Containing Health Care Expenditures for State and Local Government Entities

By Aldhizer, George R., III; Cashell, James D. | The Journal of Government Financial Management, Fall 2006 | Go to article overview

Containing Health Care Expenditures for State and Local Government Entities


Aldhizer, George R., III, Cashell, James D., The Journal of Government Financial Management


Similar to private industry, the cost of providing employee health care benefits has increased rapidly for state and local government entities (SLGs) over the past five years.

At the same time, SLGs have found it difficult to raise taxes or cut other expenditures to cover these increased costs.

Health care rate increases have been especially severe for SLGs since the average public sector employee is older than his or her private sector counterpart. Also, unlike the private sector, public sector employees retire at an ear lier age and often continue to receive similar health care benefits as currently active employees.

The pending enactment of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions, further intensifies the need for SLGs to effectively manage their health care costs.1 Similar to the private sector, this new standard will require SLGs to report health care costs on an accrual basis (versus the current cash basis) beginning as early as calendar year 2007. Similar to pension accounting, the accrual basis will require SLGs to record the cost of retiree health care benefits that current employees are earning as an expense on their financial statements (versus only requiring current payments to existing retirees as an expense on their financial statements). As a result, pre-funded balances and reported health care expenditures will increase dramatically. As taxpayers become more aware of the magnitude of SGL health care costs, they may encourage elected officials to develop a cost-containment strategy.

In many cases, the only recourse an SLG has for covering rising employee health care costs is to raise taxes and/ or cut other program expenditures. Unfortunately, raising taxes is never a popular decision and cutting other program expenditures is easier said than done since every budget line item has its own constituency.

There are several options an SLG may consider to help contain employee health care costs. Many of these options, however, involve risks requiring careful oversight by the SLG's internal auditors or outside consultants. This article discusses some of the more promising cost-saving issues, specifically:

$ reducing service provider billing fraud and errors;

$ adopting self-insurance versus full coverage insurance;

$ selecting service providers who use state-of-the-art information technology to increase their effectiveness and efficiency; and

$ providing employees the ability to help contain health care costs.

Reducing Billing Fraud and Errors

Typically the health care provided to SLG employees involves multiple health care service providers (primary care physicians, hospitals, etc.) and multiple service claims per employee during any given year. With this diffused billing, the risk of errors and fraud increases, as does the cost of employee health care.

Three common service provider fraud schemes include inflated claims, fictitious claims and claims for services not covered under the summary plan document (SPD).2 Inflated claims often involve either a service provider billing for a higher level of service than was actually rendered (billing for a brand name prescription drug but dispensing generic drugs, for example) or double billing for services related to a major surgery. (For example, one can submit a separate bill for the major surgery and the related services that occur a few days before and after the surgery when the bill for the major surgery already includes the fees for the related services.) Fictitious claims often involve putting together a group of licensed providers and fraudulently billing for nonexistent physician services (such as x-rays, surgeries and ambulance trips never taken). The third fraud, claims for services not covered, often involves the service provider disguising the non-covered service as being a covered service. …

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Containing Health Care Expenditures for State and Local Government Entities
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