The 1% Solution

In the daily travails of state government, it appears the Senate is prepared to take action best described as “self-reform.” According to reports, beginning as early as September, employees of the Senate will contribute 1% of their pay towards healthcare premiums. These employee contributions through employer-sponsored arrangements are generally made in pre-tax dollars. Given the prior arrangement was 0% of pay, the rate of increase in employee contributions is well…. astronomical.

To be sure, this is but the first step in the long journey toward reform. Yet, this effort was significant and should be acknowledged as such. It would be encouraging if the House and other state departments and agencies would go further in the direction of reform. Undoubtedly, the first entity to implement marketplace norms would be the most distinguished in the minds of many taxpayers. Traditionally, lawmakers have engaged in the reverse dynamic of enhancing benefits and distancing public-sector compensation from private-sector standards—most notably in state pensions.

Recognizing that no good deed goes unpunished, this action also invites certain observations and questions. Consider the following:

According to the 2005 Kaiser/HRET National Survey of Employer-Sponsored Health Benefits, the average annual employee contribution for healthcare was 16% of premium for single coverage and 26% of premium for family coverage. These percentages equate to $610 annually for a single employee and $2,713 for a family coverage, on average. When released, the 2006 data will likely show an increase in employee contributions, even if the percentages remain unchanged.

In those private-sector companies which require a percentage of wages for healthcare premiums, there is always an underlying objective related to the proportion of the overall cost of health coverage, such as the 16% figure mentioned above. For instance, one large Pennsylvania employer targets 18% of premium through a pay algorithm which determines what percentage of employees’ pay is contributed towards healthcare premiums.

Since wages tend to rise slower than healthcare costs, a fixed percentage of wages results in lower employee contributions compared to a percentage applied to the total healthcare premium. The effect of relatively lower employee costs will result in higher employer (read: taxpayer) costs over time.

Such an approach is in contrast to a benefit, such as pensions, where the employee contribution is proportional to the benefit received. In addition, some public-sector entities have adopted a pay-related premium for retiree medical care. To pay 1% of your final year’s pay as a continuing annual contribution for retiree healthcare that increases in cost every year still seems to be an extremely generous plan. Thus, pay-related health care premiums are not without issues.

Therefore, the logical questions are:

  1. What was the process that led to an employee contribution of 1% of pay? Was it determined arbitrarily, or was it determined by the overall health care expenses?
  2. Overall, what percentage of the total healthcare premiums will the employees effectively be contributing?
  3. How is pay defined for the purpose of healthcare premiums? Would it include all the sources of income under the pension definitions such as “unvouchered expenses”?
  4. Given that employee premiums typically increase with the number of covered dependents, are there any “adjustments” to account for family size? Or, does everyone pay 1%?
  5. What rebate do individuals who waive coverage receive?
  6. For those qualifying employees, does long-term care insurance remain a 100% taxpayer-paid benefit?
  7. Why do the Pennsylvania House and Senate have separate healthcare contracts with different insurers, independent of the PEBTF (the healthcare plan for many state employees)?
  8. How do these changes impact medical contributions for current and future retirees?

The need for reform in state government and the need to bring public-sector perks and benefits in-line with the private sector is clear. There are many questions as to whether the Senate healthcare benefit changes achieve this goal. Yet, the initiative is there and the dialogue around these reforms should be productive. The journey will no doubt continue…

# # #

Richard C. Dreyfuss, a business consultant and actuary, is a Senior Fellow with the Commonwealth Foundation (, a public policy research and educational institute located at the foot of the Capitol in Harrisburg.