Red Cross for Blue Cross? Massive Shortage in State Employees' Health Plan Forces Damage Control

Updated February 26, 2010

The crisis with the State Health Plan (SHP), which provides health coverage for 667,000 state workers, teachers, retirees and their family members, was discovered, at least in part, prior to the November 2008 general elections. But the Raleigh political class, being the courageous figures we know them to be, left the tough decisions on this matter to 2009’s incoming class of legislators.

It didn't help that state revenues were coming in well below projections at the time. The state budget shortfall was forecast to exceed $2 billion by the end of the fiscal year in 2009.

George Stokes, administrator of the North Carolina State Employees’ Health Plan for the three years immediately preceding the crisis, was fired in July 2008 after lawmakers discovered the unexpected shortfall on the agency's books. Former state health plan director Jack Walker then stepped in to replace Stokes.

In reports to the 2009 General Assembly and the State Health Plan’s board of directors, Walker noted that while original estimates projected a $228 million cash balance for the State Health Plan in July 2008, the actual cash balance at the end of July was only $72 million. Walker blamed the shortfall on dramatic increases in medical and pharmacy claims during the fiscal year.

Managing expenses
It came as no surprise to anyone that the State Health Plan (SHP) had gotten enormously expensive. The SHP became increasingly generous as lawmakers added more and more benefits to its policies, and the growth in costs continues to worsen as the state adds new retirees and  workers to its rolls. Lawmakers have known for some time that something had to be done to contain expenses.

North Carolina state employees and retirees comprise a huge health insurance pool, large enough to operate as a self-insured health insurance fund. In 2006, Stokes, who was hired to manage the SHP after presiding over two other failed health plans, believed that he could help alleviate skyrocketing costs by creating a Preferred Provider option within the SHP. The idea was that Blue Cross, the SHP's third party administrator, would negotiate cheaper rates with providers for the PPO and the new plan would encourage participants to use wellness benefits, all of which would result in lower costs.

Sadly, those savings never materialized. And while it’s true that Stokes failed to report the escalating problem to the legislative committee charged with oversight over the SHP, it’s also true that the committee members didn't ask.

A problem with oversight
State lawmakers, who must address the continuing of the SHP, had been expecting a $50 million surplus for the plan for fiscal 2008-09.  Instead, the plan reported an initial shortfall of $65 million. At the time, SHP officials projected that the health insurance program would run out of money by March 2009 and lose more than $240 million by the middle of 2009.

The critical funding shortfall came as a shock to almost everyone. But since the SHP is a self-insured plan, then-North Carolina Insurance Commissioner Jim Long was helpless to intervene, since he did not have direct authority over the health plan’s operations.  Any further financial examination of the state health plan administration would have to be ordered by the legislative committee which is charged with providing oversight of the health plan.

The Committee on Employee Hospital & Medical Benefits (§ 135‑43.1.) is comprised of the Speaker of the House, the President Pro-Tempore of the Senate, and their appointees, resulting in a powerful group indeed. Though a non-standing committee, it is required to meet once each quarter. But the committee and the associated State Health Plan Administrative Commission (§ 135‑43.2.) met rarely, apparently trusting oversight decisions to the Health Plan administrator and the plan’s Board of Trustees.

State Auditor steps in
In mid-2008, then-State Auditor Leslie Merritt announced that his office would conduct a performance audit of the NC Teachers’ and State Employees’ Comprehensive Major Medical Plan (SHP). Performance audits are reviews of activities and operations for the purpose of evaluating whether resources are being used economically, efficiently, and effectively and whether the desired operating results are being achieved.

“This audit was prompted by the $115,000,000 disparity between the initial forecast and the current projection and will focus on oversight and financial forecasting,” Merritt said in a written statement.

In the audit completed in October 2008, Merritt blamed the health plan’s problems on “inadequate and ineffective” oversight, recommending that the General Assembly place the SHP under the authority of an executive branch agency to ensure proper operational and financial oversight.

“Thirty-five states operate their state health plan under an executive branch agency and thirteen states operate their health plan under boards of trustees,” wrote Merritt. “But the primary authority over North Carolina’s Health Plans is a legislative body – the Legislative Committee on Employee Hospital and Medical Benefits." Merritt added that he believed that the legislative committee's influence may be in violation of the state constitution's Separation of Powers clause, creating the potential for undue political influence in the Plan’s administrative decisions and contract negotiations as well as the opportunity for conflicts of interest.

