State employee health care is in a $34 billion hole

 In March 2018

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Around the perimeter, razor wire sparkles in the sun, but inside, there’s little cheer at Maury Correctional Institution in eastern North Carolina’s Greene County. One wing here is for those with psychiatric issues, another for the physically sick. There’s one for those with nothing left to lose.

“I worked in the lockup unit where inmates would get upset and throw urine and other stuff at you,” says a former guard. Statewide, on average, a guard is assaulted every shift. “I wasn’t paid enough for the risk.” Entry-level pay is less than $700 a week.

There was one bright spot. “Great benefits,” he says, including health insurance.

Now, that benefit for nearly 500,000 North Carolina state employees and another 220,000 retirees is at the heart of upheaval in the $70-billion-a-year Tar Heel health care economy.

This year, for the first time, even basic health insurance, free for employees such as the prison guard for more than three decades, will end. It’ll now cost $25 a month. While less than many private-company premiums, that expense and other changes are triggering protests from active workers and retirees. Starting in 2021, new hires at Maury and other state agencies will no longer receive health insurance upon retirement.

The pain of cutting benefits is occurring because North Carolina dug itself a $34 billion hole by not reserving money to make good on its pledges to state workers. That’s a contrast with the state’s retirement pension plan, which had $98 billion in assets on Dec. 31, covers 900,000 workers and ranks 10th-best in the U.S. with an 85% funding ratio as of 2016.

Sooner or later, the health-plan deficit has to be addressed, almost certainly at the cost of redirecting money that otherwise would pay for public safety, schools, universities, social services and other programs.

Reducing the deficit also has implications that stretch beyond the highway employees, teachers, patrol officers and others who collect state paychecks. The State Health Plan is North Carolina’s biggest nonfederal purchaser of health care, spending about $3.3 billion a year. It’s suffering, in the view of the state treasurer who oversees it, from years of neglect by N.C. officials and lawmakers.

Bryan Regan

Dale Folwell

The bomb isn’t just ticking, says Dale Folwell, a CPA and former legislator elected in 2016 to mind the state coffers. “It’s actually going off right now.” While the state is spending 4% more on the plan this year, medical claims and drug costs are increasing at a 7% to 8.5% rate, he says.

Folwell promises to bend that curve by marshaling the plan’s purchasing power to jawbone and cajole the state’s hospitals, doctors and other health care providers into helping it climb out of the hole. Members aren’t exempt, either. He’s cracking down on fraud, and he’s pressuring them to repent unhealthy habits — smoking, for one — and snitch on suspicious billing, duplicated tests and unnecessary services.

More than 65% of the plan’s cost is borne by state government, which appropriated $2.26 billion for the plan during this fiscal year. The insured pay the balance. To put that into perspective, Folwell says, “The amount I’m going to spend on the State Health Plan this year exceeds the entire General Assembly appropriation for the state’s university system.” The 17 campuses also receive more than $2 billion annually.

Put another way, spending the state’s entire annual operating budget of $23 billion would cut the health-plan deficit by two-thirds — and still leave a $10 billion gap.

Fortunately, Rome wasn’t built in a day, and North Carolina has years to revive the State Health Plan. Unfortunately, there’s little consensus on how to fix the problem. Politicians, state officials and representatives of active and retired state employees agree that the plan’s future is an emotional, pocketbook issue.

“This is part of an employment package employees have earned because their pay is woefully inadequate,” says Ardis Watkins, chief lobbyist for the 55,000-member State Employees Association of North Carolina. “For almost 20 years, I’ve been lobbying for state employees, and no matter who’s in charge, some in the legislature always seem to believe health benefits are some kind of gift.”

Richard Rogers, executive director of the 70,000-member N.C. Retired Governmental Employees’ Association, adds, “The state needs to live up to its promises.”

However, some legislators who hold the plan’s purse strings regard retiree health care as frosting on state paychecks and have shown more inclination to cut benefits than improve them.

N.C. Sen. Andy Wells, a Hickory Republican, sponsored the legislation to end coverage for newly hired state employees after they retire. He calls the existing plan lavish. “I don’t know of any private-sector employers that provide free health insurance for life for employees who can retire at age 50.” Indeed, fewer than one in five private companies with more than 50 employees offers insurance coverage for retirees over 65, and the number is declining rapidly.

