What’s coming for state employees’ insurance in the coming year? Here are the details.

By Rose Hoban

There’s a fundamental principle in the field of economics: “incentives matter.” 

The premise is that if the right kinds of financial carrots are put in place, rational people will weigh costs and benefits and adjust their behavior, especially if it’s in their self-interest to do so.

That’s the conclusion Tom Friedman, executive administrator of the North Carolina State Health Plan, hopes state employees and retirees will come to as significant adjustments are made to the insurance program for some 750,000 beneficiaries.

“We are very blessed in North Carolina to have really strong and high-quality providers, so we want to make it easy for people to make a good choice,” Friedman told reporters in June. 

That was his lead-up to a meeting on Friday (July 10) of the State Health Plan Board of Trustees, a 10-member board with the fiduciary responsibility of setting premium rates, determining the plan’s deductibles and co-pay requirements and considering vendor contracts.

After extensive discussion, the board voted to:

• Increase premiums by around 5 percent for most members in 2027
• Move to a tiered provider network system that uses lower premium, co-pays and other carrots to entice participants to so-called “preferred providers” while increasing costs for those who stick with “non-preferred” providers.
• Go with UNC Health and Novant Health as the plan’s preferred providers, as well as Iredell Health for people in and around Iredell County.
• Designate Atrium Health and Duke Lifepoint as “non-preferred providers.
• Return to having Blue Cross Blue Shield of North Carolina as being the administrator for the State Health Plan, beginning in January 2028.

Since 2025, when North Carolina Republican treasurer Brad Briner took office, he, Friedman and the board have had to find ways to dig the State Health Plan out of a $1.5 billion fiscal hole. 

Briner and the trustees decided to increase premiums last year for the first time in eight years for the employees and their family members on the plan. Even though it was a big hike, it got the plan only partway out of the red. There’s still another couple hundred million to go, Friedman said. 

The plan got some help from state lawmakers, who added around $200 million last year and again this year. 

Even amid that persistent deficit, plan leaders say, they’ve created ways for members to save money if they’re willing to be smart shoppers and, perhaps, travel a bit further for care. 

The numbers

Meanwhile, health care costs across the country are predicted to have the highest rate of growth in more than a decade. According to health policy think tank KFF, Affordable Care Act marketplace insurers are proposing a median premium increase of 14 percent for 2027, while private insurance is expected to climb about 8 percent, according to the Millman Medical Index.

The State Health Plan’s 5 percent premium increase in 2027 comes as most state employees will see their pay increase only 3 percent this fiscal year. That raise, included in the recently adopted state budget,  came after the bulk of the state workforce saw no pay hikes at all during the previous fiscal year that just ended June 30. 

And even though the pay increase is welcome, state employee advocates say, it does keep up with annual inflation rates  In May, the annual headline inflation rate for a broad basket of goods and services was 4.2 percent, according to the U.S. Bureau of Labor Statistics.

Ardis Watkins, executive director of the State Employees Association of North Carolina pointed out that friction Friday as she spoke to the trustees.

“A 3 percent raise for most state employees is not going to cover inflation for this year alone, much less the increase y’all gave them,” Watkins said. “We agree with a lot of your theories on how to get to lower costs, but it’s got to move faster for our folks. They’re hurting too much.”

“A 3% raise and a 5% premium hike — plus higher out-of-pocket exposure for anyone whose doctor lands in the non-preferred tier — is a net loss for too many of our members,” a statement from SEANC added soon after Watkins spoke. 

The State Health Plan premiums for most retirees’ Medicare Advantage plans will stay flat. 

Moreover, Friedman said, members have the opportunity to pay less overall for their care if they decide to switch to the plan’s “Preferred” providers, which statewide are Novant Health and UNC Health. 

“They are a growing health system, so that you’ll continue to have more options,” Friedman said of UNC Health. “We also have a lot of employees that work for the UNC system that are covered in the State Health Plan.

“They want your business, they’re investing in lowering your costs,” he said. 

What has incentivized hospital systems to make bids to join the State Health Plan as “preferred providers” with a discounted rate, Friedman said, is that they anticipate getting a higher volume of patients who choose them for their health care.

“The discounts we’re getting from UNC and Novant are allowing us to help our sickest members save as much as $7,000 a year.”

Friedman said the treasurer’s office is in negotiations with other health systems to become preferred providers. He said he believes that when other systems see that UNC and Novant are making money from their contracts they’ll jump on board, too. 

People who live in areas where there are no preferred providers will pay somewhat more under the “Access” plan, which covers many rural parts of the state. Friedman said that the Access plan, for most people, is “cost neutral,” or close to what they pay for care this year.

There won’t be pressure on everyone to change providers immediately under the new system. People in the middle of prenatal care or have a child in a neonatal intensive care unit can stay where they are without being charged the higher rate, as can those in the middle of cancer or transplant treatment.

“No one is non-preferred in an emergency situation,” Friedman said. “If folks come to an emergency room, they’re not going to be penalized for having an emergency.” 

Friedman also highlighted a new cost-saving option that could lead to some beneficiaries getting free surgery through the Lantern program and save as much as $7,000 on health care.

