State Supreme Court rules government retirees had contractual health care right

The N.C. Supreme Court has ruled, 4-2, that 220,000 state government retirees had a contractual right to premium-free health care benefits that had been promised to them. Now a trial court will have to determine whether state changes to those benefits a decade ago violated the contract.

The decision reverses the state Court of Appeals, which had ruled completely against the retirees. But the Supreme Court did not reinstate the original trial court decision. The trial judge had ruled that the state had violated retirees’ contractual rights when it forced them to start paying for health coverage that had been offered for years free of charge.

A change in state law in 2011 blocked retirees from remaining enrolled in a premium-free preferred provider organization health insurance plan that allocated 80% of costs of health care services to the insurer and 20% to the insured.

“It is understandable that the Retirees — who, before 2011, were eligible to remain enrolled in the 80/20 PPO Plan without paying a premium— would perceive being required to pay a premium to remain enrolled in the 80/20 PPO Plan as diminishing their bargained-for rights,” wrote Justice Anita Earls for the Supreme Court’s four Democrats. “[W]e agree with the trial court that the Retirees enjoyed a constitutionally protected vested right in remaining enrolled in the 80/20 PPO Plan or its substantive equivalent on a noncontributory basis.”

That’s not the end of Earls’ analysis. “Nonetheless, the Retirees are entitled to receive only the benefit of the bargain they struck with the State and nothing more,” she wrote. “To prevail on their claims arising under Article I, Section 10 of the United States Constitution (the Contracts Clause), the Retirees must also demonstrate that the General Assembly ‘substantially impaired’ their contractual rights when it eliminated the option of enrolling in the premium-free 80/20 PPO Plan. And even if the Retirees meet this burden, the State must be afforded the opportunity to show that the impairment was ‘reasonable and necessary to serve an important public purpose’ and was thus not in violation of the Contracts Clause.”

Now a trial court will address “numerous genuine issues of material fact.”

“Although the 2011 Act plainly requires the Retirees to pay a premium to remain enrolled in a plan previously offered on a noncontributory basis, many variables besides a premium — such as the size of a plan member’s deductibles and co-pays, and the scope of coverage the plan affords — affect the value of a health insurance plan,” Earls wrote. “Furthermore, in a rapidly changing world of dramatic medical advances and evolutions in how health care is financed, including changes to the State’s overall health insurance offerings that provide new options for retired state employees, it would be unreasonable to expect that the State would maintain the precise terms of the plans it offered in an entirely different era.”

Chief Justice Paul Newby took no part in the case. The other two Republican justices issued a partial dissent from Earls’ majority opinion.

“I agree with the majority that we must remand this case for factual determinations on whether the State substantially impaired a contract and whether such impairment was reasonable and necessary,” wrote Justice Tamara Barringer. “However, because the evidence in the record, when viewed in the light most favorable to the State, creates a genuine issue of material fact as to whether any contractual obligation is present, we should also remand that issue to the trial court for resolution by the fact-finder. Accordingly, I respectfully concur in part and dissent in part.”

Evidence of a contractual obligation is not as clear to Barringer. She cited information provided to state employees and retirees over the years, along with changes to the health care benefit laws.

“While certainly some materials supporting plaintiffs’ position exist, plaintiffs must also admit the existence of other materials that directly contradict the reasonableness of their reliance,” she wrote. “When the entirety of the record is viewed in the light most favorable to the State, the right-to-amend provision, the disclaimers in the booklets, and the constant statutory changes are substantial evidence that could support a finding that plaintiffs did not reasonably rely on a promise of health benefits provided by statute in entering into or continuing employment with the State.”

If there is a contractual obligation, a trial court would have to determine the obligation, Barringer concluded. “[F]or the entirety of the State Health Plan’s thirty-year existence, retirees have never received a health plan at a locked-in, unchanging value,” she wrote. “Rather, retirees received whatever plan the State was then offering to current employees, which varied from year to year. Given this constant variance, the question of what terms would attach to a contractual obligation arising out of plaintiffs’ reasonable reliance is also a genuine issue of material fact, one that the fact-finder should resolve in this case.”

The case started in 2012 with 26 initial plaintiffs, led by retired state Supreme Court Chief Justice Beverly Lake. Class-action certification in 2016 expanded the list of plaintiffs. Lake, the lead plaintiff, died in 2019.

Challengers object to a 2011 law allowing the State Health Plan to charge state workers and retirees a monthly premium for standard health care coverage, known as the Regular State Health Plan. Plaintiffs argue that the state had breached its contract to provide them with premium-free health insurance.

They want the state to resume premium-free coverage and reimburse them for premiums they have paid.

The retirees won an initial courtroom victory in May 2017, but the N.C. Court of Appeals reversed the trial judge and ruled against the retirees in 2019.

The case faced lengthy delays as the Supreme Court tried to determine whether it would have enough justices to be able to hear the case.

A January 2021 court filing revealed that five of the seven sitting state Supreme Court justices had “members of their families who are within the third degree of kinship by blood or marriage and either are or may be members of the plaintiff class.”

Last August, the Supreme Court agreed to proceed with the case, invoking a “Rule of Necessity.” Justices heard oral arguments last October.

The case could have limited impacts beyond current plaintiffs. A 2017 state law ended retirement health benefits for any state workers hired now and in the future.

Still, a ruling in the retirees’ favor would add new costs to the State Health Plan. State Treasurer Dale Folwell’s office oversees the health plan. Folwell has warned about the plan facing underfunding of tens of billions of dollars.