Best Practices

Strategies for Managing Health-Care Costs

Governments need to closely monitor health-care costs and choose approaches that make use of the jurisdiction's purchasing power, share costs appropriately, encourage good consumer behavior, promote health, and support governmental jurisdictions' ability to hire and retain a highly qualified and motivated workforce.

Large increases in health-care costs can make it difficult to balance a budget, but at the same time, health-care benefits are pivotal in attracting and retaining qualified staff. This best practice provides an overview of some of the best strategies for budgeting, managing, and containing these costs while still promoting a healthy and skilled workforce.

Governments need to closely monitor health-care costs and choose approaches that make use of the jurisdiction's purchasing power, share costs appropriately, encourage good consumer behavior, promote health, and support governmental jurisdictions' ability to hire and retain a highly qualified and motivated workforce. The GFOA recommends that governments examine the following primary strategies for managing employee health-care benefit costs more effectively:

Monitor Medical Plan Provider Network and Prescription Drug Discounts. Groups of physicians, hospitals, and other health-care providers agree, through the jurisdiction's insurance carrier or third-party administrator, to provide medical services to the organization's employees at discounted costs. Employers need to verify that these providers produce the best outcomes at the lowest price and to challenge their insurance carrier or third-party administrator to demonstrate that they have contracted with providers that produce quality outcomes. Periodically reviewing the provider network discounts that have been negotiated on the jurisdiction's behalf will allow the jurisdiction to find the deepest discounts. Also, because there are many types of discounts for prescription drugs, plan sponsors need to make sure they understand what is available (e.g., discounts for generic drugs, brand-name drugs, and for retail and mail order transactions). The organization may also benefit from rebates provided by drug manufacturers.

Set an Appropriate Level of Cost Sharing with Employees. The plan needs to be designed in ways that help employees better understand the trade-off between increasing health-care costs and other forms of compensation. Employers can also share a larger percentage of the cost for lower-cost plans as a way of making them more attractive. Copayments, deductibles, and co-insurance should be set at levels that encourage employees to use the services and prescription drugs that are most likely to produce the best long-term outcomes. It is also possible to set cost-sharing targets for the employer and employee share of medical services and prescription drugs.

Encourage Good Consumer Behaviors. The typical health insurance model provides an incentive to overuse health-care services because there is no perceived connection between participants' out-of-pocket costs and the actual cost of services. Introducing or increasing deductibles, co-insurance, and co-pays can improve employee awareness of costs. Moreover, participants need to understand that chronic health conditions and poor health habits are major cost contributors. Employers can address both issues by creating incentives for employees to make economically efficient health-care choices and helping employees become healthier so they need less medical care. This can be done through value-based benefit design, consumer-directed health care, including high-deductible health savings accounts and wellness programs.

Analyze Risks in Self-Insurance. Plan sponsors should consider self-insurance. Some employers stand to gain the greatest savings by self-insuring the health plan (assuming the risk for providing health-care benefits rather than transferring it to an insurance carrier). The employer pays for each claim as it is incurred instead of paying a fixed premium to a health insurance provider. Tips for managing a self-insured plan include:

  1. Set annual premiums. The jurisdiction will need to employ the services of an actuary to forecast future claims costs and establish annual premiums.
  2. Watch administrative fees. Understand the fees the plan is paying to third-party administrators for adjudication and payment of claims.
  3. Carve out high-cost claims. Some claims are rare but extremely costly, and these can be covered by conventional insurance. Examples include organ transplants and specialty pharmaceuticals.
  4. Carefully manage high-cost areas. The specific areas of greatest cost vary by employer, but all jurisdictions can save money by helping their employees better manage chronic diseases and by conducting billing audits.
  5. Institute stop-loss insurance programs. These set an annual cap on the amount a self-funded employer will have to pay on a given claim. Once a claim exceeds this amount, stop-loss insurance kicks in.
  6. Use data to improve wellness programs. Analyze claim data to focus on the jurisdiction's specific health concerns.

Use Measurements to Assess Plan Performance. Reviewing the following information will allow plan sponsors to quickly understand how their health-care plans are performing:

  1. Medical loss ratio (for fully insured plans).
  2. Medical claim trend.
  3. Provider network discounts.
  4. Administrative fees (for self-insured plans).
  5. Prescription drug cost trend.
  6. Generic drug substitution rate/generic drug dispensing rate.
  7. Prescription drug rebates.

Additional Strategies. In addition to the more global strategies above, employers can also save on costs by using the following tactics:

  1. Review Federal Requirements. Sponsors of group health plans need to implement a process for reviewing the Affordable Care Act and other federal health-care benefit requirements at least annually. Doing so will allow employers to plan ahead and use the most cost-effective approach to ensuring compliance.
  2. Develop a Long-term Plan. Implementing the plan incrementally limits the amount of change employees will have to adjust to at one time, and many cost management strategies are compatible with an incremental approach. The timing of labor union contract renegotiations should also be factored in.
  3. Build Support. Consider organizing and supporting an employee benefit committee that includes members drawn from collective bargaining groups, those not represented by collective bargaining, and management. The committee should include representatives who can analyze the financial impact of decisions. (See the GFOA's best practice, Communicating Health-Care Benefits to Employees and Retirees).
  4. Educate Employees. Understanding the value of the health-care benefit helps employees better appreciate the need to manage costs carefully. The employer should teach employees about how their insurance works and what the best options are.
  5. Audit Plan Records. Periodically audit plan records to review the eligibility of dependents, employees who are eligible for Medicare, and retirees for plan participation. Auditing is also important because it allows claims to be adjudicated effectively.
  6. Rebid Periodically. Periodically rebidding plan services will help ensure that the employer is getting the best deal for its money.


  1. Value-based benefit design is a payment methodology that creates consumer incentives for adopting services that have been demonstrated to be valuable in patient care and disease prevention. Consumer-driven health care is an approach that encourages and empowers patients to be smart medical consumers; patients themselves decide how their health-care dollars will be spent. A health savings account is a tax-advantaged medical savings account available to employees who are enrolled in a high-deductible health plan (a health insurance plan that has lower premiums and higher deductibles than a traditional health plan). Wellness programs are an employer-sponsored approach to improving employee health, including activities and health screenings designed to help employees eat better, lose weight, and improve their overall physical health.
  2. Medical loss ratio refers to is the percentage of premium dollars an insurance company spends on providing and improving the quality of health care versus the amount spent on administrative and overhead costs.


  • Containing Healthcare Costs, a GFOA whitepaper, 2011.
  • Strategic Health Care Plan Design, GFOA best practice, 2009.
  • Developing a Review Process for Implementing National Health-Care Reform, GFOA best practice, 2011.
  • Board approval date: Friday, February 28, 2014