Put retiree health care to bid
AS I SEE IT
By Josh Archambault and Casey Miles (published on Feb 26, 2013)
Critics suggest changing insurers can be problematic, but at least two Massachusetts cities already competitively bid their health care insurance. The evidence shows that they have been able to decrease costs and improve the quality of benefits.
Gov. Deval Patrick’s recently proposed $35 billion state budget includes $2 billion in tax increases that would raise the taxes of more than half of Massachusetts residents.
While taxes are an inevitable part of life, the state has a responsibility to prune unnecessary spending before increasing taxes. One area to find significant savings is retiree health care. Competitive bidding is an opportunity not only to save taxpayer money, but also to improve benefits for retirees in the commonwealth.
Unfortunately, the governor’s budget proposal is silent on the issue.
Massachusetts taxpayers face a $40 billion unfunded liability for retiree health care. Recognizing the seriousness of the problem, two years ago the Legislature established a special commission to study the issue.
Though a labor union representative on the commission recommended mandating that municipalities put their health plans out for bid at least every five years, the commission’s final report only suggests further study of competitive bidding.
Studying competitive bidding is pointless. It’s a well-established business practice, and through a simple Google search, the commission could have found numerous examples here and across the country of municipalities and states saving millions by bidding out their health insurance.
Currently, the Bay State’s two largest health plans have cornered 67 percent of the market for health benefits. Without competitors, dominant market players can raise prices without losing business.
This is analogous to when two airlines dominate a flight route. What pressures airlines to differentiate pricing and services is the entrance of new competitors to the market. Southwest Airlines, for example, probably would not offer extremely low fares and two free checked bags unless there was market pressure to do so.
In the same way, bidding out health insurance plans creates pressure among providers to supply the best value for retirees.
Critics suggest changing insurers can be problematic, but at least two Massachusetts cities already competitively bid their health care insurance. The evidence shows that they have been able to decrease costs and improve the quality of benefits. In 2005, Greenfield selected a plan that both added benefits and led to multiple years of declining premiums. Brockton’s Medicare plan selection last fall will decrease this year’s costs by $1.2 million without cutting benefits or shifting costs to retirees.
Iowa and Minnesota successfully use competitive bidding to award state employee health insurance contracts. In September 2012, Iowa approved a contract that lowers premiums by 6.5 percent, saving Iowa $22.4 million in healthcare costs this year alone. Two years ago, Minnesota’s competitive bidding process saved the North Star State $175 million during the past fiscal year.
Retirees, other taxpayers, and the state would all benefit from competitive bidding. Retirees win because their premium costs go down while the quality of care is either unchanged or improves. Taxpayers and the state win because competitive bidding saves significant money.
Every state budget is an opportunity for reform. The results achieved by Brockton, Greenfield, Iowa and Minnesota suggest that competitively bidding health insurance plans provides the best value for retirees as well as immediate and long-term savings for taxpayers. There are few “low-hanging fruit” opportunities to save money. Lawmakers ought to grab this one now.
Josh Archambault is director of health care policy and Casey Miles is a research intern at Pioneer Institute, an educational think tank.