Whether better health benefits are necessary to compensate for lower pay for state employees is a thorny issue. The research on public versus private-sector pay is inconclusive. A 2014 study by the conservative American Enterprise Institute concluded North Carolina public-sector wages were about 13% less than the private sector, and health benefits were about 4% less. Overall, though, it concluded North Carolina public compensation was “market value,” give or take 5%. A similar nationwide study by the employee-oriented Economic Policy Institute concluded public employees in right-to-work states such as North Carolina had average wages that were 14% lower than private-sector workers.

One of the plan’s undisputed problems is what Folwell calls “the blessed event” of longevity. “In the mid-1970s, we were sending pension checks to 248 90-year-olds,” he says. Nearly all were also on the State Health Plan. “Last month, it was 7,100.”

Reforming the plan is likely to touch all Tar Heels, because hundreds of millions of dollars of cuts in what he calls bloated health care costs are likely to be passed on to other customers. Folwell sees lots of potential cost trims. He cites differences in what hospitals charge for procedures. An example is implanting heart pacemakers, which a federal study found can run more than $90,000 at Duke University Medical Center in Durham — and $35,000 at The Moses H. Cone Memorial Hospital in Greensboro. He’s encouraging medical tourism, in which State Health Plan patients seek out hospitals with lower charges.

Results of Folwell’s arm-twisting appear evident already. “Our goal is to always negotiate the best possible health care prices for our customers, and with the state of North Carolina our largest customer, they’re a big part of that,” says Austin Vevurka, spokesman for Blue Cross and Blue Shield of North Carolina Inc., which insures about 3.9 million people in the state. Blue Cross acts as a third-party administrator for the state, receiving about $80 million a year to run the self-funded plan. The state bears the insurance risks, while Blue Cross negotiates with hospitals, doctors and others and then pays health care bills with the plan’s money. Folwell wants Blue Cross to get tougher, and Vevurka says it’s happening. Last fall, Asheville-based Mission Health, the dominant health care provider in western North Carolina, stopped accepting Blue Cross insurance because it deemed the reimbursement rates insufficient. (See interview with Mission CEO Ron Paulus, Page 48.) Perhaps the thorniest hospital-versus-insurer fight in state history, the matter was settled in December. Few contract details have been disclosed, so it’s unclear if the State Health Plan’s initiatives played a role.

Folwell is also paying close attention to the proposed collaboration between Charlotte-based Atrium Health, formerly Carolinas HealthCare System, and Chapel Hill-based UNC Health Care, which would combine the largest hospital groups in the Triangle and Charlotte. He expresses skepticism about the deal’s benefits and criticizes the lack of disclosure by hospital officials. No details had been unveiled as of mid-February, though Folwell has requested that Atrium and UNC post a $1 billion bond that would compensate the State Health Plan if costs rise.

In a January statement, Blue Cross Chief Executive Officer Patrick Conway criticized the combination, noting that hospital mergers typically lead to cost increases. To which Dale Jenkins, chairman of UNC Health’s board of trustees, said, “Done properly, consolidation can improve outcomes and costs.”

The man who’s inherited the health-plan deficit is a finance wonk who’s no stranger to strangled budgets or the health care industry. Folwell’s 7-year-old son was killed by a car as he boarded a school bus in 1999, a tragedy that has inspired his work ever since. While serving in the General Assembly from 2004-13, he promoted legislation fostering organ donation, concussion research and similar medical issues. A Winston-Salem Republican who had an early job as a garbage worker and later became a financial adviser, he was House speaker in 2011-12. A year later, then-Gov. Pat McCrory tapped him to head the state’s Division of Employment Security. In a typically low-profile post, Folwell instituted tighter oversight of welfare spending and enforced the General Assembly’s decision to reduce the maximum amount and duration of unemployment benefits to align with neighboring states. Within three years, North Carolina’s $2.5 billion debt to the federal government turned into a $1 billion surplus, aided by a stronger economy that cut the jobless rolls.

The health plan is a far bigger, more expensive challenge. “How did we get here, and why are we sounding the alarm?” Folwell asks, then answers with a quip from a billionaire investor. “Warren Buffett said, ‘It’s hard to tell who’s naked until the tide has gone out.’ Well, the tide has gone out.”

The State Health Plan was born in 1972 in the era of bell-bottoms and rotary telephones, when the General Assembly told retirement systems for teachers and state employees to spin off health coverage. It asked the systems to kick in $10 a head, per month. The impetus, says Weaverville’s Ed Sheary, who began as a librarian in the early 1970s and retired as director of Buncombe County’s library system in 2014, was simple.

