LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Health and Dental Benefits For Annuitants (9650)

The state contributes toward health and dental insurance premiums for annuitants of the Judges', Legislators', District Agricultural Employees', and Public Employees' Retirement Systems (PERS), as well as specified annuitants of the State Teachers' Retirement System. Annuitants have the option of selecting from up to eight state-approved health plans depending on where an annuitant lives.

Budget-Year Costs Not Yet Completely Determined

We withhold recommendation on the $861 million General Fund request for annuitant benefits pending final determination of health insurance premium rates for calendar year 2006.

The budget proposes total expenditures of $861 million from the General Fund for health and dental benefits for annuitants in 2005-06. This is $65 million, or 8.2 percent, more than estimated expenditures for this purpose in the current year. This increase reflects continued enrollment growth of 3.5 percent, with the remaining increase of approximately 5 percent for health cost inflation. For 2005, health insurance costs grew more slowly than in recent years for the state's basic plans and declined for the state's Medicare supplement plans.

Figure 1 displays General Fund expenditures for annuitant health and dental benefits for the three fiscal years starting with 2003-04. Although these costs initially are paid from the General Fund, the state recovers a portion of these costs (about 33 percent) from special funds through pro rata charges.

Figure 1

Health and Dental Benefits for Annuitants

(Dollars in Millions)





Change From 2004-05





















Federal Subsidy for Prescription Drugs Will Offset State Costs. The amount proposed in this item includes an offsetting half-year savings of $35 million for the Medicare Part D prescription drug program that becomes effective on January 1, 2006. For employers (including the state) providing drug coverage that is at least equivalent to the Part D benefit, the federal government will subsidize a portion of prescription costs. The federal government currently estimates the value of this subsidy at $611 per Medicare enrollee in 2006.

Amount Needed Depends on Negotiations With Providers. The actual amount of funding needed in the budget year is dependent on negotiations over health insurance premiums currently underway between PERS and providers. These negotiated premium rates, which will cover the 2006 calendar year, should be available for review during legislative budget hearings. Pending receipt of the new rates, we withhold recommendation on the amount requested under this item.

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