State Health Plan for Employees and Retirees Reform

Imagine you get a new job with good pay and excellent benefits. In fact, the health insurance coverage is the most generous you’ve seen. You pay nothing for coverage while you are working, and after a set number of years, you can get free coverage in your retirement years as well. Once the excitement about the new job and great benefits wears off, you may begin to wonder just how your employer is paying for all that health insurance not just for active employees, but for virtually every retired former employee who put in more than just a few years’ service.

Moreover, given that this is a large company, you know that the number of retirees receiving health coverage is large and growing fast, and that people are living longer than ever before – thus creating an ever growing fiscal burden on the company.

And you would likely be right to be concerned, because such obligations would prove to be unsustainable and the company could very well go bankrupt because of it.

Such a scenario is playing out with the North Carolina State Health Plan. Except unlike the scenario with the company that would go bankrupt, we are dealing with the state government who just continues to reach deeper into the pockets of taxpayers to fund their unsustainable obligations.

• North Carolina state government has amassed a $33 billion unfunded liability for health benefits for state retirees.
• Total expenses for the State Health Plan have risen 30 percent in just five years.
• 27,000 additional retirees began receiving benefits in a recent five year span, a number equivalent to all the full-time state government workers in Nebraska.
• The share of insurance premiums North Carolina state employees and retirees are asked to pay is only about one-fourth as much as workers at large private sector companies, and less than half of state and local governments in the southeast.
• Taxpayer share of financing the State Health Plan has soared to $1.8 billion per year – and is growing fast.

Only a few state politicians have recognized the serious nature of the State Health Plan’s financial burden. A few very modest reforms have been enacted recently, but nothing remotely sufficient to make a noticeable difference. With some reasonable reforms to the program to make the State Health Plan benefits more closely aligned with those offered in the private sector and other state governments, however, the state can put the State Health Plan back onto a sustainable path.

 

Overview

The North Carolina State Health Plan (SHP) is the health insurance plan offered to state government employees and retirees. It is much more generous than what many workers now have – and it’s headed for fiscal calamity.

SHP now covers 664,000 state government employees (including teachers), retirees and dependents.[1]  The plan offers two PPO coverage options, both offered by the Blue Options network – administered by Blue Cross Blue Shield North Carolina.

The two plans are the “70/30 basic plan” and the “80/20 standard plan.” The 70/30 plan offers higher out-of-pocket expenses in return for lower premiums. The state budget is responsible for paying the majority of the premium costs for enrollees.[2] Eligible employees and retirees pay no premium on the 70/30 plan, and as of July 1, 2011 are asked to contribute a mere $22.76 per month for the 80/20 plan. Eligible employees and retirees can also enroll dependents onto the SHP, but are responsible for paying the full premiums.

To be eligible to enroll and receive state premium subsidies in the SHP, an employee must be a permanent staffer working 30 or more hours per week for nine or more months per calendar year. Part-time workers can also enroll in the plan, but are responsible for paying their own premiums.

Moreover, retirees hired before Oct. 1, 2006 must have only five years’ service, while those hired after that date must have 20 or more years of service, in order to receive the state-subsidized insurance in their retirement years. Also, as noted in a Dec. 2011 Fiscal Research presentation, “When the retiree becomes eligible for Medicare, the SHP coverage becomes secondary and the retiree is expected to enroll in Medicare Parts A and B, but not D.”[3] Thus, state retirees who are also enrolled in Medicare are somewhat less expensive for the state to cover.

How Much Does the SHP Cost? How is it Funded?

With the state offering such generous coverage to hundreds of thousands of people, the costs mount quickly. Total payment requirements for the State Health Plan are estimated to be roughly $3 billion in FY 2012-13.[4]

These expenses include medical and pharmacy claim payments and administrative costs. Ninety-eight percent of the revenue to cover the SHP expenses comes from premium contributions, with taxpayers picking up much of the tab. Funding to pay for the SHP premiums come from:

• state agencies (i.e. your tax dollars) for active employees
•  the Retiree Health Benefit Fund for retiree premiums, with funding from General Fund appropriations (i.e., your tax dollars)
• premiums from employees and retirees making the small monthly contribution to the 80/20 plan as well as those paying for dependent coverage.[5]

 

The annual taxpayer share for the SHP for active employees and retirees comes to about $1.8 billion. This is nearly 10 percent of the state’s $20 billion General Fund budget.[6] Yet things are going to get much worse, and soon.