Perhaps stung by criticism of the legislative committee’s complete lack of hands-on oversight, House Majority Leader Hugh Holliman (D-Davidson) and Senate Rules Chairman Tony Rand (D-Cumberland), co-chairs of the committee, decided that they wanted out.  In 2008, the two wrote to then-Commissioner Long, requesting a change in leadership for the health plan.

Damage control
Lawmakers departed the 2008 session of the North Carolina General Assembly with a keen awareness of the dilemma, but without taking any action to address it - and all of the subsequent analysis did nothing to solve the problem. By December of 2008, the State Health Plan went into emergency mode, withholding $45 million in payments to vendors in anticipation of action by the 2009 legislature.

Legislators were quick to suggest tapping into the state's Rainy Day Fund to pay SHP vendors, but the results of a January 2009 Civitas Institute poll indicated that taxpayers would prefer solving the problem by requiring state workers to contribute to their own premiums, rather than spending taxpayer dollars to bail out the SHP (state employees pay for dependent premiums, but pay nothing for their own insurance).

“With the specter of a $2 billion budget shortfall looming, voters in North Carolina feel state employees should carry the load of fixing their own health plan,” stated Francis De Luca, executive director for the Civitas Institute. “As the economy has tightened, North Carolinians have to assume a greater share of the cost of health insurance. It appears that voters think state employees should not be exempt from that cost sharing.”

State workers, of course, disagreed.

The fallout
Lawmakers who faced the immediate crisis – where to come up with $300 million immediately to cover the $45 million in overdue payments to providers and keep the plan solvent through the June 30 end of fiscal 2009 – were relieved when Governor Beverly Perdue offered up the cash from the Rainy Day Fund in March 2009.  Meanwhile, lawmakers worked feverishly to come up with a longer-term fix – roughly $1.2 billion to fund the SHP for the 2009-10 budget biennium.

The options weren’t attractive, particularly for plan beneficiaries who had come to expect low-cost, benefit-rich health insurance from the state’s taxpayers. Under the proposal, premiums for state employees would be increased by 8-percent annually.  Other possible changes included:

• Increasing co-pays for plan participants (state workers and retirees);
• Increasing premiums for dependants;
• Increasing deductibles and co-pays for plan participants;
• Requiring maintenance prescriptions - those which are taken for chronic conditions - to be purchased through cheaper mail-order pharmacies, likely from out-of-state.
• Placing smokers and obese workers in a separate, more expensive plan.
• Reducing or eliminating some benefits altogether; and
• Increasing spending for the plan by raising taxes or transferring spending from elsewhere within the state budget.

As debate began, lawmakers immediately faced the wrath of the state employees’ & teachers’ “unions” (SEANC/SEIU & NCAE), on whose dollars they relied heavily during the 2008 elections. At a rally in front of the legislative building in February 2009, SEANC/SEIU leaders demanded that lawmakers fix the problem without imposing premiums or reducing benefits on state employees.

The rally angered many who believed that the time had come for those workers to take a look at what is happening in today’s economy. While millions of private sector workers are losing their jobs (including benefits) – and millions more are either paying a larger share of premiums or losing health insurance entirely as employers struggle to cut costs enough to retain their jobs, North Carolina’s state workers are lucky indeed to have health insurance coverage at all … and at taxpayers’ expense.

Adding to the fray were North Carolina's independent pharmacies, who balked at a mail-order prescription proposal, which would hurt their businesses while reportedly saving the SHP $90 million.

An alternate view
One veteran legislature watcher had a different take on the whole ordeal.

“State lawmakers often look for an April surprise, a boost or sudden downturn in state tax collections that can make putting together a state budget easier or more burdensome, depending on the result. [In 2008], lawmakers got a July surprise. They learned that a surplus projected for the State Health Plan, which insures state employees and retirees, would instead turn into a shortfall that could reach $140 million,” wrote Scott Mooneyham, a syndicated columnist.

Mooneyham recommended that 2009 legislators turn to the state health plan’s operator – Blue Cross Blue Shield. He pointed out that Blue Cross has $1.3 billion in reserves, more than the state of North Carolina. And while the SHP was running into financial trouble, Blue Cross earned $61 million in the first quarter of 2008.

