Rising health care costs might impact benefits for state employees. Here’s what to know
Since becoming North Carolina’s treasurer in 2017, Dale Folwell has energetically asserted that rising health care costs could significantly impact the State Health Plan.
It’s gotten to the point that lawmakers are considering a request from Folwell to force hospitals to cut what they charge the plan — or face shutdowns.
The plan, which Folwell’s office oversees, serves roughly 740,000 state employees, teachers, retirees and their dependents.
Adequate funding for it matters because it helps keep premiums low, co-pays at bay and benefits robust, he told The News & Observer.
If health care costs keep rising without adequate funding, Folwell said his office won’t be able to “hold the dam in terms of freezing family premiums and deductibles or copays,” which he said has been a priority for him.
Nationally, health care costs have increased faster than those in almost any other economic sector, according to the Peterson-KFF Health System Tracker, which monitors the U.S. health system. From 2000 to 2021, health spending tripled, to $4.3 trillion, according to the tracker.
About half of that growth in spending can be attributed to hospital costs.
Is there a funding shortfall?
The revenue for the State Health Plan mostly comes from premiums paid by employees and contributions paid by employers, including state agencies, school systems, universities and community colleges.
The state, via the budget, funds the employer contributions for active state employees and qualifying retirees.
The State Health Plan had a cash balance at the end of May of $796.6 million. This was well above the target stabilization reserve, set at $359.9 million. This reserve is meant to tackle any unexpected costs and hiccups.
If the plan’s revenue increases by more than 18% from this year to 2027, and health care expenses grow by over 28%, there would be a nearly $1 billion deficit, according to an analysis by The N&O of a report by The Segal Group.
In that scenario, reserves would be wiped out. Sam Watts, the interim administrator for the plan, said that’s cause for worry.
“We have to ensure that we have sufficient funds to pay the claims from our members,” Watts said. “We have to have sufficient reserves in the event of any type of emergency or fast-changing need, whether it be a natural disaster or anything else that causes high utilization of health benefits,” he said.
What about retiree benefits?
In terms of retirees’ health benefits, the state health plan has a $23.75 billion liability, according to a June 2022 report from The Segal Group. This is in addition to a $7.6 billion liability amassed by local governments, Folwell said in a June press release.
This means taxpayers today are paying for medical care and prescription drugs for retirees.
David Draine, principal investigator for Pew’s research on public sector retirement systems, said North Carolina, “has significant underfunding of the retiree health care plan,” and fares worse than many other states.
For Draine, a reason North Carolina and some other states have large liabilities is that they did not pre-fund the plan by setting aside money when workers were employed, and “suddenly a cost that might have seemed relatively minor as a share of the budget, decades ago is now growing at the same rate as healthcare inflation.”
“It’s a pay now or pay later situation. If you’re going to keep these benefits for the people currently in the system, a shortfall today is an amount that needs to get paid in the future,” he said.
In 2006, the state raised the number of years of employment needed to qualify for retiree health benefits from five to 20 years. In 2017, they eliminated health-insurance coverage in retirement for employees hired after Jan. 1, 2021.
This means “over time, the benefits promised to current workers and to existing retirees get paid off. And if the state is able to maintain the pay as you go, eventually that liability goes away,” he said.
Still, “there’s a long lag” with “what’s been promised today, there’s claims being paid out, eight years from now,” he said.
For Timothy O’Connell, the executive director at the North Carolina Retired Governmental Employees’ Association, the state’s health liability is “is an issue not to be made light of, but at the same time, how do you attract the talent pool to keep one of the top performing states, in the country, economic and in many other fashions running.”
“That’s the greater question of all these changes, between the health plan and the pension plans: What is being pulled back from employees?” he said. “How are they going to retain them in a competitive industry, environment?”
How much funding will the state provide this year?
The state budget is still being worked out between the House and the Senate, with no deal expected until August or later.
The treasurer’s department requested budget writers fund the State Health Plan at $4.15 billion in 2023-2024 and $4.49 billion in 2024-2025, according to Watts.
“That will meet the needs in the short run,” Watts said.
The House proposal fully funded the request, while the Senate called for providing $4.10 billion in the first year and $4.29 billion in the second year, Watts said.
The Senate, in its proposed budget, also included a provision requested by the treasurer that requires certain hospitals to meet a savings target set by state lawmakers for cutting costs to the State Health Plan, or risk being shut down.
The proposal by Senate Republicans wouldn’t kick in until 2026. The annual statewide savings target for that year is $125 million, according to the budget.
On funding for the retiree health liability, the House included $33 million to address the billion-dollar hole.
Watts said based on the funding this year for the State Health Plan, “the General Assembly is stepping up. I mean, they’re doing what needs to be done to pay for the benefits for employees and teachers.”
Suzanne Beasley, a lobbyist with the State Employees Association of North Carolina, said underfunding was a “valid concern” and that “at some point, we’re gonna go in the opposite direction with the State Health Plan and it’s not going to be solvent anymore.”
This insolvency “certainly would increase all kinds of costs for the members of the State Health Plan, if it could even be sustained,” she said, and “the state workforce doesn’t make the kind of money to pay those exorbitant costs,” with family coverage already a “week’s worth of a paycheck for the average state employee,” she said.
Beasley said with vacancy rates in state jobs already so high, a loss of benefits or an increase in their costs could lead to people, especially younger adults, seeking positions in the private industry.
What is being done by the treasurer’s office?
Folwell, a Republican candidate for governor, told The N&O his office had “done all we can” to find health savings for state employees, having saved $700 million as part of a pharmacy benefit contract and billions more in other contracts. Those savings have been used to freeze premiums over the past years, he said.
To increase pricing transparency and reduce the growth rate of health care spending, Folwell said they also implemented a clear pricing project in 2019, which took the power to negotiate rates away from hospitals and set rates based on what Medicare pays providers, plus a 96% average markup.
Most hospitals and providers did not join the pricing project and were allowed to remain under their previous Blue Cross Blue Shield contracts, without becoming out of network.
Without price concessions and savings from hospitals, costs will continue to increase, Folwell said.
So, this year, Watts said they reached out to hospitals and the North Carolina Healthcare Association to discuss ways to save money, but they “slammed the door on us.”
Asked about funding shortfalls for the plan, Cynthia Charles, a spokesperson for the association, wrote that the “the healthcare association and our members have always said that we are willing to meet with the Treasurer to discuss specific ideas for how to improve the state health plan for its members.
“On the topic of under-funding in healthcare, hospitals in North Carolina have a strong case to make that they are under-funded as they continue to provide services that are the lifeblood to patients and communities. Particularly in the past year, hospital margins have been going in the wrong direction, month after month, due to rising costs,” she wrote.
A third-party insurance company, Blue Cross Blue Shield of North Carolina, administers the plan by paying hospitals and providers based on negotiated rates that are kept confidential. This year Blue Cross NC lost the contract it has held for over 44 years to Aetna.
Transparency and technological issues were cited by Folwell as reasons for the change. Pat Ryan, a spokesperson for Aetna, previously told The N&O that the company, as the new third-party administrator, would share provider contracts with the State Health Plan.
