Updating health plan designs can cut short-term costs and long-term liabilities.

• Author: Saintamour, William

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Local governments face a critical moment. Although the economy shows signs of recovery, community leaders are dealing with more than minor belt tightening, and 2011 and 2012 will be years of significant budget cuts.

According to the 2010 National Survey of Local Governments, recently released by Cobalt Community Research, the revenue and employment expectations of local governments continue to reveal challenges:

* 50 percent of responding local governments expect their revenues to decline over the next year, and 16 percent expect the decline to be greater than 5 percent. Interestingly, a greater percentage of respondents from larger governments expect revenues to decline than respondents from smaller governments.

* 19 percent of responding local governments expect employment levels to decrease over the next year.

* 26 percent of responding local governments expect workforce changes through consolidation/shared services.

* 23 percent expect employment declines through attrition.

It's a huge problem, according to the nonpartisan Employee Benefit Research Institute (EBRI). Governments tend to have more comprehensive benefits than private-sector employers, so their costs are higher, and they are slower to change. Jurisdictions that are constantly running deficits, however, need to consider making some changes to address sustainability.

STRATEGIES TO ADDRESS HEALTH COSTS

With shrinking budgets and fewer staff, local government officials are closely examining the costs of employee and retiree health care. Health-care costs might not be their biggest expense, but current and future employee and retiree costs are exerting growing political and financial pressure as elected officials target employee benefits and rating agencies reexamine bond ratings.

In 2010, the non-profit Cobalt Community Research (a research coalition created to help schools, local governments, and other non-profit organizations measure, benchmark, and manage their efforts through citizen and employee engagement surveys, budget allocation surveys, and planning workgroups using audience-response technology) gathered more than 1,950 responses from local governments across the county that shared the changes they are making. Now in its fourth year, the study offers an extensive menu of potential changes that communities can consider. Some improve quality of care. Some reduce coverage.

The most frequently used methods for controlling healthcare costs include:

* Increasing deductibles and copays

* Increasing the employees' share of premium costs

* Implementing wellness programs

* Expanding use of generic drugs

* Implementing health savings accounts and health reimbursement accounts

* Negotiating lower costs with current carriers

* Educating employees and retirees to make better health-care decisions.

Fewer than 4 percent of respondents plan to close health plans to new employees or eliminate coverage for employees, retirees, or dependents. But local governments appear to be shifting a higher share of premium costs to early retirees. These are individuals who retire from their employer, but are not yet eligible for Medicare (see Exhibit 1).

While many local governments are implementing cost-containment strategies, several untapped strategies hold promise, such as implementing disease management initiatives. There is growing focus on preventative care and managing chronic illnesses, a major driver of health-care costs. Wellness and disease management programs can be reasonable approaches to controlling overall health-care costs while improving quality. The challenge is that many small and medium-sized governments do not have a large enough group or solid analytics to convince people that these strategies are effective.

Many local governments are just now looking at practices that have been successful in the private sector. Value-based benefit design is one example. According to the...