Of the nearly 665,000 participants in the SHP, nearly 314,000 are active employees, 159,000 are dependents of active employees, 167,000 are retirees and another 19,000 are dependents of retirees.[7] Of those participants, two-thirds are enrolled in the 80/20 standard plan – which began requiring the minimal monthly premium contribution from employees and retirees only last year.

Growing Health Care Costs Making SHP Unsustainable

As one might expect, the costs of the SHP have been rising rapidly over the last several years. In FY 2007-08, total expenses came to $2.3 billion.[8] Thus, the estimated $3 billion in expenses for FY 2012-13 would mark a dramatic 30 percent increase – or $700 million – in just five years for SHP expenses.

The explosive and unsustainable increases in SHP expenses have been recognized – although insufficiently – over the past few years, leading to some very modest reforms in an effort to curb the growing program. As mentioned above, legislation passed in 2011 asked employees and retirees enrolled in the 80/20 plan to contribute $22.76 per month toward the premiums for their health coverage. Also, a number of co-pays and other out-of-pocket expenses were slightly increased for both plans.[9]  Increasing the out-of-pocket expenses in the plan’s coverage was estimated to save the state about $75 million in FY 2012-13, while the new employee/retiree premium contributions for the 80/20 plan are estimated to save nearly $95 million.[10]

These reforms offer a step in the right direction, but are fairly minor when considering the total costs and the rate of cost increases confronting the SHP. For however dire the outlook is today, it’s going to get worse and worse in coming years.

Unfunded Liability for Retirees at $33 Billion – and Growing Fast

The most significant fiscal challenge facing the State Health Plan is the large and rapidly growing unfunded liability for state retirees. The most recent actuarial valuation conducted as of Dec. 31, 2010 estimated North Carolina’s unfunded liability for retirees at $33 billion. North Carolina’s per capita liability ranks 9^th highest nationally, and is growing fast.[11] The $33 billion liability is up $9 billion from just five years prior – a stunning increase of 38 percent.[12] Furthermore, at its current trajectory, that liability is projected to exceed $50 billion in another seven years.[13]

The unfunded liability represents the present value of the amount of estimated premium subsidies for retirees’ health insurance the state will be responsible for over the next 30 years. What this means, in short, is that as more and more state employees retire and live longer, it will cost state taxpayers a rapidly escalating amount to cover SHP premiums.

To get an idea how quickly the annual payment required to cover retiree health benefits can climb, consider this: In FY 2012-13, more than half a billion in taxpayer dollars ($516 million) will be required to finance SHP premiums for state retirees from General Fund supported positions.[14] In FY 2000-01, that required amount was only $87 million, meaning the annual taxpayer contribution to cover state retiree health benefits had exploded virtually six-fold in just a dozen years.[15]

This problem will continue to worsen in dramatic fashion as the number of state retirees enrolled in the SHP continues to rise. For instance, the number of retired state employees enrolled in the SHP swelled from 133,486 in 2005 to more than 160,000 in 2010.[16] The additional 27,000 retired SHP enrollees marked an increase of 20 percent in just five years. To put that number into perspective: the state of Nebraska’s entire state government employs 27,000 full-time workers.[17]

The 2011 legislation asking retirees enrolled in the 80/20 plan to contribute a small share of SHP premiums will help to offset the rising liability crisis, but very slightly. Moreover, legislation passed in 2006 also attempted to curb the growing rate of retiree health benefit liabilities.[18]  Senate Bill 837 changed the eligibility requirements for state retirees to receive SHP premium coverage. For employees hired on and after October 1, 2006, retirees must have 20 or more years of service to receive the full state-funded premium support. This new threshold is up from the 5-year standard that had previously been in place. Furthermore, the legislation determines that retirees with 10 to 20 years’ experience can receive a state subsidy of 50 percent of the SHP premium, and retirees with five to ten years service can enroll in the SHP but pay the full amount of the premium.

