Coverage conundrum: the challenge of rising state employee health insurance costs is hitting states hard.

In the fall of 2001, only weeks after the deadly terrorist attacks of 9/11 (when many Americans were issuing calls for unity), nearly 30,000 state employees in Minnesota went out on strike. The move was characterized by the American Federation of State, County and Municipal Employees as the "single largest union action in the state's history."

The walkout had nothing to do with salaries or work conditions. It dealt with what Steve Kreisberg, AFSCME's collective bargaining director, calls "the most important, emerging state worker issue of the new century:" the increasing cost of health insurance and how much of those costs should be borne by the employees themselves.

The strike lasted for 21 weeks. Negotiators for AFSCME, which represents more than 19,000 state employees in Minnesota, as well as the Minnesota Association of Professional Employees, representing another 10,500 workers, came to an agreement that marginally held down insurance costs.

Last year, when Minnesota again sat down with union negotiators to renew the two-year state employee contracts, labor representatives agreed fairly quickly to the terms offered. The agreement was then, almost as quickly, ratified by two-thirds of AFSCME's Minnesota voting rank and file.

Outside observers may have been stunned by the contrast between the state negotiations in 2001 and 2003. But for David Haugen, the differences were easily explainable.

"By 2003, we had had a cost-tiered structure for state employee health insurance in place for two years," says Haugen, the assistant commissioner for employee insurance with Minnesota's Department of Employee Relations. "I just think many people came to the conclusion that this particular approach was working. It wasn't perfect, but it was perceived to be a step in the right direction."

A NATIONAL PROBLEM

As the continuing cost of employee health insurance challenges both the imagination and resources of administrations and lawmakers in virtually every state, the Minnesota story has become a subject of interest far beyond the state's borders.

That the challenge is nationwide and is being felt by private and public employers is without question. "Everyone is feeling their health care dollars being stretched to the limit today," says Mohit Ghose, director of public affairs for America's Health Insurance Plans in Washington, D.C., which represents private and public health plans.

Average premium increases of nearly 14 percent for the last three years in a row have prompted many private employers to shift costs onto their workers, according to the Kaiser Family Foundation.

Only 4 percent of the large employers surveyed by Kaiser were still paying 100 percent of the premiums for their employees' family coverage in 2003--down from 21 percent in 1988.

At the same time, more and more employers have imposed annual deductibles and co-payments of 20 percent or more for prescription drugs, doctor visits and hospital care.

"Obviously this is one instance where the private sector has had a clear advantage over the public sector," says Stephen Rinaldi, an employee benefits consultant with Everett James Inc. in Ridgefield, Conn.

"Regular businesses can look at yearly double-digit premium increases and simply respond unilaterally by cutting back benefits or increasing employee contributions," Rinaldi says. "State and even local governments are in a much more difficult situation. Not only do they have large labor unions to deal with, but also because there are an increasingly large number of mandated benefits, such as legislative dictates for mental health parity, coverage for chiropractors, coverage for naturopaths and so on, that push costs up."

Ghose agrees: "The states may be feeling the pinch the most. Not only because they have traditionally offered generous health insurance benefits to their employees, but also because these insurance increases have taken place just as the states have seen their revenue from other sources decline, due to the national economic downturn."

Indeed, according to Conrad F. Meier, a senior fellow in health policy for the Heartland Institute in Chicago, the problem for the states has now become so big it is no longer possible to hide it from the public.

"The increases are not really new, they just have gotten so large that legislators can no longer simply raise taxes and fees to cover the costs," Meier says.

"What is rapidly becoming transparent to the public is that state employee health benefit plans are richer than most of the best private sector plans available," Meier says.

But public employee union officials say they have been willing to curb salary and wage increase demands in favor of maintaining health insurance benefits as the states faced budget shortfalls in recent years. At the same time, AFSCME's Kreisberg argues against the notion that state workers are getting anything more or better than private employees.

"I really don't think our health care plans are richer than what's available today in the private sector," Kreisberg says, noting that both public and private plans make varying choices of what to cover. "None of them is the same, but the differences are not really that great in terms of overall benefits."

The evidence appears to suggest that both states and private employers are trying to maintain quality coverage. A Kaiser Family Foundation report released last year said that employer-sponsored health insurance prices in the private sector increased nearly 14 percent between 2002 and 2003. But overall levels of coverage did not decline, the report said, because employers shopped for a plan with better prices rather than reducing benefits.

EMPLOYEE SHARE CAN'T KEEP PACE

Even when states attempt to stave off rising costs by upping the amount employees kick in, it often is not enough. In Kentucky this year, Governor Ernie Fletcher proposed increasing the amount state employees pay for their coverage in response to anticipated increases in health insurance costs of 16 percent in 200S and 19 percent in 2006.

But the average monthly employee increase of $40 will not be enough to offset the expected costs, says Brad Cowgill, Kentucky state budget director.

"The commonwealth will still spend about $54 million more for state and school district employees' health insurance coverage over the next two years than is currently being expended," Cowgill says.

All SO states have health benefit plans for their employees, but their breadth and depth vary widely. Sixteen states in 2003 paid the full cost of health care coverage for individual employees. Six more paid the full premiums for family coverage, according to Workplace Economics Inc., a Washington-based consulting firm.

Another 12 states offered a total premium for family coverage exceeding $900 a month.

For the remaining states, premiums are paid by a combination of state and employee contributions. The exact amount depends on the nature of the health plan and the type of coverage.

WHAT TO COVER

What is more difficult for insurance adjusters and policymakers to gauge is how we define sickness and what ailments should be covered.

