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Diagnosis: Disaster - The $44 billion price tag of state retiree health insurance

Diagnosis: Disaster - The $44 billion price tag of state retiree health insurance

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Published by: Illinois Policy Institute on Feb 28, 2012
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The problem
Illinoisans are beginning to see the dangers of another unfunded liability: free or subsidizedhealth care for retired state workers. The state has liabilities of more than $100 bil-lion in health benets for state retirees during the next 30 years, yet it has set aside nothing to pay for them.
These unfunded liabilities aregrowing 2½ times faster than state revenues and,if left unreformed, will work in tandem with ris-ing pension costs to dramatically cut govern-ment services. One of those services is healthcare to the poor and disadvantaged.In Illinois, three general groups of people re-ceive free or subsidized health care:
 The state’s poor, both children andadults;
 The disabled and the elderly; and
Retired state employees, many who siton million dollar pensions. The state simply cannot pay the health care costsof all these groups, and certainly not with thecosts of the federal health reform, more com-monly known as ObamaCare, on the horizon.Generous health care coverage for retired stateemployees competes with resources for thesteadily eroding services that Illinois’ poor re-ceive under Medicaid. The state’s budget woesand mismanagement of Medicaid already haveled to low reimbursement rates and long pay-ment delays to doctors and hospitals, leaving thestate’s most vulnerable population with few op-tions.
They must wait much longer to receivecare, if they can get it at all.
With nowhere leftto turn, Medicaid patients have no choice butto seek nonurgent care from hospital emergency rooms.
 The program’s mismanagement hascreated huge access barriers that only will wors-en in the coming years as more unpaid bills pileup and ObamaCare kicks in.
 Meanwhile, many state retirees contribute littleor nothing to their health insurance premiums.In fact, for the state’s largest retiree health pro-gram, the State Employee Group Insurance Pro-gram, retirees only contribute 9 percent towardtheir premiums. That’s a lot less than other states, which require state retirees to pay six times thatamount.
In the private sector, the vast majority of retirees are not offered coverage at all, andthe few who are must pay the majority of theirinsurance costs.
 Finally, to make matters worse, the state’s healthcoverage policies incentivize early retirement of state employees, signicantly driving up costsfor the state.State politicians have a clear choice on the re-form of retiree health care costs. If they failto act, they will continue to favor free Cadillaccoverage for well-off state retirees, while themost vulnerable search for a doctor willing tosee them.
The state’s prioritization of retir-ees over core government services and the socialsafety net already has hurt many. As the cost of providing these generous benets continues toclimb, it only will get worse.
 Jonathan Ingram
is a Health Care Policy Analyst with the Illinois Policy Institute.
Diagnosis: Disaster
The $44 billion price tag of state retiree health insurance 
   H  e  a   l  t   h   C  a  r  e
   B  r   i  e   f  
   F  e   b  r  u  a  r  y   2   8 ,   2   0   1   2
Page 2 of 17
Fortunately,there is a solution for Illinois. The solution  properly aligns state retiree benets in Illinois with those in other states by taking intoaccount a retiree’s years of service, agat retirement and ability to pay.
and more state money will be redirected fromother core government services. The state pays for the costs of these heathcare plans each year from that year’s revenues. These costs are expected to rise an average of 4.5 percent a year, although this future growthmight be understated, as it is far below the his-torical average.
Even so, it is almost two times faster than thestate’s expected tax revenue growth. Even as-suming the modest 4.5 percent growth in re-tiree health care costs, the total cost to tax-payers for providing this insurance will exceed$100 billion during the next 30 years.
Thelatest actuarial valuation for these programsestimates it has an unfunded liability of almost$44 billion, the amount the state should setaside today in order to meet these obligationsin the future.
 Fortunately, there is a solution for Illinois. Thesolution properly aligns state retiree benets inIllinois with those in other states by taking intoaccount a retiree’s years of service, age at retire-ment and ability to pay. It also reduces incentivesfor early retirement by capping subsidies for fu-ture retirees, ensuring that those who choose toretire several years early are not given special re- wards.
 The state’s three major insurance programs
Illinois administers three major health insur-ance programs for retired state employees; theState Employee Group Insurance Program, orSEGIP; the Teachers Retirement Insurance Pro-gram, or TRIP; and the College Insurance Pro-gram, or CIP. Together, these three programsprovide health insurance coverage to morethan 180,000 retirees, dependents and surviving spouses.
As the costs of providing retirees withthis benet continue to climb, however, more
State Employee GroupInsurance Program110,862Retired employees of state agencies, boards, commissions,universities and elected ofcialsTeachers RetirementInsurance Program65,031 Retired employees of school districtsCollege Insurance Program 5,539 Retired employees of community colleges
Graphic 1. More than 180,000 people receivestate-provided retiree health insurance
Total retirees, dependents and surviving spouses with state-provided health insurance in 2009
Source: Illinois Policy Institute calculations.
Graphic 2. Retiree health insurance to cost taxpayersmore than $5 billion annually within 30 years
 Annual employer costs for retiree health insurance, by program
Source: Illinois Policy Institute calculations.
Page 3 of 17
 Altogether,the state pays more than 90 percent of the costs for retirees’ State Employee GroupInsurance Program coverage.
Separately, the state pays for TRIP and CIP in-dividually through a combination of retiree pre-miums and payroll contributions from activeemployees, local school districts or community colleges and the state.
In many communities,the local school district pays the full teachershare of TRIP as a benet, much as they pay theteacher pension contributions.
For comparison, Graphic 3 shows that otherstates only cover 46 percent of the health carepremium costs, while Illinois’ three systems sub-sidize signicantly more.
See Appendix A fora breakdown of annual employer costs by pro-gram and revenue components.
 Who pays for state retirees’ health care?
 The state nances each of these programsthrough different means, but the vast majority is covered with state and local money (see Ap-pendix A for the methodology used throughoutthis report). The state nances SEGIP through a combina-tion of retiree premiums and state contributions.Members who retired before 1998 pay no por-tion of their premiums and, therefore, receivefree coverage. Members who retired later pay 5percent less of the total premium for every yearof service.
 This means that employees who worked for 20 years or more pay no portion of their premiums. Altogether, the state pays morethan 90 percent of the costs for retirees’ SEGIPcoverage.
Graphic 3. Taxpayers shoulder larger burdenin Illinois than in other states
Employer share of retiree health insurance costs, by program
Source: Illinois Policy Institute calculations.

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