans. For example, governments shoulder a greater burden than the private sector partly because they often cannot share cost increases with employees, according to the 2003 study “Financing Health Care Plans for Local Government Employees,” released by the Washington-based International City/County Management Association. The increasing unemployment or underemployment problems, less consumer spending and the related decreases in tax revenues have only exacerbated the problem.

“It’s killing their budgets, and yet it’s hard to raise taxes, so they’re looking at other ways to reduce costs,” says Pamela Konde, senior policy analyst for the National League of Cities’ (NLC) Center for Policy & Federal Relations in Washington. “A lot of solutions and proposals are out there, but you can’t have a lot of consumer-driven plans without consensus. It’s an important issue, and it’s really starting to impact budgets.”

Taking responsibility

A community’s population often dictates the types of healthcare plans offered by cities and counties, according to the ICMA study. Small entities often join a consortium or a state plan, while other local governments give employees a monthly allowance ranging from $66.57 to $200 to buy their own health insurance, according to ICMA.

Local governments also offer self-insured or fully insured plans. In a self-insured plan, the local government contracts with insurance companies or third parties to administer the benefits, and more importantly, assumes the full risk for the cost of all medical claims. That gamble generally pays off for local governments with a better-than-average claims history, according to the ICMA study. Stop-loss coverage can be added to a self-insured plan, causing the insurance company to pay when claims exceed a threshold. In a fully insured plan, the employer contracts with an insurance company to pay for medical claims and for all administrative costs, meaning that the number and cost of claims will affect premiums.

Many local governments offer a combination of self-insured and fully insured coverage. Nearly 66 percent of local governments are fully insured, according to ICMA, and those are more likely to have less than 25,000 residents. Half of the survey’s respondents with more than 1 million residents are fully insured, and half have a combination of plans. More than one-third of those jurisdictions with populations between 25,000 and 250,000 self insure with stop-loss coverage added.

Several states also offer plans that cover city and county employees, the largest of which is the California Public Employees’ Retirement System (Cal-PERS) based in Sacramento. The Cal-PERS program manages pension and health benefits for more than 1.4 million public employees, retirees and their families. About 40 percent of CalPERS participants come from local governments, representing more than 1,000 public agencies. Local governments also can contract with CalPERS to administer their health programs.

Davis, Calif., uses the CalPERS program to offer multiple plans to its employees. Sharon Neilson, the city’s human resources analyst told ICMA: “The city provides a set amount for health insurance to each employee. If the plan the employee selects has a higher premium, the employee pays the difference; if the plan selected has lower premiums, the employee receives the remainder as pay.”

Regional cost differences

But CalPERS has been affected by the recent hikes in healthcare costs, which have led many cities to seek cheaper premiums elsewhere. After holding down costs throughout the 1990s, CalPERS handed out a rate increase that averaged 26 percent in 2003 and another that averaged 17 percent in 2004, forcing many cities, primarily in southern California where premiums are considerably cheaper, to shop for other healthcare programs. Riverside County, with 28,000 employees, was one of the more prominent communities that exited the program in 2002.

Between 2003 and 2004, 35 public agencies left CalPERS, while only 28 joined, which led the organization to adjust its program to reflect regional differences in healthcare costs. Last year, although 17 cities, schools and other agencies left the program, 25 agencies joined.

According to the ICMA study, more than 28 percent of all local governments participate in some type of joint healthcare purchasing program where they can negotiate prices, plans and administrative arrangements. Typically, smaller localities are more likely to purchase cooperative healthcare plans than larger cities.

Cities and counties can approach cooperative healthcare purchasing in a variety of ways: multiple entities can sign a single contract with one or more insurers; they can issue a single request for proposals but each sign separate contracts for different benefit packages; one city or county can require an insurer to contract with other public entities as part of the agreement; or each entity can contract for healthcare separately but purchase ancillary services, such as prescription benefits, jointly.

Joining a purchasing cooperative is one of the top ways local governments can reduce their healthcare costs, according to ICMA. Others include participating in state health insurance programs; requiring an employee contribution toward the monthly premium, even at a nominal rate; and reducing the premium paid by the government by limiting the number of separate plans offered and increasing co-payments.

Wellness focus

To help reduce healthcare costs, many local governments are taking a longer view of employee health and focusing on wellness and prevention. Sarasota County, Fla., for example, with 3,900 full-time employees, uses self-insured medical plans, as well as a countywide emphasis on prevention and health education, to help weather premium increases. Compared to double-digit increases nationwide, the county’s healthcare costs increased by only 7.5 percent last year. “We do a lot of wellness activity,” says Steve Marcinko, manager of the county’s employee benefits and wellness program. “Our employees know that if they get healthier, then we are going to pay less premiums as a group.”

The county, along with its provider, Hartford, Conn.-based Aetna, conducted disease management predictive modeling, which uses claims data to predict where medical costs are likely to increase and why. To prevent disease and injury, the county provides educational programs, clinical intervention targeting on-site risk assessments and recommended courses of action and special events, like runs and walks, to boost healthy lifestyles.

That effort represents an important shift toward employee awareness, Marcinko says. In the past, employees knew little about what determines health coverage, and the premium and employee contribution system often was based on subjective and variable factors. Today, local governments increasingly are opting to educate their employees so they will invest in their own health, Marcinko says, which will reduce overall health risks, reduce costs and improve morale and employee recruitment and retention.

In March, nearly 90 percent of King County, Wash.’s employees joined an elective wellness program designed to cut county healthcare costs, which are expected to double to $300 million by 2012. To participate, employees had to take a wellness assessment to develop a long-term health plan.

Beginning in 2007, the county’s health plans will have three contribution levels for members — gold, silver and bronze — depending on their participation in wellness activities. Members who earn gold will pay the lowest out-of-pocket expenses while bronze will pay the highest. Benefits coverage is the same for all three levels, but the deductible, co-payments and out-of-pocket maximums will vary.

The new initiative is the latest in a series of steps the county has taken to reduce its healthcare costs. Previously, it reduced the number of available medical plans, raised co-payments and deductibles, and eliminated duplication of benefits if both spouses worked for the county. As a result, in 2003, the county’s medical expenses increased just 1.8 percent.

“We are promoting a culture of wellness in the county,” says County Executive Ron Sims. “In the end, our employees will benefit by living longer, healthier lives, and the cost savings will help us provide a higher level of service.”

The prognosis

Last December, NLC adopted a comprehensive healthcare reform policy that stressed education, incentives and programs that encourage healthier lifestyles. The association also urges government leaders and the insurance industry to make the healthcare system more transparent, so consumers and employers can better evaluate and distinguish between programs and compare costs. “Comprehensive reforms are needed in all areas of the healthcare system,” Konde says. “The federal government should promote healthcare coverage for all by making it available and affordable.”

NLC also recommends that the federal government promote integrating prevention and wellness programs into healthcare coverage plans through incentives. For instance, those who practice healthy, disease-preventing activities could receive a tax break similar to those who receive medical expense deductions.

“When you look at the 15 costliest diseases [including heart disease, mental disorders and hypertension], eight of the 15 can be [affected immediately], and cancer can be impacted over the long term, by wellness interventions,” Marcinko says. “In a fairly stable, self-insured employee population, reducing the number of health risks in the short- and long-term will reap huge rewards.”

Kim A. O’Connell is a freelance writer based in Arlington, Va.