Federation of Connecticut Taxpayer Organizations

Government pension liabilities have been in the news, but an even more urgent problem is the skyrocketing cost of health benefits. That's the gist of a new study by Josh Barro of the Manhattan Institute which finds that health-care costs for local and state governments have tripled in 15 years, outpacing the growth in private insurance premiums by about 20%.

Governments typically offer a choice of several managed care plans that include comprehensive medical coverage and supplemental benefits like vision and dental care. Governments are also three times more likely than business to provide retiree health insurance. Many companies stopped covering retirees in the 1990s when the Financial Accounting Standards Board began requiring them to report these liabilities on their balance sheets. Governments have since accrued a $1 trillion unfunded liability.

Businesses are passing some of the rising premium costs to workers, but governments are reluctant to do the same. Public employees on average pay 15% of their premiums compared to 25% for their private counterparts. About a dozen states don't require workers to contribute anything. So how are governments paying for these benefits? Property taxes, which readers may have noticed keep going up.

In the dozen or so states with property tax caps, local governments and school districts are finding savings by modifying their health plans. Other governments will have to do the same to avoid a taxpayer exodus. Mr. Barro estimates that governments could save $1,376 per employee merely by realigning premium contributions with those in business.

But a better solution would be to offer consumer-driven plans that encourage workers to use health resources more judiciously since they must pay higher out-of-pocket expenses. Such plans are becoming more common in business because they yield huge cost savings to both employers and employees. Whole Foods CEO John Mackey wrote in these pages in 2009 that his company's high-deductible plans, which include a lump-sum contribution to a health savings account (HSA), have held down his company's health-care costs.

In 2006 Indiana Governor Mitch Daniels introduced consumer-driven options and increased employee cost-sharing for managed-care plans. Employee premium contributions to the consumer-driven plans average about $260 per year versus $6,000 for managed care. It's no shocker that 70% of workers have opted for consumer-driven plans.

A study by Mercer Consulting found that the consumer-driven plans saved Hoosier taxpayers as much as $23 million and employees as much as $8 million last year. According to Mr. Barro, governments nationwide could cut $20 billion from their $130 billion health-care bills by adding HSAs to their plan options.

Alas, ObamaCare may poison the well for reform if Health and Human Services Secretary Kathleen Sebelius decides that HSAs don't meet the law's requirements for mandated "essential" coverage. Add this to the long list of ways that ObamaCare will inhibit innovation, but it's getting hard to keep track of them all.

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