Article by Erik Smith. Published on Friday, June 8, 2009 EST.

Budget Goof Wipes Out Legislature’s Modest Increase

Public Employees Benefits Board Meets in Lacey May 20.

By Erik Smith

Staff Writer/Your Healthcare Today

OLYMPIA, June 8.—One of the hottest issues in the state Legislature this year has been settled by a $20 million mistake.

            Turns out Washington state employees will see a zero-percent increase in their health benefits after all, says the agency that oversees state insurance programs.

            What it means is that some 336,000 state workers, teachers, public employees and dependents will face dramatic increases in copayments and deductibles – possibly even larger than lawmakers imagined when they passed their state budget in April.

            State payments for employee medical benefits became a major issue this year when the legislature faced a staggering $9 billion shortfall. Lawmakers thought they provided a 3 percent increase for health benefits – not enough to cover inflation, but more than enough to trigger a partisan debate over whether the state is too generous to its unionized workers.

            Now the state Public Employees Benefits Board says a miscalculation in its budgeting process will wipe out the increase. It has told private medical-insurance companies there won’t be one – that the correct figure is zero.

            “If I was one of the state employee groups, I would be pretty upset about this,” said state Rep. Gary Alexander of Olympia, the House Republican point-man on the budget.

            A $20 Million Mistake

What happened? The benefits board was $20 million off the mark last year when it estimated the amount that it would have to pay for self-insured medical claims for 2008.

            In the scheme of things, that’s not such a big underestimate, said spokesman Dave Wasser. “When you look at a program that spends $2.4 billion in a biennium, that’s less than one percent,” he said.

            It’s really a matter of the way state budgets are constructed. The state legislature writes budgets that cover a two-year period – the most recent one covers the state from July 1 of this year to June 30, 2011. But the work on the budget numbers starts a year in advance, when agencies present estimates to the governor’s office. So that means the agency has to estimate its costs a full three years ahead of time.

            “I don’t want to be dismissive about $20 million, but no insurer is going to be able to hit dead on, three years down the road, where it’s going to be at a given point,” Wasser said.

            Copayments and Deductibles Going Up

            The problem is that the shortage comes at a time when state employees are feeling snake-bit. The majority Democrats, normally the allies of unionized labor, plugged holes in the state budget in part by canceling cost-of-living increases for state workers and deferring pension contributions. The amount they provided for health benefits wasn’t enough to cover inflation – medical costs are rising at a rate of about 8 percent a year.

            But 3 percent at least was something.

            As it was, the deliberate shortage already meant that workers will have to pay higher deductibles and copayments for medical services next year. That’s because other components of state medical insurance are largely untouchable. PEBB can’t cut back in a major way on the items that are covered by state insurance policies because a 1993 law says coverages have to be “substantially equivalent” from one year to the next. Meanwhile, the share of premiums paid by state workers is virtually etched in stone by labor agreements and political tradition. Employees right now pay 12 percent of the cost of their premiums, and the state picks up the other 88 percent.

            So an increase in copayments and deductibles was guaranteed from the start. Lawmakers knew that when they passed the budget, said Sen. Karen Keiser, D-Kent. “It’s not a surprise,” she said. “It’s totally predictable.”

            What wasn’t predictable was the problem with the agency’s numbers. The hit on state employees gets even bigger.

            Exactly how big?

            Effect on State Employees

Those numbers haven’t been revealed yet because it involves a bidding process between the state and the private insurance companies that cover about half the public employees. But the numbers were startling enough that the board asked the insurers to submit new bids. At a meeting May 20, Steven Hill, administrator of the state Health Care Authority, said the board may consider reducing coverage for some medical procedures for the first time. “In order to meet the zero target, we’re looking at plan design,” he said.

One hint about the numbers was made public in a board handout. Aetna, the company that will manage the state Public Employees Plan in 2010, suggested a couple of scenarios. The most dramatic suggestion would increase copayments for doctor visits from the current $10 to $50. A deductible would be charged for the first time, up to $1,500. The maximum out-of-pocket cost would rise from $1,500 to $4,000.

            The handout put it flatly: “Neither option will be attractive to enrollees.”

            New proposals will be considered at a meeting June 24.          

            Reaction Muted – For Now

            What’s happening with medical benefits is just another piece of bad news from this year’s state budget, said Tim Welch, spokesman for the Washington Federation of State Employees. The federation is the largest state-employee union, representing 40,000 state workers and 10,000 in higher education. State employees this year lost $1 billion in raises, benefits and pensions, he said. Whatever the problem with the numbers, employees were going to pay more for insurance.

            “I think any increase is going to be more than people thought,” he said.

            Meanwhile, the $20 million mistake comes as a surprise to lawmakers – and it puts a new twist on the debate that took place in the Legislature this year. Republicans have long argued that Washington is too generous to state employees, and that they should pay more than 12 percent of their insurance premiums. This year’s cuts to other state programs put more fuel on the fire – particularly a decision to cut 40,000 people from the state’s popular Basic Health Plan for the working poor.

            If state employees wind up paying more for insurance, it’s a step in the right direction, said Doug Ericksen of Ferndale, the House Republican floor leader.

            “I think what’s certainly good about this is that state employees will start to understand what’s been happening to private-sector employees for years,” he said.

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