Texas Representative Ruth Jones McClendon sponsored a bill in 2002 mandating that state employee health insurance cover pharmaceutical prescriptions used to quit smoking. The measure was eventually incorporated into an omnibus bill authorizing, but not mandating, the state health insurance plan to pay for them.

"Smoking is the biggest single cause of illness and death in Texas," McClendon says. "And smoking is so addictive that most people cannot permanently quit without assistance. Anything we can do to help insured employees stop smoking will pay off in lower health care costs in the long run."

Similarly in Washington state, Representative Shay Schual-Berke this year introduced legislation proposing that her state's employee health insurance plan include mental health services. The bill died in the Senate Ways and Means Committee.

"I think it has been fairly well established that people with employer-sponsored insurance who have access to mental health benefits actually use their medical services less," Schual-Berke explains. "This was just an attempt to deal with reality. And that reality is that one in five Americans suffer from a mental illness at some point. One in 10 will have a serious mental illness. Why shouldn't our health insurance cover something like this?"

Representative McClendon also brings up the issue of obesity, which she says is now being talked about as "our most serious health problem."

"What if I proposed subsidized gym memberships for our insured employees?" asks McClendon. "Would the newspapers and the voters regard me as a visionary or as a spendthrift?"

WHO SHOULD BE COVERED

And as definitions of what should be covered have changed, so has the question of whom. In a handful of states, the domestic partner of a state employee is now eligible to receive benefits. This is a trend that many experts say is only going to be replicated in other states over the course of the next decade.

"There isn't anything inherent in a same-sex relationship that is more medically problematic than any other," observes consultant Rinaldi. "It is only that by including same-sex partners in an employee health plan, you are increasing the number of people who are covered. That is another thing that is leading to increased costs."

Those who advocate making state employee health plans both more expansive and inclusive say the argument for holding down costs is backwards. Cost containment is not where you start, they say, it is where you end.

"When it comes to health care costs, we are always being reactive. What we need to be is proactive," says Dorothy Gotlieb, a former Colorado representative who authored a bill in 2000 expanding state employee health benefits.

"What would be wrong with looking at all of the possible things that can go wrong with a person medically, then trying to figure out how much it would cost if you let those things go unaddressed because they weren't covered in your health plan?" asks Gotlieb.

"How much more expensive is it for all of us if a person has to end up in a trauma trait or emergency room because they put off something that their insurance wouldn't cover?"

INFORMATION IS VITAL

Ironically, both those who call for larger benefit packages and those who say packages are already too sweeping share one common complaint: Intelligent decisions by the states and ultimately by state employees cannot be made in the absence of information.

"When you start talking about complicated issues like this, the one thing you must have is information," says Ghose.

Only with information can employees ask the right questions. "Is this system better for heart surgery than the other? Would you rather pay $100 more to go to this hospital or $100 less to go to a hospital where there may be a higher chance of some sort of complications?" Ghose asks.

Such information has largely contributed to the success of Minnesota's Advantage Health Plan, says David Haugen.

"We began to really study all of the employee claims data. With that, we were able to determine the true risk-adjusted costs of delivery of care by the various clinic systems or groups that were contracting to the health plans," he says.

As a result, beginning in 2002, state employees in Minnesota could elect from a three-tiered structure that categorized service by the cost of the provider. A fourth tier for the most expensive providers was added later. The average monthly premiums were $256 (single) and $754 (family) compared to $276 and $643 nationally. Minnesota state employees did not have to contribute at all for single coverage and only 7 percent ($S1 a month) for family coverage. Nationally, state employees that year contributed $29 single and $145 family per month.

Within two years, Minnesota saw a decline in the annual increase of its employee insurance costs--from a projected 14 percent to an actual 9.9 percent. And some providers began to offer discounts to state employees in order to be moved into the lowest cost and thus most popular Tier 1 level.

"I think the response of the providers ended up being one of the best things that could have happened," says Haugen. "It was clear that they wanted to work with us, and that is a relationship we have come to greatly value."

So far Minnesota's state employees seem to like the program, too. "We support any move that offers incentives for employees who choose the most cost-effective providers," says AFSCME's Kreisberg. "Our next goal is get our employees to also go to the higher quality care providers, but we still don't have enough hard data" to tell whether ones that meet quality standards really provide better care.

For many state administrators and law-makers the complex question of how to contain employee health insurance costs cannot even be approached without the best information, numbers and studies.

"In the end, that is the only thing you can do to get a handle on this question," says Goshe. "You have to find a way to get as much information as you can on both the providers and tire plans. Only when that happens can all state employees make the health care decisions that are best for them."

A LOOK AT THE FACTS

* All lawmakers and all permanent legislative staff generally are eligible for state employee health insurance.

* Of the 4.9 million state employees nationwide, about 2.4 million have state health coverage. In addition, just under 1 million retirees also receive state health benefits.

* In all 50 states, an executive branch agency oversees these plans; legislatures may be involved in policy by passing statutes defining state employee eligibility or the portions to be paid by employees or by appropriating annual funds for the state portion of payments.

* In 2003, the average state employee family plan cost $786 per month, with $610 contributed by the state and $167 contributed by the employee.

* More than half the states also allow other public employees to participate, commonly city and county public school and, in some cases, state college employees.

* Employees may not be covered because their spouse's plan covers them, they work too few hours as part-time or are too new on the job.

NCSL has additional resources on state employee health plans online at www.ncsl.org/programs/health/stateemploy.htm

--Dick Cauchi, NCSL

Garry Boulard, a frequent contributor to State Legislatures, is a free-lance writer from Albuquerque, N.M.