Healthcare Inflation: What It Means For Local Governments

Healthcare inflation isn’t slowing down – and local governments are feeling the squeeze.
While general inflation has cooled, healthcare costs continue to climb at a troubling pace. According to the 2025 Kaiser Family Foundation (KFF) Employer Health Benefits Survey, the average cost employer-sponsored health insurance rose another 6% this year, following two consecutive 7% increases. The typical family plan now costs $27,000 per year, with smaller employers often facing even steeper hikes.

A mix of factors is driving these rising costs, from higher provider rates and the growing use of new therapies like GLP-1 medications to the increasing prevalence of chronic conditions such as cancer and diabetes. For municipalities and public employers already managing long-term retiree healthcare promises, these pressures can quickly escalate OPEB liabilities and strain local budgets.

But the good news is, there are steps you can take. Whether it’s reassessing plan design, prefunding liabilities, or revisiting actuarial assumptions, proactive management can help stabilize costs before they spiral further.

How This Affects Local Governments

1. Soaring OPEB Liabilities 

For many municipalities, healthcare benefits represent a significant portion of their OPEB obligations. As healthcare premiums continue to rise, these liabilities will increase, directly affecting government financial statements. Higher liabilities lead to increased annual contributions, which can severely strain budgets that are already dealing with other priorities like public safety, education, and infrastructure. 

2. Budget Strain and Taxpayer Burden

With healthcare costs rising at twice the rate of general inflation, local governments may need to raise taxes or cut services to cover the escalating OPEB liabilities and stay within budget. This puts them in a difficult position, especially those already struggling with tight budgets. Unfortunately in this situation there are no easy answers – push costs to employees, narrower networks, fewer covered services, etc. The reality is that as healthcare premiums grow, they consume a larger share of the budget, leaving less room for essential services. 

3. Increased Financial Volatility

As mentioned, OPEB liabilities are especially sensitive to healthcare inflation. When costs rise unexpectedly, local governments must adjust their contributions, leading to financial volatility. This unpredictability complicates long-term financial planning and can lead to larger-than-expected liabilities, which may disrupt bond ratings and their overall financial health. 

The Ripple Effect: Retirees Feel The Impact Too

Rising healthcare premiums not only impact local governments but also their retirees who depend on these benefits. For retirees with fixed incomes, higher premiums could mean paying more out-of-pocket for healthcare services, reducing their overall financial security. 

Local governments may feel pressured to shift more healthcare costs to retirees through increased cost-sharing or reduced benefits, which could lead to dissatisfaction among retirees and even legal challenges. 

So What Should You Do?

The first step, decide that now is the time for action. Here are some key strategies you can explore: 

1. Reassess Your OPEB Plans

You can explore options to reduce OPEB liabilities by adjusting your plan design – be aware that benefits may be protected by statute or State law. Are there opportunities to increase cost-sharing with retirees or introduce tiered benefits that offer more affordable options? Reviewing your plan now can help you find ways to mitigate the impact of the rising premiums before they become unmanageable. 

2. Consider Prefunding Your OPEB Liabilities

One of the most effective ways to manage growing OPEB liabilities is by pre-funding them through an OPEB trust. This allows governments to invest contributions and potentially earn returns, which can be used to offset future costs. Pre-funding is a proactive way to reduce long-term financial pressure. 

3. Update Financial Projects and Actuarial Valuations 

Rising healthcare costs should signal immediate updates to actuarial assumptions. If you fail to adjust for these healthcare cost increases, it could lead to unpleasant surprises in your financial reporting. Regularly reviewing and updating these valuations will provide a more accurate outlook and better inform your budget planning. 

4. Explore Group Purchasing 

If you are a smaller municipality, you may want to consider joining regional purchasing cooperatives to negotiate better healthcare rates. Collaborating with other local governments can increase bargaining power with insurers and help lower premium costs, reducing the burden on retirees and your municipality. 

Long-Term Outlook: Expect More Increases

Unfortunately, experts project that healthcare costs will continue to climb beyond 2025. Many hospitals have renegotiated contracts with insurers that include higher reimbursement rates, and new medical innovations, which are adding further pressure to employer health plans.

At the same time, some insurers are scaling back or exiting the Medicare Advantage market altogether, leaving fewer options for retirees and local governments that rely on these plans to manage post-employment healthcare costs.

For municipal employers, this means preparing for yet another year of elevated costs and increasing OPEB liabilities. Without proactive planning, these rising expense can quickly lead to budget strain and difficult decisions about the level of benefits you can realistically sustain.

The Bottom Line

Healthcare inflation isn’t a short-term hurdle, it’s an ongoing challenge that can quickly reshape long-term liabilities if unchecked. As you prepare your FY 2026 budget, now is the time to revisit your OPEB funding strategy, review actuarial assumptions, and assess whether your plan design still makes sense in today’s cost environment.

If you have concerns about how these changes will affect your municipality, or if you’d like help managing your OPEB liabilities, our team can help. Contact Odyssey Advisors to start the conversation.