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GG 9
Reduce the Costs of State Employee Health Insurance


The state’s cost of providing health insurance to state employees and their dependents has risen sharply because employees are using their insurance more and doctors and hospitals are receiving higher reimbursement rates. Moreover, employees are using prescription drugs more frequently and the cost of prescription drugs is rising. To ensure benefits remain available to employees and curb costs, the Employees Retirement System of Texas should begin to offer employee health benefits 90 days after a new employee’s start date, increase co-payments for office visits to $20 for all health insurance plans and increase co-payments for visits to specialists by $15 for all health plans.


The Employees Retirement System of Texas (ERS) administers a wide variety of health insurance and retirement benefits for state employees and their dependents. ERS’ health benefits include health care coverage for employees of state agencies and institutions of higher education (other than the University of Texas and Texas A&M systems); optional insurance coverage such as life, disability and dental insurance; flexible benefits programs such as health care and dependent care reimbursement accounts; Texa$aver deferred compensation plans including 401(k) and 457 options; a death benefits program for public safety officers; long-term care insurance; and the State Kids Insurance Program (SKIP), a health program for the children of low-income state employees.[1]

The health care plans available to participants are HealthSelect, HealthSelect Plus and four health maintenance organizations (HMOs): the Scott and White, First Care, Community First and Mercy plans. The state contracts with Blue Cross-Blue Shield of Texas to administer HealthSelect.

HealthSelect and HealthSelect Plus are self-insured, meaning the state pays all the claims and assumes all financial risks for these two plans. The HMOs are fully insured, which means that the state pays the HMO a fixed, monthly premium, and the provider assumes the financial risk.[2]

As of March 2002, more than 213,000 active state employees participated in ERS’ health care plans, as well as more than 250,000 dependents and SKIP dependents and about 55,000 retirees (Exhibit 1). Nearly 57 percent of those insured participate in HealthSelect; 32 percent participate in HealthSelect Plus and 12 percent in HMOs.

Exhibit 1
State Health Plan Participation as of March 2002

Health Plans Employees Retirees Dependents Skip Dependents Other Total
HealthSelect 114,762 45,273 125,367 8,219 5,157 298,778
HealthSelectPlus 74,635 7,045 76,380 7,731 688 166,479
HMOs 24,245 3,233 32,956 3,100 328 63,862
Total 213,642 55,551 234,703 19,050 6,173 529,119
Source: Employees Retirement System.

Health care cost increase

The cost of these health plans has risen dramatically in recent years. From fiscal 1998 to fiscal 2003, ERS estimates a 72 percent rise in total health plan expenditures and a 79 percent increase in the state’s portion. ERS also has seen its reserve fund balance fall. In fiscal 1998, the reserve fund balance reached $236 million. By 2003, ERS projects the balance will have declined to $10.6 million, a 95.5 percent reduction (Exhibit 2).[3]

Exhibit 2
Changes in Health Care ($ Millions)

Actual FY 1998 Actual FY 1999 Actual FY 2000 Actual FY 2001 Projected FY 2002 Projected FY 2003
Health Plan Expenditures $907.8 $1,002.9 $1,084.2 $1,211.7 $1,406.2 $1,565.3
Method of Finance
State payments $699.6 $717.3 $798.3 $867.8 $1,116.2 $1,254.9
Employee Contribution $175.3 $185.1 $199.9 $226.8 $262.7 $295.5
Projected Shortfall ($32.9) ($100.5) ($86.0) ($117.1) ($27.3) ($14.9)
Other Funding Sources
Hostal/Formulary Refunds $4.0 $7.0 $7.2 $7.6 $18.5 $15.0
Net Investment Income $21.6 $17.5 $16.2 $11.6 $1.8 ($0.9)
Reserve Fund $7.3 $76.0 $62.6 $97.9 $7.0 $0.8
Reserve Fund Balance $236.0 $171.1 $116.1 $18.3 $11.2 $10.6
Source: Employees Retirement System.