How to save

“I can’t give someone a $7,000 raise, but I can create an opportunity for them to spend $7,000 less on health care if they’re able to utilize all preferred providers,” Friedman said. Those savings will largely accrue to people who have the highest needs: 

“We are trying to protect our sickest members, we’re trying to save members money,” he said. 

To realize these savings, some members will have to drive greater distances to get both primary and specialty care, but Friedman said their plan data show that people are already driving to get care. “Currently about 80 percent of our spend happens in 20 counties,” he said. “So, I think a lot of those folks are traveling.”

People who want to stay with a provider at one of the “non-preferred” providers in systems such as Atrium, Duke Lifepoint, and Granville Health will pay more out of pocket, according to health plan administrators.

“You are going to pay more for non-preferred providers,” Friedman told trustees. “I can’t say that enough.”

Those systems that are now non-preferred are those that chose not to take the discounts that the State Health Plan was asking for in exchange for more volume, Friedman said. 

Those extra dollars are the stick in the incentive scheme, but Friedman said plan leaders are working to get more people to change their behavior. 

“Maybe you make the preferred benefit a little bit richer, or you offer a narrow network product that has a more attractive premium, and maybe that’s the carrot that gets people to do different things,” he said. 

And they’re working to get more health systems to change their behavior too, accepting that they’ll swap higher prices for more volume, allowing both the plan and providers to focus on patients. 

“If we’re really successful, then we can move to more population health value-based arrangements with these people, because they have every incentive to stay with the same doctor, and then the health system can win further, our members can win further, and we can win further,” he said. 

“I’m glad to see that the State Health Plan prioritized controlling cost and that they are being responsive to a hyper inflated health care system,” said Kimberly Jones, a teacher in the Chapel Hill/ Carrboro school system and a member of the State Health Plan board of trustees. 

“While I wish that our pay increases outpaced the rate, I’m glad to see that under the new plan, there is a possibility that members will save a significant amount of money on that health care and are able to hold on to more of that hard-earned and well-deserved raise.”

Who’ll be administering the plan?

In the beginning of 2025, the State Health Plan dropped Blue Cross Blue Shield of North Carolina, which had administered the plan for decades and moved administration to Aetna, the national health insurance giant. 

Before moving over to Aetna, former State Treasurer Dale Folwell complained repeatedly that he was not receiving enough information about the details of how Blue Cross NC was administering the plan and the prices they had negotiated with providers. However, at the time of the contract change, he said that the choice to change third party administrators was solely about the contract bid from Aetna.

As Friday’s meeting started, the daughter of NC State’s golf coach Press McPhaul testified with her family’s complaints about how she and her sisters — who have Crohn’s disease — had problems with Aetna, which has been administering the plan for a year and a half.

“The Aetna preferred infusion site failed to report blood work results for my oldest sister to UNC,” she said. “This created a six-month lapse in blood work monitoring that caused a spike in her symptoms. As a result, she developed a resistance to her medicine.

“She is now on the search with her doctors for an entirely new treatment protocol,” she continued. ”I want this small piece of imagery to show you that members of the State Health Plan are being forced to accommodate Aetna’s wants.”

Three hours into the meeting, after the trustees had left for a closed door session, they returned to the public hearing room and publicly voted on the winner of the new three-year contract to begin in January 2028. Representatives from both health insurance companies were in the room, waiting for the results. 

The decision was unanimous: Blue Cross Blue Shield of North Carolina will return to being the administrator for the plan, with an option for an additional two years after the three-year contract ends.

In a press briefing after the announcement, Briner said that looking at the results of the bidding process, the winner was “very, very clear.”

“Both from a cost perspective, from a member service perspective as well and then from every other dynamic you can think of, there’s really not much of a contest,” he said. 

Friedman said that the plan will benefit from Blue Cross NC’s size, its ability to process claims accurately and quickly, and the company’s tools and resources to improve member health. 

“They benefit from our scale, we benefit from their scale, we benefit from each other’s scale, and I think it’s more of a collaboration,” he said.

Friedman also said that there will be almost a billion dollars in savings over the course of the Blue Cross NC contract. 

“A billion dollars in savings will come from a multitude of things: the discounts provided by Blue Cross, partnerships we have with these folks, our ability to execute,” he said. “That is a real number over the term of the contract, but we have a lot of execution to do, we have a lot of steerage to do.” 

“We continue to believe  Aetna is the strongest partner for the State Health Plan,” said a statement sent to reporters from Aetna spokesman Phil Blando. “Our expertise and service have helped the State Health Plan to advance its cost containment goals, successfully implement the Plan’s complex provider tiering strategy, and provide members access to high-quality care.”

In addition to being the new administrator for the plan, Blue Cross NC will also become the pharmacy benefits manager, replacing CVS Caremark, which has held the contract since 2017. 

“We want every member to understand their options and feel confident in the choices they make,” Briner said. “I firmly believe that this path is the right one. It preserves access to high quality care, improves affordability for many of our members, and puts the State Health Plan in a stronger, more sustainable place for the future.” 

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