This change too, however, was projected to have a non-significant impact on the cost of financing state retiree health premiums. Projections for the 10^th year after this legislation’s passage suggest a taxpayer savings of between $11 and $13 million[19]– a barely noticeable amount given the size of the state’s health insurance obligations to retirees.

Generous Benefits Contributing to Rising SHP Costs and Liabilities

The primary drivers of the rapidly expanding costs of the State Health Plan are the growing costs of health care in general, and the highly generous benefits extended to state employees and retirees.

For the SHP offers perks that many employees in private industry and even in government in other states might well envy. Consider the following:

• The active employees’ portion of the SHP premium they are now asked to share for the 80/20 plan is roughly 5 percent of the total cost of the premium (the state picks up the rest of the costs). For the basic 70/30 plan, employees can still enroll at zero cost to insure themselves.[20]For comparison:
  • Employees of large private sector firms pay an average of 19 percent of premium costs for their individual health coverage.[21]
  • State and local government employees in the South Atlantic region pay an average of 13 percent of premium costs.[22]
  • Few employers in the private sector offer medical benefits to both active workers and retirees, as North Carolina state government does. In 2010, only 28 percent of large private sector firms offered medical benefits to both employees and retirees.[23]
    • Of those large private employers that do offer medical benefits to both active workers and retirees, 40 percent require the retiree to pay the full premium for coverage while another 30 percent have capped the employer’s subsidy at a fixed dollar amount.[24]
    • Roughly 70 percent of states require retirees to contribute more than a nominal premium, which is all NC now asks.[25]
    • Only seven other states offer to pay 90 percent or more of retiree’s health insurance premiums – even after a maximum qualifying number of years of service.[26]
    • North Carolina is one of only ten states that offer retirees a significant health insurance premium subsidy after only 20 years of service.[27]

Reform Recommendations

North Carolina’s State Health Plan is clearly on an unsustainable path. Recent tweaks to the plan are but small steps in the right direction. Much more significant reforms are necessary. Health benefits for active employees are too generous to sustain, and benefits for retirees are even more unsustainable as evinced by the state’s massive unfunded liability. The state is struggling to meet its budget goals now; coming up with the billions needed to fund health benefits as they now exist would impose a crushing burden on the economy and taxpayers.

Reforms would also benefit workers, for the current plan sets up expectations that will be impossible to meet. There are options that would still offer state employees good benefits, and even improvements in the plans, while ensuring that the plan is sustainable. North Carolina lawmakers would be wise to implement the following reforms to the State Health Plan for active employees and retirees:

• Require state employees to contribute 10 percent of the cost of their SHP enrollment in the 80/20 plan, and 5 percent for the 70/30 plan. The new contribution rate for the 80/20 plan would be roughly twice the current contribution rate, while this would mark the first time state employees would be asked to contribute to the 70/30 plan. This new contribution arrangement would cost state employees roughly $43 and $22 per month under the current premium costs of the plans, respectively.
  • As noted previously, these contribution rates would still be far below averages for large private sector employers, and less than average contribution rates for state and local government workers in the south Atlantic region.
  • Based on purely static analysis from enrollment figures of active employees from Sept. 2011, the new contribution rates would save taxpayers about $81.5 million annually.[28]

 

• Require eligible state retirees to contribute 15 percent and 30 percent of the premiums in the 70/30 and 80/20 plans, respectively. This would be up from zero and 5 percent. In dollar terms, that would mean non-Medicare retirees would contribute $64.90 and $129.80 (up from $22.76) per month for enrollment in the 70/30 and 80/20 plans respectively. For retirees also on Medicare, that would translate into monthly contributions of $50.44 and $100.88 (up from $10.52) for the 70/30 and 80/20 plans. These are fair and reasonable goals, considering how the current benefits stack up against what most other state government and private sector retirees receive from their health plans.
  • Recall that very few large private sector employers offer health benefits to both active workers and retirees at all, and of those most require full or a significant share of premiums to be paid by the retiree.
  • Roughly 70 percent of other states require retirees contribute a significant share towards their health insurance premiums, and fourteen states contribute nothing for retiree enrollment into their state health plan.[29]
  •  Based on a static analysis using the same data as above, immediate savings from the new contribution rates would total $302 million annually.[30]

