Powerful influences have focused attention on how to pay for retiree health care benefits at state and public agencies and schools. Combine the doubt about the solvency of the Medicare program, the consistent growth of a longer-living elderly population, the cost to treat acute and chronic medical conditions of the elderly, and you sum up the elements that contribute to the rapidly growing cost of promised retiree health care.

One way California policymakers can deal with the rising costs of providing health coverage is to pre-fund employee retiree health benefits through a trust such as the California Employers’ Retiree Benefit Trust, or CERBT. Pre-funding — contributing for benefits as they are earned, investing the contributions, and using both investment return and the original contribution to pay benefits during retirement — is a sure path to sustainable benefits. The CERBT at CalPERS is an effective statewide program that helps public employers in the area of Other Post-Employment Benefits (OPEB) reporting. Currently, we have more than 400 public agencies participating in the CERBT, and we are pleased that participation continues to grow.

Public agencies also may want to negotiate participation in the CERBT with their employees’ collective bargaining units as a means of helping union members defray the future costs of their health care during retirement. A few collective bargaining units — those representing Highway Patrol officers, craft and maintenance workers, and physicians, dentists and podiatrists — are already participants.

Nationally, accounting standards created by the GASB require public employers to measure and to report the future cost of OPEB, mainly retiree health care benefits, promised to their employees. These OPEB accounting standards are comparable to the pension benefit accounting standards with which the CalPERS pension plan has helped public employers statewide to comply for many years.

Pre-funding OPEB in an irrevocable trust helps lower the overall liability by using investment returns to pay for a portion of future costs. Under accounting standards, this leads to a lowering of reported liabilities based on funding plans. The more contributions are set aside to pre-fund, the lower the reported liabilities will be today.

The CERBT is administratively simple and efficient. It is currently the most cost effective vehicle available for pre-funding OPEB — as is evidenced by the significant growth in both assets and number of participating employers — and an alternative worthy of consideration by public agencies faced with finding better ways to fund retiree health care.

The growing cost to taxpayers to provide health and dental care for state CalPERS retirees is simply not sustainable without large disruptions to other state programs, or higher taxes. Neither is acceptable.

John Chiang, former controller and now state treasurer, laid out clear evidence of the financial pressures that the state will soon face in a report delivered last month. The report notes the state’s unfunded obligation for retiree care grew by $7.2 billion just since June 2013. This accelerating growth means the future cost of providing health-related benefits to CalPERS retirees is estimated at $71.8 billion. If no changes are made, this cost will increase to $92 billion by 2020.

A stronger economy and a state budget blessed with surplus revenues make spending $1.9 billion this year on state retiree health care an easier pill to swallow. However, there will be another economic downturn, and when the budget contracts, legislators will not be happy having to choose, for example, between deeper cuts to higher education or state retiree health care. 

In his state of the state address, Gov. Brown committed to negotiate with state bargaining units for larger contributions to their retirement health care. I believe this is an important first step toward reform. The current pay-as-you-go funding model is not financially practical in a world of escalating health care costs and longer retiree lifespans.

If the state shifted toward a pre-funded system rather than our current model, the state’s unfunded liability could be reduced to $46.8 billion in one year. This would require a larger general fund commitment and higher contributions from state workers but the payoff would be longer term security. 

The state should also consider whether changes to health plan designs might provide quality coverage in a more efficient manner. For example, the governor has proposed a high-deductible plan option paired with state contributions to a health savings account. Surely there are other delivery models that should not be overlooked.

I look forward to working with my colleagues to ensure the system is financially secure so current and future state retirees have a stable health care system to meet their needs today and tomorrow.

Slashing benefits to those who chose careers in state government and who are now too old to adjust course isn’t the answer. Nor is making unrealistic demands on the state based on how we wish things were, rather than on the reality of the situation.

