Benefits and Drawbacks

The insurance plan for state employees will have a $140.4 million shortfall next year — and that's the least of its problems. The projected shortfall for the following two years is $880 million, and it will take another $476 million to replenish the program's legally required contingency fund. Keeping score? That's almost $1.5 billion.

The Employee Retirement System and state leaders are surprisingly mellow about the red ink, saying growth in the cost of health benefits for the 303,000 members in the plan has actually leveled off at around 9 percent. But those steady and large increases in costs threaten to erode the program, leaving policymakers to consider cuts in benefits, to negotiate lower prices or to find vast amounts of new money.

State Sen. Robert Duncan, R-Lubbock, thinks the numbers will fluctuate but that the larger pattern won't. "It's amazing to me that our health care trends are as high as they are," he said. "It's higher than anything else in the world, other than energy. ... It's 6, 8, 9 percent every year. You can't sustain a big program like this with that sort of growth in cost trends."

The state's top three leaders asked state agencies to cut their budgets by 5 percent earlier this year. To the extent that that shrinks the expected number of state employees in the insurance program, the shortfall at ERS could shrink. The immediate shortfall has officials' attention now, but the estimated $1.36 billion needed in the next budget cycle presents a bigger problem. Then again, it's early, and ERS officials are taking care to keep budget writers in the loop so that the people in the Capitol won't be caught off guard.

The short-term shortfall can be fixed with a series of small, mostly inexpensive changes to the current plan, like adding $5 to $20 to the cost of filling prescriptions and $50 to the co-pays charged for in-patient or emergency room visits.

"Going forward into the next session is just a whole different issue," Duncan says. "The issue seems to me to be primarily these cost-trend issues ... and, you know, those are negotiated prices."

Duncan says the providers — doctors, hospitals, other medical professionals — will have to control prices. "It's not easy. It's a big ol' state, and you have a lot of issues around the state when you're negotiating these contracts. It's tough, but it's a tough time for a lot of people."

They've had some success with bargaining. ERS negotiated physician reimbursement rates during the last fiscal year, saving $2.7 billion. Hospitals will be a prime target when those negotiations start. They account for 45 percent of the plan's costs — and are rising at an annual rate of 10.5 percent. Drugs are 22 percent of the expenses and are also rising at 10.5 percent per year. Other medical expenses — a category that includes payments to doctors — account for 32 percent of costs and are rising 6 percent annually. That puts the plan's current inflation rate at 9.1 percent.

ERS is required to keep $476 million in a contingency account — the equivalent of what the system pays out in health benefits in the average 60-day period. It's well on its way to empty now, cleaned out by legislators the last time they wrote the budget. The money in the bucket at that time was used to help offset increasing costs in the health care program.

The state pays for health care for full-time employees and subsidizes it for other employees and for the dependents and family members of employees. When premiums rise, that's the state's problem. But increasing costs can and have been passed along to employees in the form of higher co-pays, higher deductibles and less generous coverage for insureds who aren't on the full-time state payroll — about 42 percent of the people who are insured.

The agency saw this coming and surveyed 45,000 people to see what sorts of cost-saving or revenue-producing changes they'd prefer. They said they'd be willing to pay a little more for primary care and prescriptions, to take on some of the insurance premiums, to bear higher co-pays in lieu of increases in deductibles, to base what they have to contribute on their years of service (higher seniority, lower share of the cost) and to accept changes that would raise fees for smokers and people who don't use disease management programs and such. The surveyors found resistance to higher prices for name-brand drugs and for hospitalization and emergency rooms, higher premiums for dependent coverage, higher out-of-pocket costs for less senior employees, and smaller hospital networks.

"State employees are a conservative bunch of people with regard to their health insurance," says Mary Jane Wardlow, a spokeswoman for ERS. They generally preferred broader, smaller changes for lots of people over narrower, more expensive ideas that would cost fewer people a lot more money.

That got incorporated into the proposed strategy for the $140.4 million shortfall expected in the year that starts on Sept. 1, which the agency is unveiling to groups of state employees in meetings this month and which its board will consider on May 25. Out-of-pocket costs for doctor visits would rise $5 to $10. Generic drugs would cost $15 instead of $10; name-brands would cost $60 instead of $40. They'd raise the price for visiting the emergency room but add benefits at a lower price for people who instead go to less expensive urgent-care centers.

"I think we're going to have to make some decisions pretty quick," Duncan says. "The ideal solution is to realize some savings from the 5-percent cuts, to realize some savings from working with providers, and then realize some savings from benefit or plan changes."

He says the "default decision" would be to do what the agency has proposed. He and other lawmakers are still thinking. "Time is running out to make a decision. I just don't know what the answer is. ... There's not any one idea right now that is winning the day."