No Room for Smoking or Obesity: How North Carolina Dealt with Costly Retiree Insurance

As healthcare costs in the US continue to rise, policymakers are seeking innovative measures to reduce the costs of health insurance programs. One of the major contributors to rising healthcare expenditures is retiree health insurance (RHI), which is becoming costlier with higher life expectancies and advancements in healthcare technology. Like many other American states, North Carolina has recently experimented with policy initiatives to contain RHI spending by modifying its State Health Plan (SHP). Recent research by Robert Clark and Melinda Morrill at the North Carolina State University, and David Vanderweide from the state General Assembly, evaluates how these policies affected subscriber choice and whether the state achieved the desired fiscal outcome.

North Carolina’s SHP provides health insurance to all current and retired state employees and teachers, including their dependents. The state bears the cost of insurance premiums for employees and retirees, but dependent coverage is paid out-of-pocket. Subscribers can opt for either the Basic or the Standard plan, the latter having higher premiums in return for more comprehensive coverage. Until September 2011, both Basic and Standard plans were available free to the primary subscriber, but the SHP stipulated that dependents must be enrolled in the same plan as the primary subscriber.

The problem with this setup manifested itself in 2004 when a new rule required the government to acknowledge unfunded liabilities. In 2005, Aon Consulting estimated North Carolina’s expected unfunded actuarial accrued liabilities (UAAL) to be $23.9 billion, against reserve assets of just $139 million. The most recent estimate of UAAL stood at $29.6 billion (2011).  With rising healthcare costs and increased life expectancies, expected payments for retired employees were escalating. As a result, retiree health insurance payments were being meted out from state funds.

Forced to seek alternative solutions, North Carolina adopted three successive cost-reduction policies. The first two, collectively called the Comprehensive Wellness Initiative (CWI), penalized unhealthy subscribers by limiting their subscription to the Basic plan. The first phase of CWI, introduced in mid-2010, barred smokers from comprehensive coverage, while the second phase, introduced July 2011, also restricted subscriptions for overweight individuals. Since a family must apply for its subscription type as a unit, this led to a significant reduction in expensive plan enrollments. In September 2011, the state replaced the CWI with a policy charging a differential premium for Standard coverage to be paid by the retiree. Like the CWI initiatives, the premium differential also resulted in a significant shift down to the Basic plan.

Interestingly, the shift to Basic plans did not reduce overall costs. However, the authors contend that the impact cannot be analyzed in the absence of a control group. As a proxy, they compare the growth in SHP costs to those of Medicare. The researchers find that, compared to the historical expenditure trends of the two programs, SHP costs were decidedly lower after the cost-cutting initiatives were introduced than they would have been otherwise.

Unfortunately, the impact on long-run costs—or the UAAL—is unclear. According to the authors, although greater subscription to the Basic plan would imply less healthcare usage, this could also backfire as people might avoid preventive healthcare and only seek consultations for aggravated conditions, which could be costlier. Furthermore, the authors also suggest that increases in Basic plan enrollments might have been a purely behavioral response to opt for the default option, rather than a conscious economic decision.

Despite some uncertainties, this paper makes a valuable contribution in deriving rigorous assessments from a very complex and unwieldy dataset of over 200,000 retirees.  Future research may seek to refine ways for differentiating default behavioral patterns from conscious choice, isolating the cost impact of program selection from other factors, and, finally, projecting expected flow of costs under new policies. As North Carolinians await another change in the state insurance plan starting January 2014 and recent modifications to the Affordable Care Act necessitate adjustments in all insurance plans, these issues are gaining even more traction.

Feature Photo: cc/(Alex Proimos)