Sen. Berger’s Greetings from Raleigh


Last night, the North Carolina Senate was scheduled to vote on SB 287- legislation addressing substantial cost changes in the State Health Plan.

This vote did not take place. SB 287 can be read here. Because of the importance and complexity of this issue, I am devoting this entire, extended newsletter to this issue.

Last Wednesday, SB 287 was considered by the Full Appropriations Committee. Upon consultation with the State Employees Association of North Carolina, I introduced an amendment requiring public disclosure of all contracts involving the State Health Plan. The historical context for the amendment can be read here. The amendment failed on a committee voice vote and I voted against SB 287 in committee.

The next day Blue Cross Blue Shield publicly released the contract. Senator Rand, sponsor of SB 287 and majority leader for the Democrats, has agreed to an amendment tonight that clearly establishes that BCBS contracts will be public documents. I believe that transparency enables the public to determine whether their tax dollars are being spent wisely, evaluate if the General Assembly is pursuing the best alternatives available, and foster exploration of other alternatives to improve the State Health Plan.

The State Health Plan is a self-administered health insurance plan. BCBS is retained to administer claims processing on behalf of the State.

1. The State Health Plan – Who is Covered?

Approximately 653,000 state employees, retirees and dependents are covered by the plan. Almost every North Carolina state employee is covered under this plan, including public school teachers. There are around 185,000 retirees covered by the plan.

In comparison, Florida’s state health plan covers approximately 440,000 employees, retirees and dependents. Out of these 440,000 members, there are 174,506 retirees covered by their plan.

2. How Is The State Plan Currently Financed?

The plan is currently funded by taxpayers of North Carolina and by contributions (“premiums”) paid by current and retired employees for their dependents. The taxpayers of North Carolina will pay approximately $1.8 billion into the plan annually over the next two years if no changes are made to the current plan. Employees and retirees with dependents will pay premiums totaling some $423,000 annually over the next two years assuming no changes are made.

In North Carolina, individual state employees pay no premiums to cover their own health insurance. Until 2006, an employee who worked for the State of North Carolina for at least 5 years became “vested” in the State Health Plan. Workers reaching 60 with a vested right in the State Health Plan receive health care coverage without paying any premiums for their coverage. In 2006, the General Assembly changed the law so state employees hired after October 1, 2006 must work 20 years before they receive premium-free health coverage after age 60. A person with between 10 and 20 years of service is eligible for health coverage as long as they pay half of the plan’s share of the premium.

A common misconception is that premiums are paid to BCBS. This misconception leads critics to perceive that funding shortages for the State Health Plan can be reined in by reducing BCBS’s profits. This past year, CEO Bob Greczyn of Blue Cross Blue Shield received a bonus of over $3 million. A news story regarding his bonus can be found “here. A cap on Mr. Greczyn’s bonus, as well as other BCBS corporate officers, similar to the cap being proposed on banking corporate executives may be warranted when private employers and employees are struggling to pay premium increases for health insurance from BCBS. However, reducing BCBS’s profits and the salaries of their corporate officers will not solve the funding problems in the North Carolina State Health Plan. While BCBS sells insurance policies to employers and employees in the private sector, BCBS is the State Health Plan’s claims processing contractor. This means they process medical claims (except for pharmacy claims), provide a medical provider network for the Plan, and supply customer service for benefit administration.

Starting January 1 this year, BCBS will be paid $15.15 per member, per month to process claims, enroll members and perform other management services. With approximately 653,000 employees, retirees and dependents covered by the State Health Plan, BCBS will receive payment of approximately $120 million for administering the program.

3. Why Does the State of North Carolina Contract With Blue Cross Blue Shield To Administer the State Health Plan instead of administering the Plan Itself?

On behalf of the State of North Carolina, BCBS negotiates the discounted prices for services charged by hospitals, physicians and other health providers across the state. These discounts are possible because of the “economics of scale.” Simply stated, BCBS is able to negotiate lower prices than the State Health Plan could on its own behalf because BCBS is negotiating not only on behalf of the hundreds of thousands of individuals covered by the State Plan but also for the hundreds of thousands of employees covered by their private Blue Cross plans. Last year, the State Plan saved approximately four percent or $232 million as a result.

A recent investigative story by the News and Observer revealed that the state averages paying BCBS approximately $10 to administer medical claims for the State Plan whereas Electronic Data Systems administered claims for the State Medicaid program for approximately $.57 cents per claim. The News and Observer article can be found here. BCBS responded to this report, claiming it makes a slim profit of less than a penny on the dollar for handling claims for the State Health Plan’s preferred provider organization. BCBS’s response can be read here.

Projections indicate that if there are no additional changes in the sources of funding for the State Health Plan, the estimated shortfall is $406.6 million dollars for fiscal year 2008-2009 and an estimated $536.9.million dollars for fiscal year 2009-2010; totaling $943.5 million dollars over the two year budget period.

5. How Does SB 287 Propose to Cover the Shortfalls Estimated in Fiscal Years 2008-2009 2009-2010, and 2010- 2011?

First, as mentioned above, $250 million will be taken out of the State’s “rainy day fund” to cover the current shortfall for fiscal year 2008-2009.

Second, in order to cover the $406.6 million shortfall for fiscal year 2009-2010, SB 287 requires an allocation of $146.2 million in additional taxpayer dollars from the General Fund, the Highway Fund and other funds. This represents a 7.8 percent increase in premiums paid by taxpayers. Increases in deductibles and co-payments by members of the plan are intended to generate an additional $144.2 million. The two most controversial components of the plan include increases on premiums for dependents totaling $29.9 million, a 7.8 percent increase, and savings of $36.4 million generated by increasing the number of maintenance drugs purchased through a provider network or by mail order.

