State Financial Crisis Leading to Transformation
of Health Benefits

WASHINGTON-State employers are in the midst of the worst budgetary and health care cost crisis since the Depression. This budget crisis may force states to align their health care purchasing practices with the private sector and consider radical changes in health benefits offered to their employees. Since states purchase health care for more than 4 million employees and retirees and millions more dependents, the effects of this crisis on health benefits offered to state employees is far reaching.

In the March/April issue of Health Affairs (www.healthaffairs.org), James Maxwell, Ph.D., at JSI Research and Training Institute, Inc., in Boston and Peter Temin, Ph.D., professor of economics at the Massachusetts Institute of Technology present the results of a survey documenting the purchasing practices of all 50 states and the District of Columbia. They also compare the results to a similar survey of Fortune 500 companies, and discuss policy implications for state employer groups and other large public employers.

"States are often the largest employers in their respective states, with many of them purchasing for municipal/county, college, and university employees, so it is important to understand their purchasing behavior," says Maxwell. "At present, states face a difficult choice between protecting health benefits and jobs of state workers or cutting other state services."

In Private Health Purchasing Practices in the Public Sector: A Comparison of State Employers and the Fortune 500, Maxwell explains that while private employers have used tough negotiating tactics such as competitive bidding to discipline their health carriers on price, states have been unable to execute the same leverage in their relationship with carriers. Unlike the private sector, the majority of states continue to offer a wide choice of health carriers to their employees, which diminishes their purchasing leverage.

Large private employers have adjusted premium contribution levels in order to steer their employees into the most cost-effective carriers. States have been unable to pursue this strategy as aggressively as the private sector due to constraints imposed by strong unions, regulations and politics. They have traditionally maintained higher contribution levels for individual and family coverage than large private employers. Nearly one-third of states contribute 100 percent to individual coverage, compared to just 8 percent of Fortune 500 employers.

The current budget crisis has forced a reevaluation of health care purchasing practices among state employers. Some state employers are considering private sector practices that would not have been considered before. These include increasing employee cost-sharing through lower employer
contribution levels, and higher co-payments for drugs, hospitals, and doctor visits. However, as Peter Temin states, "These cost-sharing strategies, in the context of rising health care costs and declining state budgets, have resulted in a loss of real wages for state employees, and hit low-income employees particularly hard."

Buoyed by strong unions, state employers typically emphasized a culture of public employment characterized by an inclusive employment policy and a generous benefit package. Yet, the current cost crisis puts the generosity of public employers at odds with cost cutting measures. According to Dolores Mitchell of the Massachusetts Group Insurance Commission, "Traditional wisdom has it that, in comparison to the private sector, lower salaries and richer benefits characterize the culture of public employment. Rising health care costs threaten this prevailing culture."

To combat rising health care costs, state leaders are calling on others not to follow market trends, but to become leaders in health care purchasing. Linn Baker, Director of the Utah Public Employees Health Program, Utah asserts, "Sticking with the status quo is a losing strategy. States are in a unique position to be more innovative in their health care purchasing, providing leadership in market reform."

To access the paper, please see the Health Affairs Web site at www.healthaffairs.org, or contact James Maxwell for hard copies at 617.482.9485.

The research summarized in this paper was funded by The Robert Wood Johnson Foundation's Changes in Health Care Financing and Organization (HCFO) program. HCFO (www.hcfo.net) supports investigator-initiated research and policy analysis, evaluation, and demonstration projects examining major changes in health care financing, and their effects on cost, access, and quality. The program provides policymakers with timely information on health care policy and encourages collaboration between policymakers, providers, and researchers.

AcademyHealth (www.academyhealth.org) is the national program office for HCFO. It is the professional home for health services researchers, policy analysts, and practitioners, and a leading, non-partisan resource for the best in health research and policy.

JSI Research and Training Institute, Inc. (www.jsi.com) is a nonprofit organization committed to improving public health both in the United States and around the world. JSI conducts research on health policy as well as a variety of clinical topics. It carries out programs on AIDS, mental health, substance abuse, aging, access issues, managed care, and health care financing. JSI has offices in Boston, Washington D.C., Denver, and New Hampshire as well as in over 45 countries abroad.

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