Improving New Jersey's Health Benefit Reform

In New Jersey, there is broad agreement that public employees should pay more of their health insurance premiums. Governor Chris Christie (R) wants all state and local workers to pay 30 percent of their insurance premiums. Senate President Steve Sweeney (D) wants to put contributions on a sliding scale, with low income workers paying 12 percent and those making over $100,000 paying 30 percent. Even the Communications Workers of America, the union representing many state employees, has proposed a plan where workers would pay on average about 13.5 percent of their health premiums.

Any of these proposals would be an improvement over the status quo (now, most workers pay 1.5 percent of salary toward their health benefits, which works out on average to about 8 percent of the premium). But the debate over what percentage of insurance premiums employees should pay somewhat misses the mark. If public workers get overly generous health benefit packages, the objective should be to reduce the employer's contribution toward health benefits. One way to do that is to raise the employee contribution. But there is also another way -- reducing the total size of the health benefit, by moving public workers away from costly "Cadillac" health plans.

The requirement that most workers pay 1.5 percent of salary toward health premiums was only enacted in 2010; previously, many public employees in the New Jersey made no contribution at all toward health premiums. Even after the 2010 reform, public workers still pay much less toward their insurance than is typical in the private sector: private employees in the state are typically responsible to cover 21 percent of their premiums for single coverage, and 23 percent for family coverage.

It is also important to note that public employees' payments do not vary with the cost of coverage. It is common for a private employer to offer multiple health plan options, with a higher employee share of premium for a more generous plan. This encourages employees to take less fancy plans and therefore holds down health care costs. And because state workers do not have to pay extra to put their spouses and children on their plans, public workers who are married to private workers are highly likely to use government insurance for the entire family.

Either the Christie or the Sweeney plan would do a great deal to address these problems: employee contributions toward health insurance would go up, and they would be linked to the premium for the plan covering the employee. Employees who choose to take up coverage for their whole families will pay extra for that privilege. And employees could be offered high - and low-cost health plan options, with some savings accruing to them if they pick less generous plans. Even the CWA plan would be a modest improvement in these regards.

The key difference between the reform proposals is one of distribution and magnitude. Because Sweeney's plan would have the state and localities pay a much higher share of premiums for some employees than Christie's would, it can be expected to save less money. Sweeney's plan would protect lower paid workers from effective pay reductions that could eat up a substantial percentage of salary.

While I hope New Jersey lawmakers work out these details, I also hope they will broaden their thinking about how to control health benefit costs beyond a focus on employee share of premium. Currently, Newark is spending about $17,000 per employee on health benefits; it would have to raise the employee share of premiums to approximately 50 percent to get down to the New Jersey private-sector average cost for health benefits. Part of the cost-saving solution should be reducing the generosity of the plans that cover many government employees, and therefore premiums as a whole.

Indiana provides a good example here. Under governor Mitch Daniels (R), the state has had great success in getting over 70 percent of state workers to move to health savings account/high-deductible health plans (HSA/HDHP) since 2005, saving the state an estimated 11 percent per year on health plan costs, according to Mercer consulting. They have achieved this by offering employees the HSA/HDHP option at very low cost, and a more traditional PPO plan with a high employee share of premium.

This reform would likely have been less successful if the state had charged a fixed percentage of premium to employees in all plan types, as state workers would have had less incentive to move to HSA/HDHP, and the PPO would have remained a much richer benefit, despite requiring a higher employee cash contribution.

As seen in Indiana, New Jersey's state and local governments should offer employees low-cost health plan options (such as HSA/HDHP) with a very low employee premium share. This would help nudge employees toward the cheaper plan options and therefore save taxpayers even more money than by increasing the employee premium share alone. Requiring a fixed premium share for all plans would actually undermine this goal. It would be better to fix the employer contribution -- for example, by setting it at a multiple (say 100 percent, or 120 percent) of the average private sector employer-paid health benefit in New Jersey.

Whether New Jersey enacts benefit reform along the lines proposed by Governor Christie or Senator Sweeney, it will have greatly improved its health benefit policy from the status quo. But if they hope to make their health benefit reforms really effective, New Jersey lawmakers should look to the success in Indiana and broaden their focus to reducing the employer share of health insurance premiums, by methods including but not limited to increases in employee share.