Teachers' health insurance program facing funding shortfall

MONTGOMERY — The board that manages Alabama's health care program for teachers is going to ask lawmakers for an additional $134 million in fiscal year 2026 to start plugging an expected $283 million shortfall in 2027.

The request would bring state funding for educators' insurance to $1.3 billion in 2026.

The board for the Public Education Employees' Health Insurance Plan, or PEEHIP, also proposed transferring up to $79.4 million from a reserve account, though later upped the ask to $118.9 million.

The board discussed raising premiums on retiree members starting in 2025 to cover the cost increase as well, but ultimately opted to ask lawmakers for the additional $134 million, as well as the up to $118.9 million transfer.

About 350,000 teachers, retirees and their dependents are currently enrolled in PEEHIP.

"In 2027, we're going to have a problem that we will have to address," said Diane Scott, chief financial officer for the Retirement Systems of Alabama, which includes PEEHIP.

"We'll be in the hole $133 million, but we'll need $150 million (to maintain our reserve funds at the statutorily required level), so $283 million, that's how much we would be short in 2027, even with this proposal that we're coming to you for today."

Dave Wales, PEEHIP director, told board members that the cause of the unexpected budget shortfall was twofold — a new cut in Medicare payouts from the U.S. Centers for Medicare & Medicaid Services, and the 2022 Inflation Reduction Act, which reduced the federal government's cost share of prescription drugs under the health care plan RSA provides for teachers through United Healthcare.

The Inflation Reduction Act, Wales told Alabama Daily News, had caused the federal government's cost share of brand prescription drugs to drop from 80% to 20%.

"So, less revenue, more expense; that's the issue with the bundled Medicare Advantage product," Wales told ADN.

Today, there is an average state allocation for each active enrollee of PEEHIP of $800 per month, a rate that has remained consistent since 2017 after it increased from $780.

Lawmakers appropriated $998 million toward the program in both the upcoming fiscal 2025 and the current fiscal 2024. In 2023 the allocation was $987 million and in 2022 it was $975 million.

For Medicare-eligible enrollees, they pay a dependent premium for spouses and non-spouses of $65 per month, a co-pay of $13 for visits to general practitioners, and a co-pay for visits to specialists of $18.

The board was initially presented with a funding solution that included raising co-pays for many enrollees.

State Superintendent Eric Mackey, who sits on the PEEHIP board, recommended that the board should ask state lawmakers for the $1.3 billion, but proposed eliminating the increases to copays and premiums, at least for the immediate future.

"We've been talking about this for a year knowing that these things could come," Mackey said.

"I think it is very wise to let the dust settle a little more on where Medicare is going to be, to let us get through this presidential election, and see if Congress makes any additional changes to Medicare."

Mackey also proposed amending the request for up to $79.4 million from the Retiree Trust Board, and instead change the dollar ask to be up to whatever state law would permit, which is $118.9 million, and allow the Retiree Trust Board to ultimately determine the amount.

"Everybody in this room knows retirees have been struggling, we've not been able to do (cost-of-living adjustments), we've not been able to do even retiree bonuses the last few years, so I hate to hit retirees with this additional cost with three-months' notice," Mackey said.

"So, I think we can let the Retiree Trust Board adjust that amount, ask the Legislature for $904 (per member) this spring, and get through 2025. I just think that with the Retiree Trust doing so well, we can buy ourselves a little more time, not put this on the back of our retirees, and see if things work out a little better in the next few months."

Mackey's amended motion was ultimately adopted by the board in a vote of 14-1, with member William Walsh being the lone "no" vote.

Asked about the additional $130 million request for 2026, Sen. Arthur Orr, chairman of the Senate education budget committee, said, "It's a problem."

"But in fairness, we've had level requests for an extended period of time," Orr, R-Decatur, said. "It's just hard to take the medicine all at once. We'll manage but it will definitely affect our ability to address other important needs like pay raises and ongoing programs."

Insurance isn't the only personnel cost increase expected in fiscal 2026.

Alabama Daily News reported in July that the funded liabilities in state employees' and educators' retirement funds have decreased in the last year and the Retirement Systems of Alabama will be asking lawmakers for more state funding so that schools and state agencies can increase by 1% their contributions to employees' retirement.

The requested increases come as the state sees a post-pandemic slowing and leveling of growth in various revenue streams.

The ETF has grown by 1.2%, or about $111 million, as of August. But sales tax revenue, the second largest funding stream to the ETF, is down by 1.8%.

The fiscal year ends this month. Legislative leaders told ADN this week some "belt tightening" should be expected in 2026.

Alabama Daily News' Mary Sell contributed to this report.