State and Local Governments Burdened by Retiree Health Care Costs

Reuters reports on findings from two Federal Reserve Board of Governors senior economists that U.S. state and local governments have about $1 trillion of unfunded retiree health care liabilities, a shortfall that is expected to pressure budgets in the near future even more than pension costs. "Because retiree health obligations are mostly unfunded, they exert pressure on state and local budgets long before the pension plans do, even though the size of the pension problem is significantly greater in the long run," wrote Byron Lutz and Louise Sheiner in a paper to be published in the next couple of months. Retiree health care benefits have fewer legal protections than pensions, which are often protected by state laws. But these health care benefits are largely unfunded in the United States, with most states and cities paying as they go. Many public employees retire before reaching the age of 65, which leaves municipalities to pay for their coverage until they become eligible for the Medicare.

States and cities have recently been exploring new ways to do value-based purchasing and value-based benefit design to attempt to alleviate some of these burdens. Implementing VBID in a state or local government plan can be especially challenging since, historically, these employers have offered very rich benefits with little or no employee cost sharing. The VBID Center at the University of Michigan earlier this year evaluated efforts by the State of Connecticut to introduce VBID into its health plan. Early indications are that the effort is working - employees are taking more control of their own health, and the State's cost growth is slowing.