New Study Cites Growing “Crisis” of Healthcare Costs on School Di

Public school districts appear to be at a near tipping point when it comes to the impact of healthcare costs on school budgets. Premiums are rising so rapidly that healthcare obligations are threatening the ability of districts to deliver critical educational programs, materials, and services, hire, pay, and provide benefits to educators and make improvements to facilities.

A new study conducted by The School Superintendents Association (AASA) and the Association of School Business Officials International (ASBO International) surveyed more than 750 public school district leaders in 42 states about the impact of healthcare costs on their budgets. Findings from the study, summarized in the report “Rising Premiums, Falling Opportunities: The Budgetary Impact of Healthcare Costs on School Districts,” reveal that 98% of district leaders report that rising healthcare costs are having a measurable impact on their budget.

To offset their healthcare obligations, 46% of school districts have modified employee benefit packages, 34% have delayed hiring staff, 31% have reduced or postponed spending on instructional materials and technology and 28% have cut back on the levels of insurance coverage they are able to offer.

These budget impacts are making it hard for schools and districts to remain competitive in recruiting and retaining a high-quality workforce. If not resolved, the problem will quickly become a “crisis,” if it isn’t already, say report authors Sasha Pudelski, director of advocacy at AASA, and Elleko Yost, director of advocacy and research at ASBO International.

How Did Things Get This Bad?

The reason things have reached this point is simple. During the 2025–26 fiscal year, nearly all districts (92%) spent up to 30% of their budget on employee insurance benefits. The leading causes of rising premium costs are increasing prescription drug costs (cited by 60% of survey respondents), more claims for expensive treatments (cited by 56%) and increased utilization of high-cost specialty drugs such as GLP-1s (cited by 56%).

“We are at the tipping point of a cost trend that has been occurring for decades,” explains Lisa Marceau, founder and president of Boston-based advisory firm Alpha Millennial Health and author of “Breaking the System: How Digital Innovators Shape the Future of Healthcare.”

The study findings are alarming, but they are not new, Marceau explains. Rather, they are an added burden on an already stressed system. She says there is sufficient research connecting strong education systems to the health of students, families and communities. When education systems are strained, programs are cut, and teacher benefits are reduced, the impact ripples not just to families and communities but to the future health status and earning potential of students.

Zahava Stadler, director of New America’s Education Funding Equity Initiative, agrees that the study findings reflect a very tough reality facing far too many school districts.

“We want district leaders to use their resources to support students and advance their learning. And we want to be able to hold decision-makers accountable for those spending choices,” Stadler says. “But as these numbers show, lots of school district dollars are spent before they even come in the door, on health benefits whose costs district leaders don’t control. How can we ask leaders to do better with their funding when so much spending is predetermined by factors that have nothing to do with educating kids?”

Taking a Clue From Business Sector Actions

A trend to watch is the growing number of private sector employers eliminating healthcare benefits entirely, something that was once unheard of, Marceau explains. The question for future public education contracts is whether rising healthcare costs will eventually force districts to reduce or eliminate healthcare benefits for educators to manage financial risk?

Right now, we’re seeing the first phase of this, where school boards are hitting the pause button on ongoing contracts and any new projects to assess what current expenditure are necessary and how to improve their investment strategies, explains David DeSchryver, senior vice president and co-director of research at Whiteboard Advisors, a research and policy firm in Washington, D.C.

There is another healthcare-cost factor set to squeeze education budgets soon, Stadler says. The big federal cuts to Medicaid are going to fall hard on states, leaving them to either fill huge new gaps in healthcare funding or let people lose access to care.

In some states, hundreds of thousands will lose their insurance if the state doesn’t step in and spend more on healthcare, Stadler says. That money will have to come from somewhere. States have to balance their budgets. The biggest pot of state spending outside healthcare is education, and he says there’s real reason to worry that states will freeze or cut education funding as the federal government dumps more healthcare costs onto them.

“Rising health care costs create pressure on school districts, but this is not a singular issue,” DeSchryver explains. “If it were only healthcare costs, we wouldn’t hear about it, but it’s not. It’s healthcare costs, plus operational costs, plus gas and transportation, plus salary-schedule pay raises, plus rising special education and clinical service needs, and on and on. All of these are magnified by flat or declining revenues.”

A Successful Funding Strategy in Montana

Pudelski and Yost are quick to point out that there is a lot that individual states can do to counter the healthcare cost challenge. They cite the example of Montana’s school healthcare transformation as “one of shifting from a state of crisis to a position of collective power.”

Montana faced a financial nightmare that would become the catalyst for change, Pudelski and Yost explain. The district in eastern Montana, then part of the Montana Unified School Trust, was hit with a staggering 72% insurance premium increase in a single year. It was the second-highest spike in the state, far exceeding the already painful average annual increase of 35%.

In 2023, a coalition of education groups in Montana helped draft HB 332, a bill designed to create a unified statewide health insurance trust, Pudelski and Yost explain. The results of this coalition building were transformative: 7 out of the state’s 8 largest districts joined the trust. A total of 180 districts opted in, bringing in more than 16,000 employees — far more than the 12,000 required.

This massive pool provided the bargaining power needed to negotiate more competitive rates with hospitals and clinics while effectively buffering against the risk of high-cost claims, Pudelski says.

Long-Term and Short-Term Steps Districts Can Take

Alleviating these pressures is part of a larger system of school funding challenges, explains Rachel White, associate professor of educational leadership and policy at the University of Texas at Austin and founder of The Superintendent Lab, an online research hub focused on the school district superintendency.

“For example, at the federal level, the government must fully fund the Individuals with Disabilities Act and Title I to free up local dollars that are currently paying for these unfunded mandates,” White says. “At the state level, legislatures need to continue to modernize funding formulas so they reflect the real rising costs of operating a school — including healthcare. Beyond the K-12 sector entirely, the nation has to have a real conversation about rising pharmaceutical costs.”

In the short term, education systems can explore alternative benefit models that provide employees with greater flexibility while reducing employer exposure to cost risks, Marceau says. One option becoming attractive is shifting from a defined benefit model, similar to a pension, to a defined contribution model, similar to a 401(k). There are emerging forms of this new model from individual coverage and health reimbursement, direct primary care plus catastrophic care and the shift to self-funded plans that permit more flexibility.

Public school systems are some of the largest health insurance purchasers, Marceau continues. States with large education systems and growing populations generate significant revenue for the health system. From this perspective, education systems can engage in negotiations that leverage this purchasing power.

“State agencies aren’t in a good position to really drive this forward,” DeSchryver explains. “It falls upon local districts, in regional collaboration and cooperatives, to identify best practices and share benchmarks and examples of what successful organizations look like.”

There are decades worth of research available about performance-based management, Drucker-like approaches to organizational efficiency, and outcomes-based contracting, DeSchryver says. It’s not new, but it’s something that schools now have to consider incorporating in their own unique way.