HSA Option

Another significant factor contributing to the unsustainable growth of the SHP is the rising cost of the insurance premiums. Recent estimates suggest the SHP’s premiums will increase more than 12 percent in the 2011-12 two-year biennium alone.[31]

However, high deductible health plans in tandem with health savings accounts (HSA) have proven to significantly curb the growth rate of health insurance premiums where they have been implemented.[32]

Offering a high-deductible insurance plan coupled with a health savings account (HSA) can help save the state millions. Moreover, it offers state employees the opportunity to build up thousands of dollars of savings to use for medical expenses – savings that they own whether or not they continue to work for the state.

Such plans also may offer features that are popular with workers. The most notable state government to offer high-deductible plans with an HSA is Indiana. The state began to offer such an alternative to state government workers in 2006. The initiative quickly gained in popularity, and by 2010 70 percent of state workers had enrolled in the option.[33] Enrollees in Indiana’s HSA plan are highly satisfied, only 3 percent had opted to return to the state’s PPO option as of 2010.[34] That shows how an HSA can be a plus for workers, too.

In short, under Indiana’s HSA plan, enrollees participate in a high deductible insurance plan which features a much lower premium. In exchange for the exposure to the high deductible, the state deposits $2,750 per year into a health savings account controlled by the employee, out of which they can pay their health bills for routine preventive check-ups, prescriptions, co-pays, etc.[35]  The state, in turn, covers the entire cost of the premium.

On net, the cost to the state likely ends up lower because the low premium combined with the HSA contribution is still lower than the high PPO plan premium.

The result of Indiana’s experience has been a substantial win-win for state employees and taxpayers. As of 2010, state employees participating in the HSA plan had accumulated a total of $30 million in their HSA accounts – an average of $2,000 per employee.[36] Only 6 percent had used their entire account balance. The accumulated HSA savings are owned by the employee, and can be taken with them even if they decide to stop working for the state.

Moreover, the savings to taxpayers has been significant. Consulting firm Mercer calculated that the state’s total health coverage costs were reduced by 11 percent due to the introduction of the HSA option, for a savings of at least $20 million in 2010.[37] And it should be noted, these savings were accumulated by an Indiana state workforce of only 30,000 – meaning the savings potential for North Carolina’s much larger SHP would be far more significant in dollar terms.

Yet more potential for savings for North Carolina state employees courtesy of an HSA plan involves coverage for dependents. Currently, workers pay the full premium for the cost to add dependents onto the SHP.  This leads to a substantial share of state employees opting not to add dependents onto the plan, leaving out many children from the plan. With an HSA option, however, children become much more affordable to insure. And by adding more children – typically very inexpensive to cover – into the SHP risk pool, premiums will tend to drop even further.

In closing, North Carolina should also offer a high-deductible health plan combined with a health savings account option for state employees and dependents. The savings could be significant, as the example of Indiana shows. For instance, if we assume North Carolina experiences similar enrollment rates and thus reaps 11 percent health care cost savings for state employees alone, the state would enjoy savings of roughly $138 million per year.[38]

Conclusion

For too long, state government has promised more health care benefits to employees and retirees than it can deliver. By acting now to create a health plan for the real-world, however, North Carolina can avert a fiscal disaster while treating workers fairly.

Asking state workers and retirees to merely chip in a minimal amount towards their premiums can secure the long-term viability of their health care benefits, while still leaving intact a benefit package more generous than other state governments and large private sector employers. The addition of a high-deductible plan accompanied by a health savings account as an option can likewise save the state millions while offering state workers additional options that may be right for their situation.

Elected officials in North Carolina owe it to its citizens and to state workers and retirees to implement sensible reforms to ensure fair coverage that doesn’t punish hardworking taxpayers. To kick the can further down the road would be irresponsible.