RALEIGH – North Carolina’s health plan for state employees and teachers is in dire straits.

In recent years, costs have run hundreds of millions of dollar above projections, leading to premium hikes and benefit reductions. Because the state writes the check for the employee premium but the employee writes the check for any dependent coverage, the plan’s enrollment base is heavily skewed in favor of older individuals with significant claims – with the resulting high premiums chasing younger dependents out of the plan, thus creating a vicious circle.

At the same time, the state health plan retains an archaic insurance model at a time when millions of Americans are moving towards consumer-driven health care, in which patients are encouraged to spend cash on routine, low-dollar medical expenses and insurance is limited to its proper role of covering low-probability, high-cost events such as hospitalizations. CDHC plans typically mix high-deductible health insurance with individual health savings accounts (HSAs) into which both employers and employees put tax-free dollars.

Until President Obama and the Democratic Congress manage to destroy consumer-driven health care – which is one of their prime goals in the legislative monstrosity they are now concocting behind closed doors in Washington – states with problems like North Carolina’s should be considering HSA-based options to deal with problems in their health plans for teachers and state employees.

Fortunately, there’s no need to speculate about how a state might proceed with the task. Indiana has already done it.

Under the leadership of Gov. Mitch Daniels, Indiana’s state government moved aggressively into CDHC starting in 2005. Daniels enrolled his own family in a high-deductible plan with an HSA and then sent a letter to all state employees explaining the benefits of it. The following year, 2006, the governor introduced a CDHC option into the state health plan. Participants received health insurance with a $2,500 deductible for individuals and $5,000 for families. As employees enrolled, the state took its premium savings and make direct deposits into employee HSAs – $1,500 for individuals and $3,000 for families.

Because the previous plan already included deductibles and copays, there wasn’t a significant increase in out-of-pocket costs to state workers. Indeed, considering the fact that without reform Indiana’s health plan would surely have required additional premiums and benefit cuts to stay in balance, there probably wasn’t much of a net increase at all.

The real difference was that the new CDHC plan changed the incentives. Rather than being rewarded for meeting the low deductibles early in the year and then consuming services at someone else’s apparent expense, state workers had financial incentives all through year to consume care wisely – to shop around for the best price, to buy generics and use lower-cost providers when possible, and to forego low-priority services.

The upshot is that in Indiana, half of all state employees have HSAs, compared to only 2 percent of employees in the average state. Net of its deposits into employee HSAs, the state of Indiana has saved $42 million and expects to save far more in the future as lower utilization translates into lower growth in plan costs.

Joseph Antos, a health policy analyst at the American Enterprise Institute, commented on the Indiana case to the monthly journal Health Care News (not yet online): “HSAs give people a real reason to ask their physician, ‘What is this procedure likely to cost?’ or ‘What is the effectiveness of this treatment you are recommending versus this other treatment for me?’”

That’s certainly a big part of the reason why such plans work. It would be great if North Carolina could learn from Indiana’s example and use consumer-driven health care to help fix our state health plan. Unfortunately, it will all be impossible if ObamaCare passes, as its new taxes and regulations will destroy HSAs.

On purpose.

Hood is president of the John Locke Foundation