Modeling the Impact of Rising Healthcare Costs on Municipalities

A municipal budget can balance in June and begin to unravel by fall. The health plan renewal comes in above forecast. Pharmacy claims jump. A retiree benefit assumption changes. Suddenly, money set aside for fleet replacement, road maintenance, or staffing has to cover a cost the budget treated as predictable.

That's what makes rising healthcare costs so difficult for municipal finance teams. The pressure doesn't arrive as one large expense. It compounds year after year, often faster than revenue and general inflation. The 2026 Milliman Medical Index estimates annual healthcare costs of $37,824 for a typical family of four covered by an employer-sponsored plan, with per-person costs projected to rise 7.9%. Aon expects U.S. employer healthcare costs to rise 9.5% in 2026, reaching roughly $17,000 per employee.

“Municipalities that model healthcare costs over 10 to 20 years, rather than relying on a five-year forecast, can spot funding gaps earlier and prepare for difficult trade-offs before they become urgent.”

Healthcare Costs Are Growing Faster Than Municipal Budgets

Municipal budgets are absorbing pressure from every direction at once. Labor, fuel, construction, equipment, and contracted services are all more expensive. Healthcare is growing on top of all of that.

The temporary flexibility created by pandemic-era federal aid is also ending. State and Local Fiscal Recovery Funds had to be obligated by the end of 2024, and most remaining obligated funds must be spent by December 31, 2026.

The underlying growth rate is the larger problem. The Centers for Medicare & Medicaid Services projects national health spending to grow at an average of 5.4% per year from 2025 through 2034, compared with 4.1% annual GDP growth. When a major expense grows faster than the economy supporting the revenue base, the gap widens even when the first-year variance looks manageable. That gap eventually reaches every part of the municipal budget. It can delay equipment purchases, reduce hiring flexibility, consume reserves, or force officials to revisit taxes, employee contributions, and service levels.

The first-year miss is usually the smallest one.

What's Driving the Rising Cost of Healthcare?

Several cost pressures are arriving at the same time. A useful financial model separates them rather than treating healthcare as one flat annual growth assumption.

Pharmacy and Specialty Drugs Are Leading the Increase

Pharmacy is the fastest-growing component of employer-sponsored healthcare costs, rising 14.8% year over year according to the 2026 Milliman Medical Index. GLP-1 medications and other high-cost specialty drugs are major contributors.

For a municipal plan, changes in eligibility, utilization, or coverage rules can materially affect the long-term projection. Finance teams need to see what happens under several assumptions, not buried inside a single benefits line item.

An Aging Workforce Expands Both Claims and OPEB Obligations

An aging workforce raises current claims while also expanding other post-employment benefit (OPEB) obligations. These may include retiree healthcare, dental, vision, and other benefits promised after employment ends.

OPEB costs extend well beyond the annual operating budget. The Government Finance Officers Association recommends that governments adopt a formal funding policy to keep pension and OPEB commitments equitable and sustainable over time. When retiree benefits sit in a separate model, leaders can't see how today's workforce decisions affect future cash requirements, debt capacity, and service delivery.

Medical Inflation and Utilization Add Volatility on Top of Base Growth

Hospital, outpatient, and physician costs continue to rise, while utilization and high-cost claims add volatility on top of that. The result is a cost category that's both expensive and difficult to forecast with one fixed rate.

A 7% assumption may look reasonable when the budget is adopted. If the actual increase is 10% or 12%, the difference carries into every year that follows. A one-year forecast error becomes a structural gap.

Why Static Planning Falls Short for Municipal Finance

Many municipalities still manage long-term projections in complex, multi-tab workbooks. These files may carry years of institutional knowledge, but they also depend on manual updates, linked formulas, and assumptions that are difficult to trace. That combination creates three problems worth naming.

