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When Healthcare Incentives Go Wrong

Giving people “incentives” to spend their money wisely is a growing part of the solution to rising healthcare costs. Give people financial responsibility for their healthcare decisions, the thinking goes, and they’ll make cost-effective choices.

It’s usually done by having people pay part of the cost of their employer-provided health coverage, and through things like higher deductibles and co-pays. Today, on average, people in the private sector pay 20 percent or more of the cost of their coverage. The trend is for this number to go up. But it’s not true everywhere.

If you look in the public sector you see a different, more troubling story. It’s a lesson in what can happen when incentives go wrong in healthcare.

Take New Jersey, for example. There is a massive controversy there as the governor seeks to close an enormous budget deficit, and is proposing cuts to a wide array of state and local services. One of the most contentious issues has to do with healthcare. The governor wants state employees to pay 1.5 percent — that’s right, one and a half percent — of the cost of their health coverage. Today, most state employees pay none of the cost. This change would, by some accounts, save the state hundreds of millions of dollars a year.

Another example is here in my home state of Massachusetts. Like New Jersey, Massachusetts faces serious problems with the cost of healthcare for employees of local government. And, like New Jersey, city and town employees pay much less than their counterparts working in the private sector. The results are very similar.

While average family healthcare premiums in the United States are about $13,000 a year, employees in the city of Framingham, Massachusetts can enroll in a plan that costs more than $40,000. Numerous towns have family plans that cost over $30,000, and many others have plans that cost over $20,000. It’s putting a great deal of pressure on spending by city and state governments.

I saw a similar story unfolding in Michigan. I testified at the state legislature last fall at a hearing where the state was trying to grapple with this same issue. A number of witnesses responsible for the cost of coverage at the local level apparently just didn’t have information about how much they spend on health coverage. It was clear, however, that the number was very, very high.

So what does this tell you? Incentives mean something in health coverage. If no one is exposed to the actual cost of healthcare, it gets overused, or benefits become too rich. It’s something to think about the next time you hear about a state or local government trying to cut its budget and taking away things that are important to you.

*This blog post was originally published at See First Blog*

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