Study: Govt. Health Cost Hikes Cause Widespread Problems

December 13, 2004 ( - A Fitch Ratings survey found that spiraling health care costs produced a plethora of problems for US state and local government officials far beyond paying for the actual dollar increases.

A news release said the health cost hikes in fact have created significant budgetary, financial, and management challenges for the government agencies. So, as governments seek to manage cost increases by shifting them to public employees, significant problems may pop up dealing with productivity, morale, and retention, the study found.

According to Fitch, the cost to local governments of providing employee health care increased an average of 14.2% per year between 2000 and 2004 versus overall annual expenditure growth of 5.5%.Health insurance represented an average of 5.4% of the responding governments’ 2004 operating expenses, up from 3.4% in 2000. Health care cost increases have had an even greater effect on local governments than private sector employers because governments have historically provided more generous health insurance benefits to its workers, the Fitch report said.

To control costs, 61% of respondents have shifted a greater share of the cost to employees by lowering the employer contribution rates on insurance premiums and/or increasing copayments and deductibles. However, many respondents said their flexibility to make these moves was limited because of labor and union demands and that additional cost shifting might make it even harder for them to attract and keep skilled workers.

Most governments (57%) have also reported shopping for other insurance providers and plan administrators. Other common actions taken or investigated were to switch to self insurance on some services (35%) and to offer less expensive plans, e.g. HMO instead of PPO or lower premium/benefit options (35%). A third of governments (30%) have offered wellness programs for conditions that can be partly controlled through diet and exercise, such as blood pressure, diabetes, and heart disease.

To control costs of prescription drugs, 26% of governments offer tiered coverage, i.e. higher copayment levels for brand name drugs than generic drugs, and have promoted the use of mail order instead of retail purchases.

Fitch expects employee health care costs will be an increasingly important credit consideration for government issuers. As part of the normal credit review process, Fitch analysts now seek information from municipalities on their current employee health care expenses, expected growth in these costs, flexibility to control the increases, and details on plans to do so. 

The report, Local Governments Pressured by Rising Employee Health Care Costs,  is at  under “Special Reports.” A free registration is required.