ERS estimates that average monthly claims per member for HealthSelect will rise from $291 in 1998 to $450 in 2003, while per-member monthly claims for HealthSelect Plus are projected to rise from $291 in 1998 to $467 in 2003. These figures represent increases of 55 and 60 percent, respectively. The average per-member monthly HMO premium also has increased, from less than $300 in 1998 to more than $450 in 2003.

ERS estimates a 27 percent increase in the state’s health insurance costs during the next biennium, from $2.37 billion in fiscal 2002-03 to more than $3.01 billion in fiscal 2004-05. ERS’ cost estimate, moreover, assumes no rise in the number of participants.[4]

A number of factors have contributed to these increases. ERS has reported a significant increase in the costs of services and in reimbursement rates to hospitals and doctors; a rise in the use of services; increased usage of prescription drugs in treatment; and increased costs for these drugs, due in part to the introduction of new and more expensive drugs.[5]

National data tend to support these findings. The Kaiser Family Foundation reports that monthly premiums for employer-sponsored health insurance rose 12.7 percent from spring 2001 to spring 2002; this was the second consecutive year of double-digit increases.[6]

A PricewaterhouseCoopers study for the American Association of Health Plans reported an increased demand for services (partially a result of an aging population), prescription drugs, medical devices and other medical advances are responsible for nearly half of the increase in medical costs from 2001 to 2002. The report also identifies rising provider expenses and general inflation as factors.[7]

In a 2002 survey by Hewitt Associates, LLC, employers were asked what cost containment issues they plan to use. Seventy-six percent said they will increase co-payments for drugs; 92 percent stated they would increase dependent contributions; 89 percent will increase employee contributions; 55 percent will increase deductibles; 59 percent will increase physician office co-payments; 47 percent will increase out-of-pocket limits; and 46 percent will increase hospital co-payments.[8]

Employees contribute a nationwide average of $38 per month for individual coverage and $174 per month for family coverage.[9] Texas state employees contribute nothing per month for individual coverage and between $229 and $294 per month for family coverage.[10]

Many employers also implement a waiting period for health insurance coverage for new employees. Average waiting periods range from 1.2 months to 4.1 months, depending on the size of the employer.[11]

ERS’ history of cost containment

To contain rising costs, ERS has implemented a number of cost-containment measures over the years. In 1993, for instance, ERS began to use managed care, negotiated discounts with providers and offered employees incentives to use providers on the plans’ approved lists of health care providers.

In 1996, ERS restructured its retail pharmacy network, and in 1997, the system introduced a mail-order prescription drug program and negotiated reduced reimbursement rates with certain physicians.

For 1998, ERS increased prescription co-payments, reduced hospital reimbursement rates and eliminated early refills of prescription drugs. In 1999, ERS negotiated a two-year contract for competitively bid HMOs and standardized HMO physician co-payments. In 2000, ERS contracted with an independent pharmacy benefit manager for HealthSelect; increased HealthSelect and HealthSelect Plus co-payments for brand-name prescription drugs; and increased HealthSelect’s deductible for visits to providers not on the plan’s approved list.

In 2001, ERS implemented a three-tier prescription drug program to create an incentive for the use of lower-cost prescription drugs, increased prescription drug co-payments and implemented drug quantity limits.

For 2002, ERS required prior authorization on certain prescription drugs and expanded quantity limits on prescription drugs.


A. The Employees Retirement System of Texas (ERS) should delay new employees’ health insurance benefits 90 days from hire date.

B. ERS should, at a minimum, increase employees’ co-payments for office visits to $20 for all health plans.

This would entail an increase of $5 for members of HealthSelect, which already requires a $15 co-payment, and an increase of at least $10 for HealthSelect Plus and the health maintenance organizations (HMOs), which require a $10 co-payment.