“Blue Cross, after all, isn’t a private health care insurer. It’s a nonprofit. It wasn’t created to make money. It was created to help teachers and others who couldn’t afford health care enter into pre-payment plans so they wouldn’t be destitute when serious illness struck,” wrote Mooneyham. ”It thrived only through favorable tax treatment by the state.

Now it’s time, says Mooneyham, for the insurance behemoth to help the state.

Contract re-negotiation
While BCBSNC holds the vast majority of North Carolina’s fully-insured market, the State Health Plan is a self-insured fund for which BCBS simply serves as third-party administrators (TPA’s) for the state’s pool of money allocated for health insurance. In light of the enormous profits reported by BCBSNC for the fiscal year ended June 30, 2008, Mooneyham may have a point.  During that year, the State Health Plan paid BCBSNC $97.5 million, or roughly $10 per claim, for processing.  That's 18 times what the state pays Electronic Data Systems, or 57-cents apiece, for processing Medicaid claims.

Conveniently for BCBSNC, which boasts one of the state's more powerful lobbies, lawmakers had exempted BCBS from open bidding laws at the time the contract was awarded, and Big Blue holds the contract through 2013.  Could that contract be renegotiated? 

As it turned out, even while the issue was under debate, the terms of a new contract amendment between SHP and BCBSNC, which had been drawn up late in 2008 but withheld from the public, were released.  Under the new agreement, BCBSNC began billing the SHP $15.15 per insured individual per month for claims processing - a figure that could potentially net BCBSNC $121.3 million annually.  According to Jack Walker, that figure is roughly $1.15 per individual higher than the average that other states pay, but not unreasonably out-of-line.

Other cost drivers
Unfortunately, though, administrative fees aren't the only problem. Over the last two decades, North Carolina lawmakers have heaped mandate after mandate on fully-insured (i.e. non-self-insured) health insurance policies, creating a regulatory environment which has caused employer-sponsored health insurance benefits to plummet. But while the self-insured SHP is not subject to these government-imposed mandates, lawmakers have chosen to adopt those regulations and more for the SHP, increasing its costs dramatically.

In a report to a legislative panel in February of 2008, fiscal analyst Mark Trogden stated that $1.2 billion  would be needed for the SHP through the year 2011.  Trogden suggested that “a menu of benefit reductions, premium rate increases and other operational changes would have to be seriously considered” to maintain the solvency of the SHP.

Individual control over spending?
Today, private employers, most of who are too small to qualify for the less regulated self-insured market, are struggling simply to retain jobs for their employees, and workers who are surviving in today’s economy with their private-sector employment intact are increasingly likely to be without health insurance benefits. As individuals take over their own coverage, they are discovering just how unaffordable health insurance can be – with more and more of the state’s citizens choosing to join the ranks of the uninsured.

Perhaps another route should be considered, both for private-sector individuals and for state employees.

Studies have shown that health insurance plans in which the insured individual has the ability to decide when, where and how their health care dollars are spent result in considerable cost savings, as people thoughtfully choose their health care providers, select generic drugs, study their bills for accuracy, and reject unnecessary costs. These plans are termed “consumer-driven” health plans because the consumer (the insured individual), rather than the insurance company, manages his or her own health care spending. These programs can take several forms, such as Health Savings or Health Reimbursement Accounts – and employers, including the State of North Carolina, can play a role in providing funding for benefits at much lower costs.

Lawmakers continue to neglect considering the benefits of consumer-driven health plans for the state workers and retirees, probably because the change is too dramatic.  But something must be done to contain costs, and that’s going to take both the courage of lawmakers and the full and active cooperation of the state's employees, who must take careful individual responsibility for the management of their health care spending. By engaging everyone in a consumer-driven health care delivery system, precious dollars can be saved – both for state workers and the taxpayers who pay for their benefits.

Summary
While the debt grows, the debate continues. In February 2010, an analysis by Aon Consulting concluded that the North Carolina state health plan had the lowest claims costs per member per month when compared with Georgia, Tennessee and Virginia. But it also noted that NC is the only state of the four that charges no premium to active members, and only NC includes community college and university employees in its plan.

As it now stands, the plan is expected to exceed its revenues by $500 million during the fiscal years 2011-2013, with no resolution in sight.