NCPA - National Center for Policy Analysis

The High Cost of Public Employee Health Benefits

August 12, 2011

In light of budget deficits and the need to identify ways to reduce spending in states across the United States, public discussion has increasingly 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, says Josh Barro, the Walter B. Wriston Fellow at the Manhattan Institute.

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 copayments.
  • 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.  Barro recommends instead that governments work more broadly to reduce their spending on health benefits -- including by reducing the overall cost of plans offered to employees. 

Source: Josh Barro, "Cadillac Coverage: The High Cost of Public Employee Health Benefits," Manhattan Institute, August 2011.

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