C. ERS should, at a minimum, increase employees’ co-payments for visits to specialists by $15 for all health plans.

For fiscal 2003, HealthSelect requires a $15 co-payment for specialist visits, while HealthSelect Plus and HMOs have a $10 co-payment. The recommended increase in co-payments would result in co-payments of at least $30 for HealthSelect and $25 for HealthSelect Plus and the HMOs.

All of these recommendations are designed to keep health care benefits available while curbing costs.

ERS should develop methodologies to measure and report the achieved savings from these recommendations to the Comptroller of Public Accounts and the Legislative Budget Board (LBB). These methodologies would have to be approved by March 1, 2004 by the Comptroller of Public Accounts and the LBB. In addition, ERS would have to report to the Comptroller of Public Accounts and the LBB every six months on the savings realized with the first report submitted for the period ending August 31, 2004. Any shortfall in savings shall be made up by increases in co-payments sufficient to generate the required savings.

Fiscal Impact

This estimate assumes savings would begin in the first year of the fiscal 2004-05 biennium.

ERS estimates that delaying new state employees’ health insurance coverage by 90 days would save the state about $30 million per year.[12]

Savings also would be achieved by increasing participants’ co-payments for medical appointments. An increase in co-payments for doctor’s office visits would save about $35 million annually. Increasing the co-payment for specialist visits by $15 would result in annual savings of $37.6 million.

Blue Cross-Blue Shield of Texas receives an administrative fee based on the number of employees enrolled in HealthSelect and HealthSelect Plus. Blue Cross-Blue Shield pays the medical costs of these employees and then submits claims for reimbursement to ERS. Increased co-payments would require members to pay more of the cost of their medical care, allowing the state to pay less.

Increasing HMO co-payments would shift more costs to the member, allowing ERS to decrease its monthly premiums for HMO members.[13]

In all, these changes would save the state $205,200,000 over the 2004-05 biennium.

To realize these savings, the state should reduce the amount of the appropriations transferred to ERS by these amounts of the employees’ increased co-payments.

Fiscal Year Savings to General Revenue Savings to Dedicated Funds
2004 $60,534,000 $42,066,000
2005 $60,534,000 $42,066,000
2006 $60,534,000 $42,066,000
2007 $60,534,000 $42,066,000
2008 $60,534,000 $42,066,000


[1]Employees Retirement System of Texas, Agency Strategic Plan for the Fiscal Years 2003-2007 (Austin, Texas, June 14, 2002), p. 6.

[2]Texas State Auditor’s Office, “Selected Controls at the Employees Retirement System,” Austin, Texas, March 27, 2002, p. 1.

[3]Employees Retirement System of Texas, ERS Health Plan, a presentation for the Texas Conservative Coalition (Austin, Texas, July 19, 2002), p. 7.

[4]Employees Retirement System of Texas, ERS Health Plan, p. 23.

[5]Employees Retirement System of Texas, ERS Health Plan, p. 15-16.

[6]The Kaiser Family Foundation, Employer Health Benefits: 2002 Summary of Findings (Menlo Park, California), p. 1.

[7]American Association of Health Plans, The Factors Fueling Rising Healthcare Costs, by PricewaterhouseCoopers (Washington, D.C., April 2002), pp. 5-8.

[8 ]Hewitt Associates LLC, Health Care Expectations: Future Strategy and Direction (Lincolnshire, Illinois, January 2002), p. 17.

[9]The Kaiser Family Foundation, Employer Health Benefits: 2002, p.77.

[10]Employees Retirement System of Texas, Employment Guide to Benefits (Austin, Texas, 2002) p. 5.

[11]The Kaiser Family Foundation, Employer Health Benefits: 2002, p. 51.

[12 ]Interview with Sheila Beckett, executive director, Employees Retirement System of Texas, October 11, 2002.

[13]Interview with Sheila Beckett, executive director, Employees Retirement System of Texas, October 15, 2002.