The fact is that there are few viable options to reduce the state’s long-term liability without shifting more of the costs onto retirees. Obviously, the governor’s negotiations with the various unions that represent government retirees will be complex, and big savings can’t be achieved without drastic cuts that are unlikely to be politically viable. Simply shifting more expenses onto retirees, however, without efforts to also increase the value of health insurance, would be a wasted opportunity.

High-deductible health plans and higher copayments are effective cost control mechanisms, but newer value-based insurance designs are perhaps a better tool for using financial incentives to encourage the most clinically effective interventions.

Encouraging new retirees to enrollee in Covered California may be an attractive option to the state, but this won’t produce large savings in the short-term, because current retirees can’t drop their coverage and qualify for subsidies for Covered California. Only future retirees, who turn down their state retiree health benefits, would be eligible for federal subsidies to purchase insurance from Covered California. As attractive as this option may be, it will most likely require the state to still offer some financial incentive to future retirees to make this choice.

California is late to explore and implement some of these ideas. But like many things in life, better late than never. Whatever path we choose will require empathy and shared sacrifice. The coming months will reveal whether we, as a state, can meet the challenge.

Whereas most sectors keep pace with the overall economy, health care continues to grow at higher rates than inflation and the U.S. spends substantially more on health care than other developed countries. Some researchers believe the U.S. pays more for health care because prices are higher, technology is more readily available, and Americans have greater rates of chronic disease. If we want to continue providing retired state employees with the health care benefits they deserve, we must get serious about bringing down cost.

Controlling health care costs at the purchaser level is essential to managing the rising costs of providing coverage for employees and retirees alike. Identifying actual health care costs, which are often hidden to the consumer, is the first step toward reigning in rising prices. Toward this end, I have introduced a number of bills aimed at making health care costs more transparent in recent years. This year, I’ve introduced SB 26, which will put provider cost and performance information directly into the hands of consumers and purchasers so that they can understand their financial liability and realize the best quality and value available to them. 

As chair of the state Senate health committee, I am working on additional steps aimed at controlling costs including; quality incentives, payment reforms, value-based purchasing, selective contracting and guiding consumers to providers who meet certain standards. As an example of policies that have been proven to work, CalPERS adopted a “reference pricing” policy, after carefully reviewing quality and cost information, which guided their enrollees to hospitals that provide hip and knee replacements below a certain price threshold. As a result, CalPERS saved $2.8 million for themselves and $300,000 in cost sharing for enrollees in 2011 without sacrificing quality, according to a study published in Health Affairs in August of 2013.

I applaud Gov. Brown for shining a light on the $72 billion liability California has incurred as a result of the promises we have made to our state employees. In order to keep those promises, we must do a better job planning for the future and we must also address the underlying issues that drove those costs up in the first place.

What’s required is a change in the “us-vs.-them” thinking at CalPERS and an opening up of its buying power to all Californians.

For example, CalPERS could be the core of a new “public option” that many Californians have been hungering for — one sold on the state’s health exchange.

CalPERS already gives state employees and retirees access to a self-funded plan. A “public option” would provide a network of hospitals and doctors and be free of insurance company profiteering (including up to 20% overhead and profit). The network and claims services are provided by an insurance administrator at a set fee of about 3%. 

The problem is the self-funded pool tends to be retirees and older workers, who want easier access to doctors and hospitals. The savings from cutting out insurance companies is offset by costs of an older and sicker group.

By opening up CalPERS to all Californians, the insurance pool likely would become far healthier and the costs for the state likely would go down, as would the public’s costs. The public option competing with private plans on Covered California would be a big consumer hit, given the new skinny networks that predominate.

Similarly CalPERS has yet to use its power to bulk purchase drugs and receive the kind of huge discounts the Veterans Administration or Canada does.

Reducing prescription drugs costs by up to two-thirds through bulk purchasing could be a huge savings, and it could be passed on to other Californians in a “public option.”

There’s a way, there just needs to be a will to take on the insurance company and drug company opposition that is certain to be formidable.