Four months after finding that the State Employees’ Health Plan was on track to finish the fiscal year $264 million in the red, N.C. legislators yet have to agree on a plan to stop the bleeding.
While the plan’s administrators struggle to find ways to economize, the Senate’s No. 2 lawmaker, Tony Rand, is trying to develop a long-term fix to the problem — a fix that will most likely involve higher premiums and co-pays for the 650,000 teachers and state employees who depend on the plan.
Legislative leaders found the projected shortfall in June as the General Assembly was deep into negotiations over the state’s 2008-09 budget. At that time it was thought that the plan’s deficit would be about $60 million. The plan’s executive administrator was fired, and a new one, Dr. Jack Walker, was hired with the mandate to sort out the mess.
By mid-July, Walker reported that the hole actually was much deeper than anyone had imagined. Rand, chairman of the Senate’s Select Committee on Employee Hospital and Medical Benefits, quickly convened meetings with key lawmakers and representatives of interested groups to discuss possible solutions, but an impasse developed over how to cover the costs.
Members of the House wanted to use money from the state’s Rainy Day Fund, while senators argued that premiums and co-pays should be increased as soon as possible. Neither side would budge, and since the plan was projected to remain solvent at least through December, leaders in both chambers decided to defer action until a more thorough audit could be completed by the new executive administrator in the fall.
On Sept. 14, Walker presented his report to lawmakers in a conference room packed with anxious lobbyists. His conclusion: If no changes were made to premiums, co-pays, and plan options, the plan would need an infusion of as much as $800 million to make it through the 2009-11 biennium. Walker also told the committee that without changes, the plan might need an extra $325 million by January to avoid defaulting.
According to Walker, the crisis originated in a series of errors that were made in the implementation of the Preferred Provider Organization plan in 2006. When the new plan was still on the drawing board, administrators sought input from an outside actuarial firm to determine how much it would cost to provide the desired types and levels of coverage. The premiums that were charged to participants in the plan were based on those figures.
Many of the assumptions used by the actuarial firm to develop its usage model turned out to be faulty. The number crunchers badly over-estimated the discounts the plan would receive from the preferred health-care providers.
Members took advantage of outpatient services at a rate 13 percent higher than anticipated, and wound up paying about 35 percent less in premiums and co-payments than was needed for the plan to break even.
At the same time, health-care costs were increasing nationwide, although Walker told the committee that the cost increases in North Carolina “were not out of line with what is happening across the nation.”
Walker’s report indicated that it would take a premium increase of 32.8 percent to 37.4 percent, depending on usage and inflation, to make the plan solvent again. But there seemed to be little appetite among the legislators present to discuss raising premiums, and no plan of action was put forward.
Since then Walker has made several administrative changes to the plan to save money, dropping an exercise incentives program that had proven to be inefficient, and making better use of in-patient mental health and substance abuse programs. According Rand, whose committee oversees the plan, administrators constantly look for ways to make the plan more efficient, but that the changes they can make without legislative authorization are incremental, at best.
In an interview Oct. 21, Rand suggested that the sooner premiums and copays are raised, the lower the increases would need to be. He also said that the legislature would “have to take a look at reimbursement rates” and noted that he has “long proposed that people who smoke should pay a premium.”
While Rand and others look for a long-term solution, other factors are coming into play. On Oct. 15, State Auditor Les Merritt released a report on the health plan that called its oversight “inadequate and ineffective.” While Merritt’s report did not try to pinpoint blame for the health plan’s crisis, it did point out a number of problems with the governance structure of the plan that could have contributed to its fiscal problems.
According to Merritt’s report, the plan’s executive administrator is free to conduct daily operations for long periods of time with little, or no, supervision. In theory, the plan is governed by a board, but the board receives only limited financial information and lacks the power to hire or fire the executive administrator, or even to evaluate his performance or set his salary. The real power behind the plan is Rand’s Committee on Employee Hospital and Medical Benefits, but according to Merritt the committee does not meet often enough to provide adequate managerial oversight.
Merritt also concluded that having a legislative committee run‚ what should be, in his view, an executive branch operation could be a violation of the State Constitution’s separation of powers‚ clause. He also cited the potential for undue political influence in the plan’s administrative decisions and contract negotiations, and the conflicts of interest that could arise from such tight legislative involvement. His report recommended that the plan be put under the authority of an executive branch agency, or that the board be given full authority to oversee the functioning of the plan.
Asked for comment about the auditor’s report Rand said that there may be a bit of politics involved and noted, “It’s that time of year.” Taking issue with the auditor’s concerns about the plan’s governance structure, he said. “I don’t see how it violates the separation of powers clause.” The legislature has “absolute authority” to appropriate money, he said, and given the nature of the plan and the money involved, legislative control is “about the only way I see to do it — it has to be that way.”
Jim Stegall is a contributing editor of Carolina Journal.