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

Straining to maintain long-term solvency, governors, mayors andcounty commissioners are seeking new, creative ways of providingcost-effective health care coverage for both active and retiredworkers. For many, consumer-directed health plans are anincreasingly attractive option.

Public Sector Embraces HealthAccounts

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

According to a recent study of state employee health benefits byThe Segal Company, a benefits and human resources consultancy,there is a general trend towards greater cost sharing for allmedical plan types. The study notes that the most significantchange in plan types offered between 2009 and 2010 was that fivestates added a high-deductible health plan or other type ofconsumer-directed health plan. Nearly one-half of states now offersuch plans.[1]

Innovators Lead the Way

The state of Indiana and the city of Tempe, Ariz., are twoemployers who have taken innovative paths in embracing alternativesto traditional health plans.

In an article he wrote last year in The Wall StreetJournal, Indiana Governor Mitch Daniels noted that adding ahigh-deductible health plan with an HSA to the conventional planspreviously offered state workers has proven highly popular andfiscally sound. Last year, more than 70 percent of the state’semployees chose the HSA plan, up from just 4 percent when it wasfirst introduced a few years ago.

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

The city of Tempe found a creative way to continue itsemployees’ retiree health care benefits while also reducing itslong-term financial liability. It redesigned its retiree healthplan – from a defined benefit to a defined contribution plan – sothat participants would shoulder a greater financialresponsibility.

For example, employees with fewer than 10 years of service areno longer eligible for subsidized coverage upon retirement.Instead, the city makes an initial contribution to a funded HRA forthese workers, plus monthly contributions, until they separate fromservice.

The HRA assets are held in trust. Participants have individualaccounts and can manage their accounts from among a selection ofmutual funds. In retirement, participants can use the HRA funds topay for eligible medical expenses, including health planpremiums.

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

With states and municipalities staring at ominous budgetdeficits and feeling the lingering effects of the recession, publicsector interest in health plans paired with tax-advantaged healthaccounts will undoubtedly continue to accelerate. Benefits advisorslooking to grow their business will want to train their sights onthis market.

[1] Segal Company, 2010 Study of State Employee HealthBenefits, Jan. 2011

[2] Illinois Policy Institute, Health Savings Accounts: AWin-Win for Illinois Public Employees and Taxpayers, Sept.2010