State jobs, which paid lower wages than comparable private ones, were sweetened with health insurance and other perks to get and keep good employees. “Benefits were historically aimed at that and reducing turnover,” says Sheary, now a library consultant. “Turnover is awfully expensive.”

As competition for workers heated up, benefits grew more generous. In 1978, during Gov. Jim Hunt’s first term, lawmakers decided the state would foot the entire bill for retiree health care. Two years later, the General Assembly created the self-funded State Health Plan, paying all costs for active employees.

The politics were clear. Traditionally, well-organized state employees and retirees were a strong voting bloc for the Democrats who ran state government for generations. How to pay for the plan was less clear, complicated by, among other things, a scarcity of actuarial statistics. It wasn’t until 2005 that the state produced its first official estimate of the program’s long-term cost: $23.8 billion. Thirteen years later, the deficit has increased more than 40%.

“These plans never anticipated an employee base in which employees could literally be retired longer than they worked,” Folwell says. “You graduate from college when 22, work 30 years and, particularly if you’re female, you will be retired longer than you worked.”

Prior to 2011, the health plan was controlled by a General Assembly oversight committee that lacked day-to-day control and executive authority. While the state is now spending about 3% of its general fund on current retiree health care costs, the deficit mounts because legislators haven’t reserved for the longer term when more retired workers will live longer and require more medical care. The inaction passes the health-plan buck to later generations.

“It’s other people’s money,” says Folwell. Likewise, most employees and retirees present their insurance cards for treatment and don’t question cost. “You can tell how much the clothes you’re wearing cost, or the last tank of gas, price per gallon, but not the value or cost of health care.”

Under Folwell’s predecessor, Janet Cowell, the plan’s liability declined sharply from 2010-12 because of changes in drug benefits and new Medicare supplement offerings. Since then, the deficit has expanded by more than $10 billion. Cowell could not be reached for comment.

Folwell’s style clashed with Mona Moon, who resigned as the plan’s executive administrator in May. She cited a different vision than the treasurer. Leadership consultant Dee Jones was hired to run the plan in July.

Representatives of state workers note that past health-plan administrators showed little desire to pressure providers into better deals. “It’s not that state employees and retirees are sicker than other North Carolinians,” Watkins says. “It’s that in many cases, the health plan is paying a far greater price for services than the private market. We’re the biggest purchaser, and we should be getting the best prices. That’s clearly not happening.”

Folwell promises to change that, though he and others agree that reducing the deficit won’t happen quickly. Federal and state courts have typically blocked any changes to benefits promised to workers. In 2012, retired teachers and employees sued the state in Gaston County Superior Court, contending they’d been promised free health insurance when hired. The pledge was violated a year earlier when the State Health Plan started charging them as much as $105 a month. The case became a class action involving 220,000 retirees, and a judge agreed: The state broke its contractual promise, retirees were entitled to free insurance, and the state must pay back the premiums.

After various appeals, the case is headed for the N.C. Supreme Court. An estimated $100 million in refunds could be at stake.

Meanwhile, Folwell and plan trustees are working to stop the deficit from growing. Under its most generous offering, in which the plan picks up 80% of costs until an out-of-pocket limit is reached, workers and retirees will pay monthly premiums of $50, up from $15. For the option in which the plan pays 70%, active employees will pay $25 a month. (Retirees who choose this version don’t pay a monthly premium.)

But that is the employee rate. To cover one’s family, the state plan is often prohibitively expensive. Employees, such as the Maury prison guard, who want to cover their families face daunting premiums of nearly $700 a month. If they choose to go uninsured or buy cheaper private plans, that leaves the state plan with older, sicker members. “That’s a horrible model,” Watkins says.

Folwell emphasizes the need to attract younger, healthier people, so he pushed for no increases in family premiums and co-pays this year. “A beginning trooper, teacher or other state employee, in the year we just ended, if they chose the family premium, would effectively be working one week out of every four just to pay it.”

Saving the health plan fits Folwell’s self-image as a crusader. After the death of his young son, he went on a nationwide motorcycle tour to raise organ-donation awareness. “A lot of my ability to fix things comes from being a motorcycle mechanic and garbage collector,” he says. “When you’re a mechanic and have a blue-collar background, you don’t have any choice but to do your job and fix things.”

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