The State Health Plan for Teachers and State Employees faces a $515 million budget shortfall over the next two years and a $30 billion unfunded liability over the next 30 years. Lawmakers hope to balance the budget by making state employees to pick up more of the tab and by placing the plan under the supervision of the state treasurer.

Senate Bill 265, State Health Plan Appropriations and Transfer, calls on teachers and other state employees to pay for the first time a monthly premium for their health insurance — $21 for the plan offering the best coverage and about half that for the basic plan, amounting to roughly 5 percent of the cost of coverage.

Senate President Pro Tem Phil Berger, R-Rockingham, noted in a press release that private-sector employees almost always are expected to pay premiums for their health care. In addition to a monthly premium, the bill would increase deductibles and co-pays for office visits and prescription drugs.

The legislation, which passed the Senate by a 29-16 vote Monday night, has divided the two largest public employee organizations in North Carolina. The North Carolina Association of Educators staunchly opposes the bill, while the State Employees Association of North Carolina largely supports it.

In a press release (PDF), SEANC said, “the positive portions of this bill far outweigh the negative.” Among the sections the employee group supports include:

• The creation of an oversight board, headed by the state treasurer, on which state employees would have four of eight seats.

• The end of cost-plus contracts “that allow million-dollar bonuses for big insurance CEOs.”

• The removal of penalties in the health plan for participants who have high body mass index scores or use tobacco.

SEANC called the premium unfortunate, but inevitable.

“When the governor and both houses of the legislature are in solid agreement on an issue, that issue will be nearly impossible to defeat,” the press release said.

The press release goes on to criticize the NCAE for its opposition to the bill, saying the premium is a small price to pay for a bill that will give state employees “a strong voice and real ability to reclaim the State Health Plan.”

Oversight

Until now, the executors of the state health plan have had little to no oversight. They were expected to make periodic reports to a legislative committee, but the committee didn’t meet often and may not have known what questions to ask.

This lack of oversight may have allowed the health plan to get into serious financial trouble. In December 2008, the manager of the plan, George Stokes, reported to the General Assembly that the plan was on track financially, predicting a $25 million surplus. A few months later, Stokes reversed course, reporting a $200 million deficit, which turned into a $400 million deficit by the end of the 2009 fiscal year, and an additional $300 million deficit projected for 2010.

“They were running into cash flow problems, trying to manage whom they pay when and how they pay it,” said Joe Coletti, director of health and fiscal policy studies for the John Locke Foundation. The General Assembly had to scramble to find the money, Coletti said.

Today, the plan needs $3.6 billion to provide health care to state employees through 2013, and it’s $515 million short. To meet the projected $30 billion it will cost to provide health care to all current state employees from now until their deaths, the state has set aside a mere $500 million.

The state health plan operates on a “pay-as-you-go” basis. Private health insurance companies set aside a large portion of a customer’s monthly premiums while he is young and healthy, Coletti notes, so they don’t have to charge “outrageous” premiums when the customer is older and using more medical services. By contrast, Coletti said the state contributions are basically enough to handle current benefits. Health plan managers don’t even think about how to pay for a retiree’s health benefit “until he’s 55 and starts using it.”

Retirees also are using more care than the plan has expected and the cost of care is higher than expected.

Coletti said lawmakers are setting aside $1.8 billion a year for employee and retiree benefits, which covers current payouts and not much else. That total should be more like $3 billion, he said. Otherwise the plan’s deficit will keep getting bigger and bigger until the General Assembly will have to pay $3 billion a year just to cover current costs.

In addition to coming up with a plan to save money, someone needs to figure out how to make the health plan cost less to run, Coletti said.

But this is not a job for the General Assembly, say Coletti and the sponsors of S.B. 265, which would transfer administration of the plan from a legislative committee to the state treasurer.

“The General Assembly is one of the few legislatures in the country that oversee[s] the state health insurance,” Berger said in a press release March 24.

Sen. Tom Apodaca, R-Henderson, the bill’s sponsor called putting the state health plan in the state treasurer’s hands a “natural fit,” as the treasurer already controls the state pension plan.

Coletti agreed, saying state employee benefits — current health care payments, future health care promises, and pension obligations — should be looked at as a whole and calculated in the same place. This would let the treasurer decide what payments should be made now, how much will be needed in the future, and what comprises “the best combination of compensation,” he said.

Since the treasurer has actuaries and budget experts on staff, Apodaca said the treasurer’s office is better equipped than the legislative oversight committee was to keep track of the plan’s financial health.

“They’ll be able to monitor it on a daily basis, where we only met a couple of times a year,” Apodaca said.

Under the bill, the General Assembly would continue making a general appropriation each year. But it would no longer be responsible for determining the specifics on how the money is spent. The treasurer would have to put together a plan and make it work with the money she is given, he said.

“What we need to be doing is not managing the health plan,” Apodaca said. “We need to be doing legislative matters.”

State Treasurer Janet Cowell agreed.

“Having the Plan under the executive branch is a good way to ensure accountability and good governance,” she said.

Sara Burrows is an associate editor of Carolina Journal.