One of few states still covering its employees' premiums, Oregon struggles to balance rising rates with the burden on taxpayers.

Oregon taxpayers shell out an average of $706 a month to cover the health insurance premium for each state worker and her family.

The total cost: $330 million in the current budget, and that will climb by about 20 percent for 2005-07.

State workers pay nothing toward their premiums, a benefit that's disappearing for many U.S. workers as health care costs soar. That's unlikely to change, because after accepting a two-year wage freeze in order to hold on to it, Oregon's employee unions have no intention of dealing away the free health benefit. The governor isn't inclined to push for it, either.

Instead, workers and management are trying to find ways to cut health care costs to slow the growth of insurance rates. That won't help state agencies putting together their two-year budget proposals this summer; they have to use current projections. But changes could lead to savings by the time lawmakers, facing another struggle about spending, act on the budget next year.

Across the nation, public and private employers have forced workers to pick up a greater share of the costs by contributing more to premiums and through higher deductibles, co-pays and other out-of-pocket expenses. In 2003, Oregon was one of only eight states that still provided its workers fully paid family health insurance.

Critics say getting a grip on health care costs is crucial to regaining citizen trust. Runaway costs, they say, are a big reason voters resist paying higher taxes.

"We have turned health insurance into a tax scheme," says Steve Buckstein, president of the Cascade Policy Institute, a free-market think tank. "It's as if auto insurance paid for every gas fill-up."

The generous state worker plan doesn't go over well in a state dominated by small businesses that are cutting benefits and eliminating coverage for their workers. J.L. Wilson, a lobbyist for the National Federation of Independent Businesses, says about 62 percent of his group's members in Oregon provide health insurance -- a number that mirrors national surveys -- compared with 70 percent five years ago.

The price for family coverage has reached $1,300 a month in some rural areas of the state, Wilson said. And fully paid plans are "totally unheard of."

Sen. Kurt Schrader, D-Canby, co-chairman of the Legislature's joint budget-writing committee, sees the resentment at his veterinary clinic.

"The staff in my clinic work hard. I provide health insurance, and they pay a small amount," he says. "They are paying taxes for people who don't pay anything. It rubs them the wrong way."

Some workers are paying more

U.S. health care spending reached $1.6 trillion in 2002, nearly doubling in a decade. One reason, experts say, is the availability of employer-paid health insurance. Isolated from the true cost, people overuse the system, visiting the doctor for routine ailments. The uninsured also push rates higher as insurers shift the cost of providing free services toward workers with coverage.

Other cost drivers include escalating drug prices, pushed by aggressive marketing; aging baby boomers who need more health care; bureaucracy in the health care industry; and doctor shortages, especially in rural areas.

Some large public and private employers still provide fully paid health insurance, particularly if their workers have strong unions, but the trend is toward more cost-sharing by employees.

Schools and local governments in Oregon are following this trend.

"Our members are cutting back on benefits, going to higher deductibles, or plans that the employees pay more for," said Lynn McNamara, administrative and development services manager for City County Insurance Services, which administers health benefits for about 250 local governments.

In 1997, more than half of Oregon's school districts offered fully paid health insurance. That's down to a handful, with Portland the biggest holdout.

Portland's fully paid plan is sure to be a big issue this fall when Multnomah County voters decide whether to repeal the past two years of the county income tax voters approved in 2003 to support schools.

National efforts to cut costs include a new health savings account Congress approved last year. The program, pushed by fiscal conservatives but slow to gain wide acceptance, combines a high deductible-low premium health insurance plan with a tax-exempt account that workers can use to pay current medical expenses or save for future expenses.

The program was designed to improve on previous medical savings plans that required people to spend down their accounts by the end of the year or lose the money.

Supporters, such as the Cascade Policy Institute's Buckstein, say the health savings accounts could dramatically cut taxpayer costs and give people more responsibility for their own health care.

Critics argue that the idea benefits people who already are "healthy and wealthy," and some say government should do more.

Leslie Frane, executive director of Service Employees International Union Local 305, the largest in the state work force, touts Democratic presidential candidate John Kerry's plan. He calls for the federal government to share the cost of catastrophic care in exchange for requiring employers to offer insurance to every worker.

Ideas include pools and incentives

In Oregon, state and union officials are exploring ideas to cut costs, such as creating associations, or pools, to gain more purchasing power, particularly for drugs, and "evidence-based" plans that create incentives for better performance by providers and better choices by employees.

Frane's union backed legislation adopted last year that allows the state to buy prescription drugs in bulk, cutting out the middle man.

The state's current contracts with insurers prohibit that kind of pooling through 2005, but officials are working on changes for 2006, says Jean Thorne, executive director of the Public Employees' Benefit Board, a labor-management group that negotiates with insurers about the rates and design of the state's health insurance plans.

The board also is looking at ways health insurance can be linked to effective treatment. For example, workers could pay less for treatment of high blood pressure if they went to a clinic that had proved it could do a better job than other clinics of lowering blood pressure.

"We have to make sure we're getting value for the money we're spending," Thorne says.

Another program would create a tiered payment for medicine, with lower costs for employees who use generic drugs over more expensive brand-name alternatives.

Contracts add complexity

But making health benefit changes, and calculating their effects on agency budgets, is complicated because of two separate but overlapping negotiations.

Every two years, tracking the biennial budget, unions negotiate labor contracts that include whether employees will contribute to premiums. And annually, the benefit board negotiates with insurers on rates and plan details such as co-pays and deductibles.

The board has agreed to new contracts with insurers for 2005 that will raise rates by about $15 million to $30 million and leave all benefits the same for the past seven months of the 2003-05 budget.

About $9 million is reserved in the emergency fund for that purpose; the rest probably will come out of existing agency budgets, which could mean cuts in services.

It won't come from workers' pockets.

"The governor is absolutely committed to retaining benefits through the biennium," Thorne says, given the wage freeze workers accepted in 2003 to help the balance the budget and the Legislature's cuts in retirement benefits.

But the board will be looking to boost co-pays and increase some other out-of-pocket costs for employees in 2006 and beyond, Thorne says. Increasing these employee costs can reduce the pressure on rates.

That kind of shift carries risks, though. Studies show increased worker costs discourage needed care. And critics say plans that offer low premiums in exchange for high deductibles can unfairly shift the burden to the sickest workers.

That's what makes the changes aimed at bringing down costs so important, Thorne says. "The union leadership needs to understand we need to make some changes," she says. "Health care costs could easily eat up any compensation changes."

But Democratic Gov. Ted Kulongoski, while "open to design issues," probably won't push for a worker contribution to premiums in the 2005-07 labor agreements, says Therese McHugh, his acting chief of staff. She emphasizes that workers have forgone raises to keep health care costs down.

Union leaders are adamant about protecting health benefits, including out-of-pocket expenses. "We think all Oregonians deserve affordable health care. We're glad our members have it, and we intend to keep it," Frane says.

Nobody is predicting that any of the changes would reduce health insurance rates, but the hope is to bring their rapid increase under control. McHugh estimates that every $100 increase in rates costs Oregon taxpayers about $32 million.

One thing all parties agree on: There are no easy solutions.

"If we beat up on insurance companies, if we beat up on providers, if we beat up on consumers, it's not that easy," Thorne says. "Everybody plays a role."

James Mayer: 503-294-4109; jimmayer@news.oregonian.com