Who Pays for Public Employee Health Care Costs?

...the compensation of school district employees tended to rise, on net, by 85 cents for each dollar increase in benefit costs.

When the cost of health insurance for public sector workers rises, is the higher charge reflected in higher taxes, in lower wages or other benefits for the employees, or in some combination of the two? In Who Pays for Public Employee Health Costs? (NBER Working Paper No. 19574) Jeffrey Clemens and David Cutler find that about 15 percent of the cost of recent benefit growth was paid by school district employees through reductions in wages and salaries. They find that in tough economic times, a larger share of the cost increase is borne by the workers themselves through cutbacks in other compensation.

One in seven workers is employed by a state or local government. These employers spent $70 billion (in 2012 dollars) on health insurance in 2001, and $117 billion in 2010, for an increase of $130 per capita. In the private sector, businesses may pass such costs back to workers in the form of increased cost sharing for health insurance, less coverage, lower contributions to employee benefits, or smaller wage increases, or they may increase prices for their products. But where wages and benefits are covered by union contracts -- as is the case for many state and local employees -- the opportunity for shifting costs to workers is often limited.

To understand how governments have responded, the authors analyze data on school district budgets and the benefit costs associated with their employees over the period between 2001 and 2012. They find that benefit-driven increases in employee compensation were largely financed by resource transfers from higher levels of government, often in the form of transfers for which the states and districts had some discretion in reporting. One-third of the relevant dollars, for example, are associated with "categorical aid" for students with special needs. The analysts conclude that the compensation of school district employees tended to rise, on net, by 85 cents for each dollar increase in benefit costs.

Clemens and Cutler also compare the costs of employee health plans for state government employees to the average cost of private employer-provided health plans. They conclude that state governments raised premium requirements relatively more for more generous plans, which were typically in states with prominent public unions, than did private employers. Coupled with a slowdown in premium growth, this change suggests that state governments achieved significant savings relative to trends in the private sector.

--Matt Nesvisky