How much will NJ taxpayers and public workers get slammed by health plan hikes?

As health insurance sign-up season begins, everyone is bracing for hikes in their premiums. But one group already knows that the cost of its coverage will rise by an unprecedented amount — an increase that taxpayers will help pay.

New Jersey public employees — members of the State Health Benefits Program and School Employees’ Health Benefits Program — are the largest insurance group in the state, with 816,000 active and retired members and their dependents. Next year, the cost of their health coverage will rise by 21% for government employees and 15% for school employees.

The taxpayers’ share of those price hikes depends on the union contracts governing the employees.

Five unions of state government employees made deals with Gov. Phil Murphy’s administration last month that require them to pay only 3% more — with taxpayers covering an 18% hike. But it’s unclear yet how local and county governments and school districts that participate in the state plan will split the rate hike between taxpayers and their employees.

The eleventh hour announcement of such a drastic increase led county and local leaders on Wednesday to demand Murphy and state lawmakers find a way to help them, or face the wrath of taxpayers or public employees who will shoulder the burden.

“How do you expect us to put a budget together? It’s impossible,” Essex County Executive Joseph D. DiVincenzo Jr. said at a virtual press conference attended by 100 local government leaders. The rate hikes will cost his county an estimated $21 million, he said. “The only thing I can do is raise taxes, lay off employees, or find other things to cut in the budget.”

Newark Mayor Ras Baraka said his city faced additional health insurance costs of $24 million. If passed on to employees, the premium hikes will wipe out any salary increases. “All these things are too much for New Jersey families to bear right now,” he said.

The effects of COVID-19 and a larger-than-expected rebound in demand for health services after the lockdown of 2020 contributed to the premium increases, along with higher prices due to overall inflation and other causes. And New Jersey’s public-employee benefits have always been generous, with fewer of the cost-control measures private employers use to mitigate rate hikes.

But “New Jersey seems to be alone in this type of increase,” said Michel Cerra, executive director of the state League of Municipalities. “We all still have a lot of questions as to how we got here.”

New Jersey and participating local governments and school districts expect to spend $3.8 billion on health coverage in 2023, their share of the $5.2 billion in total health costs for these employees, the state Department of the Treasury said. The state appropriation is more than the annual operating budgets for the state Departments of Health, Labor, Transportation and Public Safety combined.

‘Disappointing and kind of unbelievable’

New Jersey’s massive buying power might have been expected to give the state negotiating leverage to hold rates down or test the effectiveness of cost-control measures. After all, one in seven New Jerseyans with employer-sponsored health coverage gets it from the state.

But it hasn’t worked out that way.

The state appropriation for 2023 health benefits is approximately $600 million higher than it was in 2019, when Gov. Phil Murphy convened a State Health Benefits Quality and Value Task Force to study how to better manage costs and improve health outcomes.

“It’s disappointing and frankly kind of unbelievable that more hasn’t been done,” said Dudley Burge, a staff representative of the Communications Workers of America who represents the AFL-CIO’s public workers as a member of the New Jersey State Health Benefits Commission.

Public employee labor unions have made many recommendations that could serve as a basis to revise the health plans, he said. “I think we could, if we put our minds to it, come up with a plan where there wouldn’t be any rate increase.”

New Jersey needs reforms that will “balance controlling public employee benefits costs with providing quality health insurance options to our public workforce,” said Regina Egea, president of the Garden State Initiative, an independent organization to promote investment and economic growth. She served as chief of staff during Gov. Chris Christie’s administration.

“What are government leaders doing to more effectively balance health care costs with taxpayer burden?” she asked.

There are no easy fixes, said Heather Howard, a former state health commissioner who was a member of Murphy’s task force and directs the State Health and Values Strategies program at Princeton University’s School of International and Public Affairs.

“We know generally what the options are,” she said. “You can either charge employers more or charge the workers more. You can cut benefits, or you can pay providers less. None is easy. Each has its own pain points.”

NJ hikes far higher than elsewhere

New Jersey is not alone as it faces higher health premiums for 2023, but it has been hit harder than most states and the private sector.

The state’s premium hikes far exceed the 6.5% increase forecast for employer plans nationally by Aon, a benefits consulting firm that also serves as the state’s consultant.

