October 2002

The State of Healthcare

By Andy Homer
TPEA Director of Government Relations

With a budgetary shortfall projected to be from $5 to $12 billion in the state's next two-year budget, state employee compensation may face attack on two fronts: The legislature is already exploring ways to cut back on state employee health coverage, and rising health care expenditures threaten to consume any available new revenues, leaving little potential funding for desperately needed state employee pay raises.

“All state employees and retirees need to know that we face a very difficult legislative session beginning next January," Gary Anderson, TPEA's Executive Director, said. "Not only will it be difficult to get needed pay raises, but we face a very real threat of significant cutbacks in health care coverage. Now is the time to let legislators and other state leaders know where we stand on these issues.”

Texas, like the rest of the nation, faces a health care crisis, both in terms of availability and affordability. After a period of relatively stable health insurance prices in the mid-1990s, recent years have witnessed an explosion in costs and a rapid increase in health insurance premiums. The Texas Association of Business reported that the average increase in HMO premiums for businesses in Texas this year was 25 percent.

Employers are witnessing double-digit increases in health care costs, averaging from 12 to 16 percent per year for the last several years. Faced with drastic cost increases, many employers are cutting back on health coverage, some are passing cost increases through to employees in the form of higher premiums, deductibles and co-payments, and still others are simply discontinuing health insurance coverage for their employees.

Health Care Participation and Costs Skyrocket

The state of Texas is the largest provider of health care coverage in the state. According to figures compiled by the Legislative Budget Board, the total number of participants in state-financed health care programs grew by more than 30 percent from fiscal year 2001 to 2003. Forecasts estimate that there will be more than 4.2 million people covered by state health care programs in FY 2003. That's ONE out of every FIVE Texans. Overall state expenditures for health care increased by more than $6.1 billion from the last budget to the current 2002-2003 Appropriations Bill - a staggering 39 percent increase. Such increases are simply unsustainable.

State-financed health care is provided through various programs to four distinct groups: poor and lower income families and children; inmates incarcerated in TDCJ; state employees, retirees and their dependents; and employees, retirees and dependents of public school districts. Growing health care expenditures are driven by two major components: growth in the number of people participating in various state-financed programs and overall increases in health care costs (normally called “health care inflation”).

Groups Covered by the State

Poor and Lower Income Families and Children

Medicaid, a federal/state health care program for lower income families and children, is the state's largest health care program with more than 2.1 million participants projected in 2003. Another 500,000 people receive health coverage through CHIP, the Childrens Health Insurance Program, which offers health coverage for children in "working poor" families. The combined increase in expenditures for Medicaid and CHIP was roughly $3.85 billion, more than half of the $6.1 billion overall increase in state health care expenditures. However, both Medicaid and CHIP are largely paid for with federal funds.

Inmates

The state also provides health care to more than 140,000 inmates in the custody of the Texas Department of Criminal Justice. Participation in this program has been relatively stable, with 2003 expenditures estimated to decline slightly.

State Employees

In 2003 the state will provide health coverage for approximately 732,000 state employees, retirees and their dependents. About 540,000 employees, retirees and dependents receive their coverage through the Uniform Group Insurance Program that is administered by the Employee Retirement System of Texas. The University of Texas and Texas A&M University run separate health insurance plans for their employees. Participation in the state health care system by state employees has been relatively stable, with only an additional 10,000 participants in 2003. Overall, health care spending for state employees has increased by more than $800 million from this budget compared to the previous two-year state budget - a stunning 43 percent increase.

State Expenditures
Public Education Employees

The largest growth in participation and the most explosive growth in costs are attributable to health care coverage provided to active and retired school district employees. Since 1985, the state has provided health care to retired school district employees through the Teachers Retirement System of Texas. Enrollment in this program will rise to nearly 130,000 retirees and dependents in 2003. State appropriations for this program increased by 147 percent between 2001 and 2003. The 77th Legislature also created a new state-financed health insurance plan for active public school district employees that will provide coverage and/or financing for nearly 590,000 participants during FY 2003. This likely constitutes the largest programmatic expansion in state government in the last 20 years. Because this program was only funded for the second year of the current biennium, it creates a huge budgetary strain for the next biennium. Public school district employees have contributed, more than any other group, to skyrocketing state health care expenditures. Overall, health care spending for state employees has increased by more than $800 million from this budget compared to the previous two-year state budget - a stunning 43 percent increase.

State Employee Health Care Is at Risk

The result of the increasing number of people who receive state-financed health coverage and the ongoing inflation in health care costs is that it will require billions of dollars in new funds to maintain these programs over the 2004-2005 biennium. Current projections suggest that revenue growth will be insufficient to maintain these programs in their current form.

Both the Texas House and Senate are already examining how to control rising health care costs. A Finance Committee subcommittee chaired by Senator Robert Duncan of Lubbock is studying the issue in the Senate, and the full House Appropriations Committee is similarly charged with studying the issue in the House. With money in short supply, legislators have let it be known that “everything is on the table.” For state employees and retirees, this could mean drastic changes in health coverage and/or substantial increases in costs.

TPEA believes the State should continue to pay the entire health insurance premium for employees and retirees and equally share the cost for dependent coverage with employees. The Employees Retirement System (ERS) has estimated this will require $716 million in new funds for the next biennium. Some legislators are considering lowering the state's contribution so that employees and retirees would pay 15 or 20 percent of the individual's monthly premium. Also, ERS has provided suggestions to the committees in the House and the Senate that illustrate how much the state would save under various scenarios. These options include, but are not limited to, requiring less than full-time employees to contribute more for their coverage, instituting a probationary period for new employees (during which they would not receive coverage), and changing retiree health insurance so that the state would pay a smaller portion of the premium for retirees with less tenure. ERS also estimated how much revenue would be raised by increases in co-payments, including doubling the office visit co-pay to $20 and establishing a higher co-pay for specialist office visit.

TPEA is not supporting any of these possible changes. However, in the event that cuts do happen, we are determining which options are least harmful to state employees. In addition, TPEA is working to ensure that any savings from cuts in state employee health care are used to increase state employee pay.

Conclusion

The single largest cause of the budgetary shortfall facing the next legislature was the creation of the new, state-financed health insurance program for public school district employees. This program will cost approximately $2.5 billion in the next biennial budget. TPEA believes that all employers have a responsibility to provide health coverage for their own employees, and while teachers and other school district employees deserve quality health care, it is the responsibility of the school districts to provide health care coverage, not the State of Texas.

Now is the time for you as a state employee to contact your legislators and let them know where you stand on health care and salary issues. The general election on November 5 will be one of the most pivotal votes for state employee issues in recent memory. Make your voice heard, get to the polls and vote!