Publisher's note: The author of this post is Dan Way, who is an associate editor for the Carolina Journal, John Hood Publisher.
But switch to defined contribution not on agenda
RALEIGH North Carolina is among a number of state governments plagued by massive unfunded liabilities for state retirees' health insurance benefits, and, like many of its counterparts, it is placing greater responsibility for costs on members in a movement known as medical consumerism.
For now, North Carolina - which has racked up $23 billion of unfunded liabilities in its State Health Plan for government employees and retirees - has not gone as far as some states that have adopted defined-contribution plans.
The State Health Plan uses a defined-benefit model. In that model, employers typically work with one or two insurance providers that offer a narrow menu of coverage options. If medical costs exceed the amount of money that was set aside to pay the insurance provider, the employer (in this instance, taxpayers) have to pick up the balance.
By contrast, the defined-contribution model lets employers give a set amount of money to insured participants each year. The insured members select health policies from a variety of plans they can customize. In a state plan, taxpayers would be responsible only for the money that is provided up front to employees.
"I haven't heard a commitment to [defined contribution], but I know it's an option to be considered," said Sen. Jeff Tarte, R-Mecklenburg, who is vice chairman of the Senate Health Care Committee.
Carol Durrell, director of product development for the State Health Plan, gave a report in March 2012 to the plan's board of trustees that included a presentation on defined-contribution Medicare exchanges as a plan option.
"To the best of my recall, there were no further discussions of the topic," said David Rubin, professor emeritus at UNC-Chapel Hill's Kenan-Flagler Business School, and a member of the State Health Plan's board.
"Instead, the decision was made to pursue Medicare Advantage plans for Medicare-primary retirees," Rubin said. "I don't recall any discussion of defined-contribution plans for active employees."
Nor have legislators chosen to study the matter. The State Health Plan was not among the issues approved Oct. 29 for joint legislative review committees to examine.
But the state is offering a new Consumer Driven Health Plan. That policy includes a high deductible, no regular premium, and an annual state allocation to a Health Reserve Account that ranges from $500 for an employee to $1,500 for an employee and family.
The HRA is used toward meeting deductible expenses and carries over year to year. Unlike Health Savings Accounts, unused HRA contributions stay with the state if a plan member leaves.
"In general, states have gradually offered more consumer-driven options such as high-deductible health plans plus a health savings account, but usually as an option, not a mandatory choice," said Richard Cauchi, health policy expert at the National Conference of State Legislatures.
"We do not have an exact count of defined-contribution required participation" among the states, Cauchi said.
But the survey does show that consumer-directed health plans, high-deductible plans, and Health Savings Accounts are the lowest-cost offerings in states such as Arizona, Indiana, Louisiana, Nebraska, Nevada, and Washington.
Among the most successful conversions was Idaho, which created a defined-contribution plan in 2009 and reduced its unfunded liabilities from $353 million to $22 million, according to a 2011 report by the American Legislative Exchange Council.
Money invested in HSAs, and spending from HSAs on qualified medical expenses are exempt from federal income taxes, said Chris Condeluci, an employee benefits and tax policy attorney with Venable LLP in Washington, D.C. The employee owns the accounts, which are designed to encourage saving for future medical needs to drive down health costs.
"I think it's consistent with where everybody in the health care industry is going. Many of them are seeing some data from the early adopters of consumer-driven health, and some of the data is actually showing positive results," Condeluci said.
Consumer-driven health care allows employers to budget medical costs by putting a fixed amount into each employee's account yearly. The employee will choose his own health plan.
A downside for employees could occur if the employer's scheduled contributions do not keep pace with health care inflation.
But Condeluci noted some health care analysts argue that medical inflation could be affected by the rate of increase in health care spending on employees - if premiums increase slowly, medical inflation may stay in check. The reverse may be true as well. "That's a theory, though, and that's untested," he said.
Another theory behind consumer-driven health care is employees who are expected to pay a greater share of their medical expenses out of pocket can restrain overall health care spending. When employees have low-deductible plans that cost them little for doctor visits, they are more likely to use services when they may not be necessary, driving up costs.
"From an economics perspective, if you have lower health care spending then that should put a deflationary pressure on medical inflation, and thus we might actually have medical inflation increasing by 3 percent each year as opposed to 7 percent," Condeluci said.
Chuck Stone, lobbyist for the State Employees Association of North Carolina, opposes consumer-driven reform and condemned it at as "State Health Plan snake oil" at a recent SEANC meeting at East Carolina University's Brody School of Medicine.
"The State Health Plan said, 'For every 4 percent of suckers [State Health Plan members] we can get to enroll in this consumer-driven health plan we're going to save $40 million.' ... Folks, that's what this is about, it's about costs shifting to you and I so the state can walk away from its obligation," Stone said.
"Friends, you take your life in your hand, you're gambling with your life, when you enroll in a consumer-driven, high-deductible health plan," he said.
Stone reminded the state employees and retirees that Treasurer Janet Cowell - an elected public official - is in charge of the State Health Plan.
"So if you start getting messed over on your State Health Plan, if they start trying to take our benefits away, go to the ballot box and take that person out and put someone in as state treasurer who will do the job that you need done," Stone said. "I think Treasurer Cowell is sensitive to that."
Dan Way (@danway_carolina) is an associate editor of Carolina Journal.