It’s hard to miss. Nearly every day there’s a news article about a state or local government reevaluating its employee benefit package in an effort to cope with mounting budget deficits.

Straining to maintain long-term solvency, governors, mayors and county commissioners are seeking new, creative ways of providing cost-effective health care coverage for both active and retired workers. For many, consumer-directed health plans are an increasingly attractive option.

Public Sector Embraces Health Accounts

At OptumHealth^SM, we’ve noticed over the past few years an uptick in interest among public sector employers in high-deductible health plans paired with health savings accounts (HSAs) or health reimbursement accounts (HRAs). Brokers and advisors should take note: the public sector is an increasingly ripe sales opportunity for these types of plans.

According to a recent study of state employee health benefits by The Segal Company, a benefits and human resources consultancy, there is a general trend towards greater cost sharing for all medical plan types. The study notes that the most significant change in plan types offered between 2009 and 2010 was that five states added a high-deductible health plan or other type of consumer-directed health plan. Nearly one-half of states now offer such plans.[1]

Innovators Lead the Way

The state of Indiana and the city of Tempe, Ariz., are two employers who have taken innovative paths in embracing alternatives to traditional health plans.

In an article he wrote last year in The Wall Street Journal, Indiana Governor Mitch Daniels noted that adding a high-deductible health plan with an HSA to the conventional plans previously offered state workers has proven highly popular and fiscally sound. Last year, more than 70 percent of the state’s employees chose the HSA plan, up from just 4 percent when it was first introduced a few years ago.

State workers enrolled in the HSA plan were projected to save more than $8 million in 2010, compared with their coworkers in preferred provider organization plans, according to Daniels. And he noted that, at a time of severe budgetary stress, the HSA plan was responsible for shaving the state’s total costs by 11 percent.

The city of Tempe found a creative way to continue its employees’ retiree health care benefits while also reducing its long-term financial liability. It redesigned its retiree health plan – from a defined benefit to a defined contribution plan – so that participants would shoulder a greater financial responsibility.

For example, employees with fewer than 10 years of service are no longer eligible for subsidized coverage upon retirement. Instead, the city makes an initial contribution to a funded HRA for these workers, plus monthly contributions, until they separate from service.

The HRA assets are held in trust. Participants have individual accounts and can manage their accounts from among a selection of mutual funds. In retirement, participants can use the HRA funds to pay for eligible medical expenses, including health plan premiums.

Other public sector employers, including the states of Washington and Idaho, are also investigating whether to adopt high-deductible health plans paired with HSAs. The Illinois Policy Institute, a research organization, projects that the state of Illinois could reduce its budget deficit by $3.2 billion over 11 years by offering such a plan. [2]

With states and municipalities staring at ominous budget deficits and feeling the lingering effects of the recession, public sector interest in health plans paired with tax-advantaged health accounts will undoubtedly continue to accelerate. Benefits advisors looking to grow their business will want to train their sights on this market.

Instant Insights /

Prospecting for new business? Don&rsquo;t overlook the public sector

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Prospecting for new business? Don’t overlook the public sector