Health Care

Chicago's Model Health-Care Fix

Cities can get more for the money they spend on employees and retirees.

Saving money on health care.

Photographer: JIM WATSON/AFP/Getty Images

It may not seem obvious from news reports, but health-care costs in the U.S. have been growing remarkably slowly. Among the many forces that have caused the slowdown are efforts such as those by Chicago Mayor Rahm Emanuel to change how health-care dollars are spent -- a strategy that other cities and states can learn from.

For the past five years, Chicago has kept its health-care bill for employees and retirees roughly flat, at about $450 million a year. And reflected in this success are reforms that hold much promise for the future.

Retiree health-care coverage is a substantial fiscal burden for states and cities across the U.S. In 2013, aggregate unfunded health care and related liabilities added up to more than $800 billion. That amounts to 20 percent to 30 percent of the state and local pension shortfalls that have received much more attention.

States’ efforts to contain their retiree health-care liabilities, along with the slowdown in overall health-care cost growth, pushed down costs by 10 percent from 2010 to 2013. Since 2013, though, these state liabilities have started to climb again.

Chicago’s have not. On the contrary, from 2013 to 2015, the cost of the city’s post-retirement health benefits fell by more than 20 percent.

A big reason for this is that the city has been phasing out subsidies for employees who retired in August 1989 or later. While those who retired earlier will continue to receive subsidies for more than half the cost of their insurance premiums, the later retirees are being shifted into nonsubsidized Medicare and other plans. In addition, recent police and fire collective bargaining agreements include more premiums for retiree health care, to offset some of the city’s costs.

These changes are big enough to save roughly $100 million a year, which more than explains why Chicago’s total spending on health care has not risen for five years. The cost to cover current employees has grown by 25 percent since 2011, but for these workers, Mayor Emanuel has introduced changes that should help contain that growth over time.

In 2015, for example, the city introduced incentives for employees to seek higher-value doctors and other health-care providers and to buy generic drugs rather than more expensive branded versions. Chicago also redesigned its copayments to encourage people to see primary-care physicians. And it created incentives for employees to obtain MRIs and other scans at independent facilities, which often charge less than hospitals do. Private-sector employers have long since taken many of these steps.

The effort to constrain cost growth and improve the value of health care is less like a test at school that is taken once and done, and more like a diet -- something that requires constant attention and effort. To continue its progress, Chicago will have to keep making changes. But the city is headed in the right direction.

Continued low growth in health-care costs stands to provide the country as a whole with multiple benefits, from a smaller long-term fiscal gap to higher take-home pay. Success over the next few years will depend not only on what happens at the federal level, but also on whether businesses continue to push for higher-value health care for their employees. And it will require that other cities and states follow Chicago’s promising path.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Peter R. Orszag at porszag5@bloomberg.net

    To contact the editor responsible for this story:
    Mary Duenwald at mduenwald@bloomberg.net

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