Health Savings Accounts Could Save State $194 Million

The upside of the budget stalemate in Lansing is that many legislators are searching for innovative policy solutions. One idea they should consider is health savings accounts, which combine tax-free savings accounts with high-deductible insurance policies. By moving more than 52,000 classified state employees into HSAs, the state could save more than $194 million a year.

The HSA allows employees (and the employer) to deposit money tax free into an account that is used for short-term, low-cost expenses such as doctor visits. The owner of the account spends that money until his deductible is paid at which time his insurance policy kicks in. Unspent funds are allowed to accrue over time and are portable. When an employee leaves a job, he can take that health insurance money with him.

A review of case law suggests that there is no constitutional impediment to the change. In the 2005 Studier v. Michigan Public School Employees’ Retirement Board case, the Michigan Supreme Court held that under Michigan’s Constitution health care benefits are not "accrued financial benefits" and that the legislation creating such benefits did not create a contract. Therefore, the court upheld the board’s decision to increase co-pays for drugs and to raise the deductibles under its health plan. The Studier case stands for the proposition that health benefits are amenable to change by the Legislature, which could make HSAs a possible area of government reform.

One word of caution is necessary. Reducing state healthcare benefits has not been tried before. This is uncharted territory and may result in time-consuming squabbles over who has the authority to make such decisions. Even if the authority rests solely with the Civil Service Commission, however, the Legislature could pass a resolution asking the Commission to change the type of healthcare benefits currently provided to state classified employees. The Commission would most likely accede to that request.

Health savings accounts are growing in popularity. It is estimated that by 2009 more than 30 million Americans will be enrolled in some type of HSA. Many in Michigan already are, including public school administrators and county employees. Just this week the global human resources firm Hewitt Associates published research saying 20 percent of U.S. companies offer employees an HSA option or will do so by year’s end. Almost 50 percent of companies reported that they would do the same "at a future date."

The amount of the savings from HSAs will depend on the size of the deductible accepted by employers and employees. Dr. Devon Herrick, a health care expert with the National Center for Policy Analysis, reports a savings range between 25 percent and 50 percent, though the median savings is closer to one-third.

In fiscal year 2006, the state spent a staggering $590,303,386 on health insurance premiums for classified state employees according to Joe Slivensky, bureau administrator for the Michigan Civil Service Commission. Shaving one-third off the cost of premiums would yield $194 million in annual savings. The Mackinac Center would suggest that state savings could be even higher because companies would undoubtedly offer steep discounts to cover such a large number of people. The state could take some percentage of that savings and deposit it directly into each employee’s account. Of course, this would reduce the total amount of savings that would accrue to the state.

According to Michigan’s Annual Workforce Report, health benefits for group insurance in such areas as medical care, dental, vision and others are worth about 20 percent of base salary for state employees. The value of these benefits often dramatically raises the total compensation for state employees and contributes to a significant gap between state workers and their private-sector counterparts.

In February the Center published "What Price Government," an essay that detailed compensation paid to state of Michigan employees compared to their private sector counterparts in both general and specific terms. The research showed that the "average private sector employee in Michigan earned $41,128 in fiscal 2005, compared to $48,421 for the average state civil service worker. State government employees, in other words, earned about 18 percent more than private sector workers."

Those figures only detail salary differences. When you factor in the value of health care benefits, the difference between state government and private-sector compensation increases to about $17,000. When benefits are added, the average state employee compensation package climbs to $75,000 compared to $58,000 for the private sector. Even apples-to-apples comparisons between public and private sector jobs revealed that state employees almost always did better. And these benefits don’t count the impossible-to-measure benefit of the advantage government employees have in the areas of job and pay security.

Across Michigan, businesses, government, nonprofit organizations and even the Michigan Education Association are attempting to revise the way they address skyrocketing health care costs. The MEA is the state’s largest union of janitors, cooks, bus drivers and teachers. Recently, the MEA — wearing the hat of management — faced a strike from its own workers over its attempt to reduce retiree health benefits and hike premiums for its retirees.

As a potential government shutdown or large tax hike loom on Michigan’s horizon, legislators would be wise to consider this common sense reform that could save the state upwards of $194 million, while bringing public compensation closer to that of Michigan’s private-sector employees.

HSA’s are an idea whose time has come.

For more Mackinac Center ideas on cutting the budget and reforming state government, see "Recommendations to Strengthen Civil Society and Balance Michigan’s State Budget."

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Michael LaFaive is director of the Morey fiscal policy initiative for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.