Alabama educator health plan needs $380M more by 2027

BIRMINGHAM, Ala. – Alabama's educator health insurance plan is facing a $380 million shortfall in 2027 that could compete with teacher pay raises in the state budget.

The pressure highlights a growing challenge for Alabama's education budget: Health care costs for educators are climbing much faster than expected, and the price tag is beginning to collide with other priorities. In 2027, that could mean lawmakers face tough choices between funding insurance, approving teacher raises or finding money for both.

Retirement Systems of Alabama Chief Finance Officer Diane Scott told the Public Education Employees Health Insurance Plan board Wednesday the program will need an extra $380 million in fiscal 2027 just to keep up. By then, costs are projected to reach $1.8 billion – about $500 million more than in 2024. Of that, lawmakers would be asked to cover $1.5 billion.

Scott said costs are increasing across the board — hospital, medical and prescription drug coverage.

"Every year, we're looking at a minimum increase in our cost of $100 million," she said.

Hospital care is a major driver, PEEHIP Director Dave Wales said.

"(Increases are) in hospital stays, they're in outpatient procedures, they're in doctor visits and professional services. The largest increases [are] in those doctor visits, in those outpatient procedures… and then also in mental health and substance abuse."

On Wednesday, the board approved a resolution asking lawmakers to cover a $1,209 monthly contribution per education employee in 2027. That's up $305 a month from the $904 approved for fiscal 2026, which starts Oct. 1. PEEHIP currently covers about 104,000 active members and 350,000 total employees, spouses and dependents.

Scott said Alabama isn't alone in battling rising costs.

"We are a member of the public sector health care roundtable, and everything that we get week after week is telling us that other plans around the nation are experiencing these same types of increases," Scott said.

Private plans are seeing it too. Last week, the Alabama Department of Insurance approved premium hikes of 19% to 25% for Affordable Care Act marketplace plans beginning Jan. 1.

Other possibilities to manage costs – like raising member premiums or cutting coverage – weren't discussed at Wednesday's meeting.

The plan already needed a $240 million bailout for 2026, split between the Legislature and the Education Retirees Trust Fund. Scott said even that may not be enough and warned another $74 million could be needed before the year ends.

"I will not know whether I will need that until later into 2026," she said. "And if I do, then I will have to come back to you and ask for more money from the retiree trust."

State Superintendent Eric Mackey said the trust "was set up to keep the cost down for retirees" and shouldn't be used as a fallback.

House Education Budget Chair Danny Garrett, R-Trussville, said the size of the PEEHIP request gave him pause.

"That doesn't seem like a realistic or reasonable request," he told Alabama Daily News. "I'm sure there will be much discussion about details and options to make sure the needs are addressed."

State Finance Director Bill Poole said the problem extends beyond Alabama.

"There's not an American in this country that is going to be insulated from this type of inflationary cost occurring across our health insurance sector, whether they're privately insured or publicly insured."

But the numbers in Alabama's education budget are clear. A statutory cap means no more than $10.4 billion, including about $570 million in new money, will be available across K-12, higher education and other education-related expenditures in the FY27 education budget.

Poole said the PEEHIP request would consume "virtually every new dollar available the next fiscal year. So if this full amount were granted by the Legislature, that would mean no raises and no additional operational funding in large part in the direct budget."

Poole added that it's reasonable to expect lawmakers will want to provide raises next year, especially in an election year. A teacher raise costs about $40 million per percentage point.

Senate Education Budget Chair Arthur Orr, R-Decatur, noted the same challenge.

"We will be listening to the priorities of our constituents in the months ahead as we try to balance these competing demands for budget dollars," he said.

Educators say it shouldn't be a choice. Alabama Education Association Executive Director Amy Marlowe said they supported lawmakers funding the health care cost increase because last year's proposed raise wouldn't have even covered PEEHIP's monthly increase educators would have had to pay. "We've got to find long-term solutions because we can't keep having this either or – either you get a pay raise or you get health insurance."

The pressure is expected to grow. By 2028, costs are projected to reach nearly $2 billion, which would push the state's per-employee contribution up another $400 a month on top of the FY27 rate.

Looking ahead, Scott said plainly: "Something is going to have to go up when we get to '28. It's going to come from somewhere. Or I won't be able to pay the bills."