Static Models Treat a Moving Target as a Fixed Number

Most municipalities still plan with static models: complex, multi-tab files updated by hand and relied on for decisions worth millions. A single formula error or stale assumption cascades through every number downstream, often unnoticed until after the budget reaches council.

That's especially dangerous with healthcare costs, which compound year over year. When the actual trend runs at 15% and the projection sits at 10%, the miss widens every year. Year one is the smallest gap in the model.

A traditional forecast usually applies one healthcare growth rate across the planning period. It shows what happens if the assumption is correct, but it says little about the range of possible outcomes. Healthcare costs rarely follow one clean path. Pharmacy utilization may accelerate. A labor agreement may change employee contributions. A plan redesign may lower costs in one year but shift them later. Scenario modeling makes those possibilities visible side by side.

Static Forecast	Scenario Model
Applies one growth assumption	Compares several possible cost paths
Produces one projected outcome	Shows a range of outcomes
Is updated during the budget cycle	Can be updated as conditions change
Shows healthcare as one line item	Connects healthcare to services, reserves and capital
Answers “What do we expect?”	Answers “What happens if we are wrong?”

Why a Five-Year Forecast Is Not Enough for Municipal Budgeting

A five-year plan may cover the next budget cycle. It doesn't show how recurring healthcare growth affects a fleet replacement in year eight, a utility upgrade in year twelve, or an OPEB obligation that extends for decades.

Municipalities already plan major assets over 10- to 20-year horizons. Healthcare should be modeled across the same period so leaders can see when operating costs begin to crowd out long-term capital capacity. GFOA's Rethinking Budgeting initiative warns that incremental, line-item budgeting can make local governments slow to adapt when conditions change. Extending the planning horizon helps teams test whether the current path remains sustainable.

Static Models Make the Numbers Harder to Defend

Finance directors don't just build budgets. They explain them to elected officials, department heads, employees, bargaining units, and the public. When a projection comes from a static model with no clear audit trail, one question can derail the conversation: Where did that number come from?

A strong model should let the finance team trace each result to a stated assumption, change that assumption, and show the effect without rebuilding the analysis. That turns a budget presentation into a decision conversation.

How Scenario Modeling Changes Municipal Financial Planning

Scenario modeling compares several possible futures against one shared baseline. It doesn't remove uncertainty. It shows what that uncertainty could cost.

Start With a Reliable, Documented Baseline

Begin with several years of historical data, including:

• Medical and pharmacy spending
• Employer and employee contributions
• Headcount and plan enrollment
• Claims or utilization trends, when available
• OPEB liabilities and funding assumptions
• Labor agreements
• Revenue forecasts
• Reserves and capital commitments

The baseline should be documented and auditable. When an official asks why healthcare spending reaches a certain level in year ten, the finance team should be able to show the assumptions behind it.

Build a Small Number of Useful Scenarios

More scenarios don't automatically produce better decisions. Three clear paths are often enough:

• Expected trend: The current best estimate based on renewal data and recent experience
• Lower-growth case: Slower utilization or successful cost-management measures
• High-trend case: Faster pharmacy growth, higher utilization or an unfavorable renewal

Teams can then test specific decisions within those paths. What happens if healthcare grows at 10% instead of 7%? What if a police salary agreement and a double-digit insurance increase land in the same year? What if GLP-1 utilization rises faster than expected? What if reserves are used to soften the first increase?

You don't need to guess the exact renewal rate 12 years from now. The goal is to identify which pressures appear across every plausible future and which choices preserve the most flexibility.

Connect Healthcare to the Whole Budget Picture

Healthcare shouldn't sit in a benefits-only workbook. The model needs to show how it affects the operating budget, capital program, reserves, debt, and workforce strategy.

That connection is where the real insight appears. A healthcare increase may look manageable on its own. The same increase may become a problem when it overlaps with a fire apparatus replacement, a sewer project, or a labor contract. The model should make those collisions visible before the budget year arrives. For example, Synario keeps healthcare, OPEB, capital, and reserves in one connected projection, not separate workbooks, so overlaps surface early enough to act on.