In order to cover the $536.9 million shortfall for fiscal year 2010-2011, SB 297 requires an allocation of $303.8 million in additional taxpayer dollars from the General Fund, the Highway Fund and other funds which represent an additional 7.8 increase in premiums paid by taxpayers. During this second year of the biennium, increases in deductibles and co-payments by members of the plan are intended to generate an additional $167.1 million. Increases on premiums for dependents total $62.2 million, representing a 7.8 percent increase, and $55.1 million saved by increasing the number of maintenance drugs purchased through a provider network or by mail order.

Third, the legislation sets forth a plan of action requiring smokers and overweight members to pay higher co-payments beginning in fiscal year 2010 for smokers and 2011 for overweight members. Smokers have one year in which to “kick the habit” and those who are overweight, myself included, have two years to reduce weight to avoid these increased co-payments. There are an estimated 70,000 smokers in the State Health Plan. There are no specific amounts included in the calculations to address the shortfall based upon these two changes. It is estimated that it cost the State Health Plan $2,000 per member per year by smokers included in the plan as compared to the costs associated with non-smokers under the plan.

For a more comprehensive presentation of these changes go here.

6. Why Independent Pharmacists Are Opposed to SB 287’s Provisions Affecting Co-Payments for Prescription Drugs?

Changes proposed in SB 287 would create incentives for employees, retirees and employee dependents on the State Health Plan to purchase generic forms of maintenance drugs by mail order. Independent pharmacists will be eligible to join a network of providers to sell prescription drugs to plan members. Members of the State Health Plan who purchase these maintenance drugs from retail pharmacists in the network or who purchase their maintenance drugs via mail order will receive a discount. It is anticipated that there will be close to $90 million in savings to the plan over a two year period as a result of members purchasing generic drugs from a provider network or from mail orders. Members of the State Plan are anticipated to save $40 million directly in lower co-payments by purchasing these drugs via these two methods. Members who do not purchase their maintenance drugs from pharmacists in the provider network or by mail order will be penalized by having to pay 50 percent of the gross cost for the drug purchased.

Independent pharmacists contend that if they join the provider network with retail pharmacists like Walgreens and CVS, etc., they will be expected to prescribe drugs at or below cost and will have to depend entirely on ancillary sales for profitable income. Independent pharmacists make a considerable portion of their profit from directly filling drugs prescriptions whereas chain pharmacies make profits more heavily on ancillary sales. The independent pharmacists argue that the 50 percent penalty will reduce the number of customers they serve, resulting in the loss of millions of dollars of revenue. Independent pharmacists estimate their will lose over 10 percent of some 55,000 employees in North Carolina, totaling a loss of over 5,500 positions.

7. What are Possible Alternatives to the Changes Being Proposed in SB 287?

Independent pharmacists are currently developing a series of proposals that include increasing the percentage of generic drugs they currently sell to members of the State Health Plan. They have worked closely with the legislature in reducing Medicaid costs for prescription drugs by encouraging more Medicaid recipients to use generic drugs. For each 1 percent increase in the total percentage of generic drug purchases by Medicaid recipients, the State saves $6 million. From June 30, 2007 to January 30, 2008, the North Carolina Medicaid generic dispensing rate increased from 59.3 percent to 63.3 percent saving the state $24 million.

At our meeting on Thursday, some legislators argued that a modest premium on all state employees and retirees paying no premium would enable us to not have to increase premiums on dependent members and increase co-payments and deductibles. I adamantly oppose this solution. Once the door is opened to charging employees and retirees, there will be a future propensity to increase member premiums rather than make hard choices to reign in costs.

8. Why Do I Believe We Are Experiencing the cComplications in Funding of the State Health Plan?

First, the policy of allowing employees to become vested after only five years has created too many members in the State Health Plan. Everyone probably has heard of someone who moved to North Carolina to become employed by the state of North Carolina during the last five years of their career so they could receive lifetime benefits after 60 without having to pay premiums. We have more members in our plan as well as more retirees than the state of Florida has in their plan which is the fourth largest state in population.

Second, the General Assembly should have adopted and still should adopt a long term policy of providing additional funds to the State Health Plan, particularly given that the State of North Carolina provided for health benefits to vest after five years of service. The total number of employees expected to come under the plan once they retire has created an estimated $16 billion unfunded liability.

Third, health care costs are increasing eight to ten percent annually. Until a national insurance plan is in place, costs will continue to increase on an annual basis.

Fourth, increased premiums for dependents have become so costly that younger, healthier state employees are purchasing health insurance in the private sector to cover their dependents. The remaining employees on the plan have more significant health issues requiring greater utilization of the health care system. We are losing potential premiums that would be paid for dependents if our dependent care was not so costly.

I have served as a public employee or elected official for over twenty years. From 1985 to 1988, I served as a public school teacher in the Kinston City School System. My wife served as a teacher of developmentally disabled, hearing impaired adults at the Caswell Center during the same time period. From 1991-1994, I served as an Assistant District Attorney; from 1994 to 2004, I served as a workers’ compensation judge for the North Carolina Industrial system. From 1991 to the present, my wife has served as a hearing impaired teacher and administrator in the Wake County system. My wife, my son and I have been, and at present receive, our heath coverage under the state heath plan. I share this history with each of you as to illustrate that any changes I vote for or against affect my family directly. I personally know the difficulty of any increases in co-payments or deductibles at a time when public employees, including teachers, will not, in all likelihood, receive traditional cost of living pay increases.

Sincerely,

Signature

Doug Berger