Who Pays for Public Employee Health Costs?

By Jeffrey Clemens and David M. Cutler July 23, 2014

The cost of health care for state and local government employees is increasing rapidly, as it is for workers across the economy. Since state and local governments are large employers — one in seven people work for state and local governments — these cost increases are materially important. Estimates suggest that state and local governments spent $70 billion on health insurance in 2001 (in 2012 dollars), and $117 billion in 2010. The real increase was roughly $2,400 per state and local government employee, or $150 per U.S. resident.

Adjusting to these cost increases is more difficult for state and local governments than for private businesses. One strategy that businesses use to address rising costs is to pass those costs back to workers in the form of increased cost sharing for health insurance, less generous coverage, lower contributions to employee benefits, or smaller wage increases (Summers, 1989; Gruber, 1994; Kolstad and Kowalski, 2012). However, in a setting where wages and benefits are covered by union contracts — as is the case with a good share of state and local employees — the ability to effect these adjustments may be limited. When wages and benefit packages cannot be adjusted, increases in health care spending are equivalent to an increase in input costs, much like a price increase for electricity would be. In private businesses, some of this cost increase would show up in higher prices......To Read More.....