Key Points: 

• Arizona’s state employee health insurance trust fund faces a $660 million funding gap

• Republican lawmakers want to study the plan’s costs and employee contributions ahead of 2027

• Rising healthcare costs and limited state budget reserves could lead to higher employee premiums, greater cost-sharing and other changes to the plan

Republican lawmakers want to make state employee healthcare a focus of the 2027 legislative session as budget staffers project a $660 million funding gap in the state’s insurance trust fund. 

The fund, which costs $1.4 billion annually, receives roughly $850 million from employer contributions and employee premiums, leaving the state to cover the remaining costs through other sources, according to Joint Legislative Budget Committee staff.  

The growing gap adds pressure to an already strained state budget, with lawmakers facing limited reserves and nearly $600 million in projected spending on recurring expenses that have been classified as one-time costs. The health insurance subsidy is the largest of those expenses, and Republicans are signaling they want to overhaul the plan as they weigh how to close the shortfall without further straining state finances.

“Costs are out of control. If we are going to claim to be self-insured, we need to take this very seriously as a Legislature and find solutions,” said Senate Appropriations Committee Chairman David Farnsworth during a Sept. 30 JLBC meeting. “I think the whole thing needs to be revamped.”

Arizona’s state employee health plan became self-insured in 2004. Since fiscal year 2023, when the state provided $103 million from the general fund to help cover costs, trust fund subsidies have grown substantially.

The subsidy payment decreased to $73 million in fiscal year 2024, but it has steadily increased since. The state spent $140 million and $195 million in the following two years before spending $325 million in the current fiscal year.

JLBC staff predicts the state will need $660 million to close the current funding gap, including $325 million from the general fund, with the remainder coming from other sources. 

“We’re not putting enough money into the health employee trust fund, and that’s why the subsidy has grown,” Rep. Matt Gress, R-Phoenix, said during JLBC’s meeting. “I think some of us are concerned about the spending side of the equation and that the plan isn’t being managed as well as it could.”

Gress said the trust fund should be a central issue for the governor and the Legislature next year. The recently enacted budget increased ongoing funding for the fund by $100 million beginning in fiscal year 2029, but that increase won’t be enough to cover the funding gap.

Why have costs risen?

The Arizona Department of Administration projects a 10% increase in healthcare prices and a 3.5% increase in employee utilization for the next three years. 

“It’s very difficult to predict this particular market that far in the future,” ADOA Benefits Service Division Director Paul Shannon told lawmakers on JLBC. “The country’s experiencing a rising inflation rate.”

The nation’s large employers also expect healthcare costs to rise 9% to 11% in 2027, according to three national surveys. 

The Centers for Medicare and Medicaid Services’ most recent national health expenditure fact sheet states that healthcare spending increased by 7.2% in 2024. CMS also expects national spending growth to outpace the country’s average gross domestic product growth by a little more than 1% through 2034. 

Spurred by increased demand, the American Medical Association found national growth rates in 2023 and 2024 were the highest recorded since 2003’s 8.6% increase, excluding 2020, when spending surged due to the COVID-19 pandemic.

Next steps

State lawmakers predict the Arizona health insurance trust fund will have a $500 million deficit by 2030 under the state’s current insurance plan and spending formula. JLBC staff recommended a combination of solutions to address that shortfall, including employee premium increases, increased employee cost sharing and structural changes to the state’s health insurance plan. 

Meanwhile, the state faces a tight budget outlook. Under current spending plans and revenue projections, budget staff expect only $61 million in available funds for the next fiscal year and $52 million the year after—amounts insufficient to cover the health insurance subsidy and other ongoing one-time expenses. 

Senate Majority Leader John Kavanagh, R-Fountain Hills, told the Arizona Capitol Times that Republicans are considering legislation in the upcoming session to address the issue. But he said GOP lawmakers first want a study to compare state employee health benefits with the private sector and other government entities. 

“In the private sector, the average employee pays 20% of the cost, whereas in the Arizona state government, our employees only pay 7%,” Kavanagh said, citing statistics from the U.S. Bureau of Labor Statistics. “That creates a lot of the usage, plus health costs are way up.”

The recently enacted budget also established an oversight board for the trust fund, tasked with designing policies to lower the employer and employee cost-share ratio of medical premiums to 85% employer and 15% employee by 2035.

Sen. Lela Alston, D-Phoenix, cautioned against raising employee healthcare costs, noting that Arizona state employee salaries are low relative to other states.

“We’re actually making salary cuts,” Alston said. “I hope whoever makes these decisions will keep that in mind so that we keep families healthy and keep our own employees off benefits like Medicare and food stamps. We do have employees in the state of Arizona on food stamps.”

At an Oct. 8 Finance Advisory Committee meeting, Ben Henderson, Gov. Katie Hobbs’s budget director, said the governor’s office is prioritizing every available option to ensure state employees have health insurance. 

“That’s an ongoing cost that’s necessary and must be addressed,” Henderson said. 

The governor vetoed a Republican budget plan in the legislative session that would have cut the health insurance trust fund by about $90 million while increasing employees’ premium share by 20% over three years. 

In May, the governor’s office said the trust fund would have ended the fiscal year in debt under the Republican budget and would have led to a yearly pay cut for Department of Public Safety officers of $7,400 to $10,000. 

Hobbs is still seeking a $700 million federal border reimbursement from the Department of Homeland Security, which she initially requested last year. Henderson said the governor’s office would like to use that reimbursement to help pay ongoing one-time costs, but Arizona’s application is still pending, and Kavanagh said he doesn’t expect that money to come to Arizona.