Turn the Analysis Into a Conversation Officials Can Act On

A team that can show a council two or three healthcare cost trajectories, each with its fiscal impact, has a different conversation than one presenting a single-line projection. Synario generates those charts and reports from the same model, turning abstract figures into a picture leaders can act on. That moves teams from raw municipal budget analysis to defensible decisions, and frees hours that manual data entry used to consume.

A side-by-side view of several healthcare trajectories can show:

• The cumulative cost over 10 or 20 years
• The effect on reserves
• The capital projects delayed under each scenario
• The required employer or employee contribution
• The point at which service reductions may become necessary
• The decisions that can still change the outcome

This way, the conversation shifts from “Do we trust the forecast?” to “Which path are we prepared to take?”

From Forecasting the Gap to Testing the Options

A model is useful only if it helps leaders act. Once the projected gap is visible, finance teams can test the cost and timing of different responses.

Those options may include:

• Adjusting employer and employee premium contributions
• Changing deductibles or plan tiers
• Reviewing provider networks
• Steering members toward lower-cost, higher-quality care
• Revisiting pharmacy benefit management
• Modeling different approaches to GLP-1 and specialty-drug coverage
• Prefunding OPEB obligations
• Phasing changes over several years

Each option carries financial, workforce, labor, and political consequences. Increasing employee cost sharing may reduce the municipal expense but create affordability or retention concerns. Using reserves may protect employees for one year but leave the structural gap untouched. A narrower network may lower costs, but only if employees and retirees can still access appropriate care.

Scenario modeling does not make those choices easy. It makes them visible.

A Practical Starting Point

Municipalities do not need to rebuild the entire planning process at once. Start with the decisions creating the most exposure:

1. Extend the horizon. Model healthcare for at least 10 years and align it with your capital planning period. Synario's long-range modeling shows how a sustained trend interacts with a bond issuance or fleet replacement years out, not just the next budget cycle.
2. Replace one forecast with several scenarios. Model an expected case, a lower-growth case, and a high-trend case. In Synario, those scenarios run side by side in one view, so you're not reconciling separate files when a renewal lands differently than projected.
3. Bring OPEB into the same picture. Model OPEB alongside current premiums. A connected view makes it visible when today's workforce decisions create a liability that won't reach the operating budget for a decade.
4. Connect healthcare to services and capital. Tie it directly to the operating budget and capital program, so the model shows what gets displaced in the same projection where the cost appears, not in a separate analysis.
5. Document the assumptions. Record every assumption so results stay traceable when an official or auditor asks where a number came from. Synario's audit trail lets you walk anyone through the logic in the room, not after the meeting.
6. Review the model throughout the year. Treat the model as a living document. When a renewal comes in above forecast or a labor agreement changes contributions, updating the assumption in Synario recalculates the impact across your scenarios.

A plan updated only during budget season becomes stale quickly. A living, connected model gives the finance team an early-warning system – exactly the kind of long-range, scenario-based modeling Synario provides.

Plan Before the Next Increase Arrives

Reserves can absorb a bad year. They can't solve a cost trajectory that grows faster than recurring revenue. Municipal finance teams need a longer view of healthcare, one that connects benefits, OPEB, capital, services, and revenue in the same model. That view gives officials time to weigh the options while the choices are still manageable.

The goal isn't a perfect forecast. A good plan shows where the current path leads and what a finance team can still change. Synario connects healthcare, OPEB, capital, reserves, and revenue in one model built for public-sector finance. Municipal teams can compare cost scenarios across the 10- to 20-year horizon they already use for major assets. Every figure traces back to its assumption, which turns a healthcare projection into a decision officials can question, adjust, and defend.

Schedule a demo to see how your team can plan for rising healthcare costs before they force harder budget decisions.

Frequently Asked Questions About Modeling for Healtcare Costs