And they are much larger than rate increases for small businesses and people who buy individual coverage in New Jersey, two markets that historically are pricier than large-group insurance. The state Department of Banking and Insurance reported that the average increase in those markets next year will be 9.3% for small employers and 8.8% for individuals.

Even public employees elsewhere will see slimmer increases: The federal government announced this month that its employees will face 8.7% rate increases for 2023, still the largest that workforce has seen in a decade. And in July, Delaware public employees saw increases of about 8% for their coverage.

Generous coverage, low out-of-pocket costs

Public workers generally pay less and get more coverage than private-sector employees. That’s part of a well-understood, if unspoken, tradition: Public employees earn less than their private-sector counterparts, but in exchange receive more generous retirement packages and health benefits.

A survey of 47 states published last year by the Georgetown Center for Health Insurance Reform found that the value of New Jersey’s coverage for employees had stayed the same for five years, even as it was reduced in several other states.

Out-of-pocket expenses remain low for members of the state health plans.

New Jersey’s most commonly chosen state health plans cover 97% to 98% of the cost of the covered benefits, according to the state Treasurer’s Office. That’s more, on average, than every state except Vermont, according to the Georgetown report.

And New Jersey contributes upwards of 90%of the total premium in each enrollment category for state workers — employee only, employee plus one, employee plus children, and family, the Georgetown report from 2021 said. While a couple of states paid 100% of the premium for single employees, few contributed more than New Jersey toward family coverage for their workers.

Municipal governments and school districts pay varying portions of the premium, depending on union contracts. “Generally, the local employee picks up about 30% of the cost and the employer picks up the remaining 70%,” said Cerra, of the League of Municipalities. (Private employers typically pay 75% to 80% of their workers’ premiums, and less for family coverage.)

Options such as high-deductible health plans and tiered coverage, where employees pay more if they use a provider who is not on the insurer’s preferred list, are available to New Jersey public employees. But very few choose them. There is little incentive to do so.

Fewer than 1% of enrollees in the state plan chose a high-deductible health plan with a health care spending account, the Georgetown report said. Of 13 states that offered a health care spending account with a high-deductible plan, New Jersey was one of only three that did not contribute cash to the account, it said.

The Omnia plan, a tiered plan offered by Horizon Blue Cross Blue Shield of New Jersey, which administers the state plans’ health benefits, was chosen by only 6% of enrollees. The vast majority of members choose a Preferred Provider Plan, which includes out-of-network coverage with higher copayments than for care from in-network providers.

The preference for plans with low out-of-pocket costs and generous benefits adds up. Public worker health coverage as a line item in New Jersey’s record $50.7 billion state budget for 2023 will account for 7.5% of total spending.

A many-layered increase for taxpayers

New Jersey’s taxpayers face increases at every level. They not only will pay more next year to provide health coverage for state employees, but also for county and local government workers, public college staffs and public-school teachers.

Nine counties with about 12,000 employees participate in the state health benefit program and their premium hikes will “cost those counties approximately $100 million,” said John Donnadio, executive director of the New Jersey Association of Counties. The counties will pay an estimated 70%, or $70 million, he said.

He is hopeful that the Murphy administration can do for state and local government what it did for the state employees’ unions — and pay most of the rate increase. An estimated $350 million to $400 million is needed, he said Wednesday, suggesting it could be allocated from the state budget surplus or American Rescue Act funds.

Cerra, who represents all 564 municipalities, said: “Local governments don’t have the financial flexibility the state has.” They can’t absorb a large portion of the premium jump to spare employees.

“Those increased premiums will inevitably drive even faster growth in our highest-in-the-country property taxes,” said Egea, of Garden State Initiative.

But it’s not just taxes local leaders worry about. Rising premiums may dissuade some applicants from joining the public sector and push others to leave for private-sector jobs.

The long-established traditional tradeoff may be disappearing. “Maybe your salary wouldn’t be as high as the private sector, but you would have a pension and you would have good health benefits,” said Cerra. “As they become less desirable, there’s less incentive.

“We’ve already begun to see what we call a brain drain in a lot of professionals.”

What explains the steep premium rise for New Jersey public employee plans in 2023?

Some factors apply to all health insurance purchasers, public and private alike. And some are unique to state government, with its unionized workforce and political pressures.

