Research & Commentary: North Carolina Retiree Health Care Reform

Published December 22, 2015

The Charlotte Observer recently reported the North Carolina legislature will soon be considering legislation to address the $25.5 billion unfunded liability in the state’s retiree health system. North Carolina officials project the 30-year unfunded liability could grow to $37.5 billion by 2020 unless reforms are implemented.

The Cato Institute estimates state and local governments spent on health insurance $117 billion in 2010, up from $70 billion (in 2012 dollars) in 2001. Cato found the real increase amounted to roughly $2,400 per state and local government employee, or $150 per U.S. resident.

North Carolina’s Joint Legislative Program Evaluation Oversight Committee is scheduled to review legislative language for public retiree health care reform based on a 2015 report. The Observer outlines several strategies the legislature may consider, including requiring all eligible retirees to transition to Medicare Advantage plans. That would shift some of the cost to the federal government, saving the state about $64 million a year. While managed care plans may improve access to care and health care outcomes, passing the costs of retiree health care to the federal government does little to improve the current system for retirees; cost and flexibility remain problems.

The report’s second recommendation would have beneficiaries increase the amount of money they pay into the system. According to the American Enterprise Institute, on average, state and local government employees pay only 13 percent of their total health care premiums, compared to 20 percent for private-sector workers in establishments with more than 100 employees. AEI also found 30 percent of state and local government employees make no contribution toward their health coverage at all, compared to 13 percent for private-sector employees.

One model North Carolina could follow to combat public employee health care costs and improve choice is Indiana’s Health Savings Account for public workers. Today, more than 50 percent of state government employees in Indiana have health savings accounts, the nation’s highest state employee participation rate in HSAs.

Indiana’s program is a traditional health plan with a health savings account tied to it. The health insurance plan has a deductible of $2,500 for individual coverage and $5,000 for a family plan; preventive services are not subject to the deductible. State employees pay nothing towards the plan premium. The state deposits $1,500 for individuals and $3,000 for families into the employee’s HSA annually and employees can add to the account tax-free. The accounts are portable; if an employee leaves state employment the HSA moves with him or her. In 2009, state officials estimated the HSA program had saved the state more than $42 million since its introduction.

The John Locke Foundation (JLF) recommended a similar reform using HSAs in a 2005 paper. JLF argued when combined with a high-deductible health insurance policy, an HSA program can replace traditional health insurance coverage while creating a health care system that is less expensive and more consumer-driven. In addition to the cost savings, Michael DeBow of JLF argues HSAs give recipients a stake in their own health care decision-making and discourage overutilization of health care services, thereby cutting health care costs overall.

North Carolina legislators cannot afford to ignore the growing unfunded liability the state retiree health insurance system creates. The deficit will continue to grow, driven by the increased numbers of retirees, unless a change similar to Indiana’s successful plan is implemented.

The following documents examine state retiree health care and the growing problem of public-employee compensation.

Ten Principles of Health Care Policy
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides reform suggestions to remedy current health care policy problems.

Health Savings Accounts: Consumer-Driven Health Care for North Carolina Public Employees and Teachers
Michael DeBow of the John Locke Foundation describes the financial difficulties faced by North Carolina’s current state employee health insurance plan. DeBow then describes the operation of HSAs and high-deductible health plans and explains the potential for such consumer-driven plans to bring about better health care at a lower cost.

Overpaid or Underpaid? A State-by-State Ranking of Public-Employee Compensation
The American Enterprise Institute ranks all 50 states according to how costly their public-employee compensation packages are relative to private-sector standards. Each state’s package is placed into one of five categories: modest penalty, market level, modest premium, large premium, or very large premium. The results show national-level analyses obscure significant differences in compensation from state to state.

Indiana HSA Success a Lesson for Other States
Thomas Cheplick examines Indiana’s health savings accounts for state employees in this Heartlander article. “More than 50 percent of state government employees in Indiana have health savings accounts, the nation’s highest state employee participation rate in such consumer-directed health plans. The average participation rate in other states is just 2 percent.”

Retiree Healthcare Tops Unfunded Pensions as Fiscal Threat
Donna Rook writes in The Heartlander about other post-employment benefits (OPEB), or government retiree health care commitments. Rook argues OPEB may be in worse condition than unfunded government pensions. “The average state has $11.46 billion of unfunded retiree health care debt, compared to $10.85 billion of pension debt as of fiscal year-end 2012.” 

Employee Compensation in State and Local Governments
In this Tax & Budget Bulletin, Chris Edwards, director of tax policy studies at the Cato Institute, examines state and local compensation costs, with a focus on the lucrative pensions enjoyed by public-sector workers.

Government Workers More Satisfied with Retirement, Health Insurance, and Vacation Benefits
Emily Ekins discusses a recent Gallup poll that found government employees are considerably more satisfied than their private-sector counterparts with their compensation fringe benefits – namely government retirement plans, health insurance benefits, and vacation time.

State Employee Health Plan Spending: An Examination of Premiums, Cost Drivers, and Policy Approaches
The Pew Charitable Trusts and John D. and Catherine T. MacArthur Foundation worked with actuaries from Milliman Inc. to produce this first-of-its kind analysis of the costs and characteristics of state employee health plans. “Although meaningful state-to-state comparisons are complicated by a number of factors, including who is covered (i.e., the number, age, and health of enrollees) and differences in health plan benefit design, this analysis offers a nationwide benchmark against which states can be compared.”

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database at 

If you have any questions about this issue or The Heartland Institute’s website, contact Heartland Institute Government Relations Manager Nathan Makla at [email protected] or 312/377-4000.