Long Term, Health Spending on State and Local Government Workers Has Outpaced Medicaid Spending by Almost 20 Percent

In a previous post I reported that health benefits for government workers cost 40 percent more than benefits for private-sector workers. This extra cost imposes a significant burden on taxpayers. Researchers at the Pew Charitable Trusts have now answered another, related question: How does spending on health benefits for state and local government workers compare with spending on Medicaid?

In a recent report, the researchers conclude that state and local spending on government workers increased by 444 percent in real, inflation-adjusted terms from 1987 through 2012. Spending on Medicaid grew by 375 percent.

That is, spending on government workers increased almost 20 percent more than spending on Medicaid. Free-market reformers continuously promote the idea of getting people off Medicaid, which is a bloated welfare program. However, we should be increasingly concerned with spending on government workers.

According to the report, state Medicaid spending accounted for $188.8 billion in 2012, whereas spending on government workers’ health benefits was $163.9 billion. If the different relative rates of growth persist, it will still take twenty years for spending on government workers to exceed Medicaid spending. Nevertheless, the trend is extremely worrisome.

How do government workers get away with it? Because health benefits are a defined benefit, rather than a defined contribution, their future costs are not properly reflected in the current fiscal year’s cashflow.

In recent years, employers have moved toward defined-contribution health benefits (especially through private exchanges). It is likely far more important for taxpayers to insist that state and local government workers be transferred to defined-contribution plans.

Comments (6)

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  1. Ava says:

    Well that doesn’t seem fair at all.

    • Elizabeth says:

      Yeah. We obsess over the money we give to people who have none, but aren’t paying any attention to those who’re getting money on top of their stable jobs and definite income.

  2. Barry Carol says:

    I think private exchanges and defined contributions plus reference pricing are the wave of the future in health insurance, at least in the private sector.

    Public sector unions are likely to fight to hold on to their gold plated defined benefit policies even in retirement. At the very least, state and local government entities need to force their employees and retirees to contribute a lot more toward the actual cost of their health insurance. Even federal workers and retirees pay 28% of the cost of their health insurance on average. Many state and local workers, including 95% of NYC workers pay nothing!

  3. Gorden says:

    High health benefits for government workers could be a reasonable approach to attract more people to apply this kind of positions. The benefits, however, should not be that high, which has been a symbol of privilege.

  4. Bob Hertz says:

    Moving to defined contribution is not the whole solution. Many jurisdictions pay the health premiums for retirees between ages 55 and 65, and some of them (unbelievably in my opinion) pay full health premiums for persons over 65 who could just as well be on Medicare as primary.

    These are of course the most expensive beneficiaries. A school district near me in Crosby MN had a bitter strike when the local board tried to get the retirees off of the health plan. This will not be a painless reform.

    • Barry Carol says:


      Unfortunately, no one town has the power to take on the public sector unions, especially the teachers and police. About 80% of school district costs are attributable to employee pay and benefits. Where I live, the schools and law enforcement combined account for more than 85% of our very high local property taxes and we get significant state aid to help pay for the schools as well. We took a 23 day teacher strike in 1977 which did little but tear the community apart for some time.

      I think the solution to the public sector employee and retiree health benefits issue is for state legislatures to either take it outside the scope of collective bargaining altogether or at least pass legislation to require employees and retirees to make a significant contribution toward the cost of the health insurance. Shortly after Chris Christie was elected governor of NJ the first time in 2009, he stood up to the public sector unions and was able to push reforms through the Democrat controlled state legislature that included requiring employees to contribute 1.5% of pay toward the cost of their health insurance. He was also able to enact pension reforms that included eliminating the annual COLA increase at least until the pension funds reach 80% funded status.

      With the emergence of the exchanges, there are new options for people to get health insurance, often with subsidies, and more reasonable rates for older folks that didn’t exist previously. Moreover, I don’t think retirees get to vote on collective bargaining agreements. With the cost of health insurance crowding out the ability to provide raises, reforms in this area should be more doable than in the past.

      I note again that federal employees cannot even bargain over wages, let alone pension and health insurance benefits. They can only file grievances over issues like work rules, promotions, alleged discrimination and the like. I haven’t seen any credible allegations that federal employees are exploited and there is plenty of competition for those jobs with a few exceptions here and there. Federal retirees, if I remember correctly from my father’s experience, pay for 25% of the cost of their health insurance.