The impact of the pandemic

COVID-19 not only led to the hospitalization of tens of thousands of New Jersey residents but forced a halt in elective hospital admissions and surgeries that is still reshaping the health care economy. The huge backup in delayed and deferred care continues to play out.

The increased demand for health services comes as prices for everything, including hospital care and prescription drugs, are rising. Hospital consolidation, supply chain issues, and the ever-increasing cost of pharmaceuticals are part of it. Butthe scope of the pent-up demand may be greater in New Jersey because the shutdown was stricter and longer, and consumer behavior more affected, than in many states.

“It may be a perfect storm of all these factors,” said Howard, the former health commissioner. “It wouldn’t surprise me if we saw the worst of it.”

Uncertainty makes it hard to predict

The past three years have been tough for the people who assess risk and set premiums. In an unprecedented pandemic, it’s hard to predict health costs.

“A really key question for policymakers is, is this a one-time bump that will go away, or is this now baked into the baseline and will be an ongoing problem,” said Howard.

New Jersey’s public-employee insurance plans are self-funded, meaning that the state — not an insurance company —pays the claims and absorbs the risk. The amount charged in premiums is predicated on the amount actuaries think will be paid out in claims, based on past experience. Rates being set for 2023 are derived from claims made in 2021. Will the big rebound in demand continue?

More analysis needed

Two factors drive up health insurance costs: higher medical prices and increased use of services. Utilization is up — and prices are up, too. But which is the bigger influence, and can policymakers reduce either without sacrificing quality care?

For example, are next year’s higher premiums caused by higher hospital prices, a result of hospitals in New Jersey forming ever-larger health systems with more bargaining power? Was it rising prices for insulin and cancer drugs? Or was it the increased need for health care caused by COVID or its long after-effects?  Or the discovery of more cancer cases at later stages, when it costs more to treat? Or all of the above?

There’s not much detailed analysis of New Jersey’s public employee plans. Horizon doesn’t own the claims data, a spokesman said; it simply pays the claims and supplies the network used by the insurance beneficiaries. Horizon’s contract with the state is based on a flat fee per member each month, and not on the amount of claims.

That dearth of analysis could change soon. The recently established Office for Health Care Affordability and Transparency this year began to collect data from both the state plans and commercial plans, said Shabnam Salih, its director.

“We plan to release the first set of reports in 2023,” she said, including specific breakouts of the trends for the government and school-employee plans. The analysis will “give us a better understanding of what is driving health care cost increases.”

A unionized workforce

Changes in coverage and benefits for New Jersey’s public employees are governed by collective bargaining agreements with unions, most prominently the Communication Workers of America; the American Federation of State, County and Local Employees; the New Jersey Education Association and the Policeman’s Benevolent Association locals.

Negotiating changes into their contracts takes time. It can delay or hamper adoption of some of the innovations that non-unionized companies have induced or even forced their employees to take. The use of high deductible health plans and tiered networks, for example, is much greater in the private sector.

Union members are proud of their benefits, which are the envy of many private employees. However, public employees are both taxpayers and premium-payers — and doubly burdened by runaway prices.

They have been sincere participants in discussions about plan revisions, some participants on the task force and commission say.

“The union representatives … have put together some innovative concepts that a lot of people think will reduce costs without shifting costs or reducing services,” said Cerra of the League of Municipalities. “They need to be looked at. Everything needs to be on the table.”

One recommendation involves “reference pricing,” or pegging the reimbursement rates for hospitals to what Medicare, the federal insurance program for those 65 and over, pays.

But reductions in payment to hospitals or doctors inevitably run afoul of those very powerful interest groups and their lobbies.

An opportunity

The state’s immense purchasing power should give it both influence and room to experiment.

Public workers tend to stay in the same insurance plan longer than private employees, who change jobs or change insurance carriers every 18 to 24 months, said Doug Forrester, a former state director of pensions and now chairman of Integrity Health.

As a relatively stable population,  public employees are a natural laboratory for incentive programs that aim to promote wellness, improve health or change consumer behavior over the long term. All of those could ultimately slow the rise in premiums.

“Public employees are the perfect target audience to put into a structure of benefit delivery that allows for savings over time,” he said. “That’s an ideal environment. “