Paying for Public Employee Health Costs

July 28, 2014

In a paper for the Cato Institute based on a report for the National Bureau of Economic Research, Jeffrey Clemens, assistant professor of Economics at the University of California-San Diego, and David Cutler, professor of Applied Economics at Harvard University, analyze the impact of health costs on public employee benefits.

Health care costs across the economy are rising, an increase that becomes clear when analyzing how the cost of providing health insurance for public employees has changed over the last decade:

  • Adjusting for inflation, in 2001, state and local governments spent $70 billion on health insurance.
  • In 2010, state and local governments spent $117 billion on health insurance, an increase of $2,400 per public employee.

While a private business would address these costs by passing them on to workers (whether by giving smaller wage increases, increasing cost sharing or providing less generous coverage), public employment is generally governed by union contracts, which limits the ability of governments to respond to financial problems by adjusting wages and benefits.

As such, how do public employers typically respond? Clemens and Cutler analyzed premium and policy data to determine whether health costs were shifted to public employees by providing less generous benefits. They found:

  • Health insurance premiums for state workers have grown much less rapidly than premiums for those in the private sector.
  • The share of health insurance premiums paid by public employees has been steady or has risen, whereas the share paid by private employees has fallen.
  • For public employees, growth in employee premium share has been especially high in highly unionized states.

The study also looked at benefit costs in school districts:

  • A very small portion of benefit cost increases are offset by wage reductions. As benefits increase by $1, wages increase by $0.85.
  • School districts pay for benefit increases with government transfers, pulling funds from government sources where reporting is discretionary.
  • In school districts where union power is weaker, districts are more likely to reduce health care costs by reducing benefits.

The study also found that student dropout rates increased as school district employee health benefits grew. 

Source: Jeffrey Clemens and David M. Cutler, "Who Pays for Public Employee Health Costs?" Cato Institute, July 23, 2014; Jeffrey Clemens and David M. Cutler, "Who Pays for Public Employee Health Costs?" National Bureau for Economic Research, October 2013. 

 

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