Public Policy Forum Blog

Should more local governments be re-examining their health care options?

In an intriguing piece in Sunday's Milwaukee Journal Sentinel, Alan Borsuk suggests a simple solution to curb runaway health care costs for the Milwaukee Public Schools (MPS): eliminate the district's preferred provider health care option, and require all employees and retirees to enroll in the district's less expensive health maintenance organization (HMO) option.

Citing MPS budget officials and the $7,400 annual cost differential per family between the two plans, Borsuk suggests the annual cost savings could be significant. As expected, Borsuk's piece already has drawn dozens of comments from readers, as well as a call from Mayor Tom Barrett to pursue the idea.

Should additional analysis of this concept verify substantial savings, and should it gain any traction with MPS, it will be interesting to see whether such an approach is pursued at other levels of government that also offer workers multiple health care options. In particular, as the Forum's recent report on the potential restructuring of Milwaukee County government indicates, this strategy could hold significant logic for that government.

Section I of our report contains a lengthy discussion of the county's health care offerings. Like MPS, the county provides a Preferred Provider Option (PPO) that offers access to a wide network of providers with co-pays and deductibles, as well as a traditional HMO option. Unlike MPS, however, the county charges much higher monthly premiums to subscribe to the PPO plan. For example, union employees pay $35 per month for an individual and $70 for a family for the HMO, and $75/$150 for the PPO.

Largely because of this cost differential (as well as, perhaps, the robust nature of the HMO plan), we found that 81% of the 4,322 active county health care subscribers selected the HMO plan in 2009. Conversely, of the 5,996 retired health care subscribers, who pay no monthly premium and, therefore, are not incentivized by lower premium co-payments to select the HMO, 71% selected the PPO plan. That plan costs about $2,000 more annually for families and $5,000 more for individuals.

The discrepancy in active and retiree enrollments in the two plans is striking in light of the magnitude of the county's retiree health care costs, which comprise about half of its annual $140 million health care bill, and for which it has an unfunded long-term liability of about $1.5 billion. Given that the more expensive option is used predominantly by retirees, and that the county has little opportunity to incentivize use of the HMO among the retiree population, it would appear logical for county leaders to ask the same question Borsuk asks of MPS officials: why even offer a PPO option?
Of course, as with MPS, that issue would need to be collectively bargained. One would imagine, however, that this would be a far more attractive bargaining chip for county labor unions than for teachers, as relatively few active union workers at the county even use the PPO. In fact, logic would dictate that of the 19% of active county workers who do subscribe to the PPO, most are likely management employees who can better afford the much higher monthly premiums.
As we have blogged previously, retirement benefits for public sector employees will continue to come under close scrutiny in light of the financial problems facing virtually all levels of government. The fact that health care benefits will not escape this microscope is demonstrated not only by the Borsuk article and reaction to it, but by a prominent article in Sunday's Green Bay Press-Gazette. If the similarly strong reaction from readers to that article is any indication, public sector health care benefits may even exceed pension benefits as a lightning rod for emotional public debate.
Rob Henken