Long-Term Obligations and the Texas Legacy Fund Health Care Benefits for Retired Teachers

Published October 2018

The Teacher Retirement System of Texas (TRS) administers two health care benefit programs: the Texas School Employees Uniform Group Health Coverage Program (TRS-ActiveCare) for current public school employees and their dependents and the Texas Public School Retired Employees Group Benefits Program (TRS-Care) for retirees and their dependents. This overview addresses TRS-Care.

TRS-Care is a self-funded program, initially established in 1985 through Chapter 1575 of the Texas Insurance Code.²⁵ As of April 2018, the TRS-Care program covered about 234,000 retirees, dependents and surviving spouses.²⁶

Program Solvency

TRS-Care funding is linked to active public school and charter school employee payrolls, not to actual health care costs. Due to rapidly rising health care prices and a contribution system that didn’t change from 2005 to 2017, this funding has not kept pace with health care expenses.²⁷

A November 2016 report by the Joint Interim Committee to Study TRS Health Benefit Plans projected that TRS-Care would incur a $1.3 billion to $1.5 billion shortfall in the 2018-19 biennium and a $4 billion to $6 billion shortfall for 2020-21.²⁸

In response to the joint committee’s recommendations, 2017 legislation:

• eliminated free coverage under TRS-Care (except for certain disability retirees enrolled during Plan Years 2018 through 2021), requiring members to contribute $200 per month toward their health insurance premiums;
• increased funding contribution rates for the state and school districts to generate an estimated $301.3 million in additional funding during the 2018-19 biennium;
• created a high-deductible health plan for enrollees not eligible for Medicare;
• created a Medicare Advantage plan and Medicare prescription drug plan for enrollees eligible for Medicare;
• allowed the system to provide other, appropriate health benefit plans to address the needs of enrollees eligible for Medicare; and
• allowed eligible retirees and their eligible dependents to enroll in TRS-Care when the retiree reaches 65 years of age, rather than waiting for the next enrollment period.²⁹

TRS-Care Contributions

TRS-Care funding comes primarily from contributions made by active employees, school districts and the state, as well as retiree and dependent premiums and certain federal subsidies.

The 2017 legislative session increased the state’s contribution from 1 percent of the salaries of all active public education employees to 1.25 percent, an increase that will generate an additional $167.4 million for the program during the 2018-19 biennium. It also increased school district contributions from 0.55 percent of payroll to 0.75 percent, to generate an additional $133.9 million in the same period (Exhibit 4).³⁰ The contribution rate for active public education employees remained at 0.65 percent of payroll.

Exhibit 4: Formula Funding Changes for TRS-Care

Source: Texas Comptroller of Public Accounts

---

Supplemental Funding

At its creation in 1985, TRS-Care was expected to remain solvent for just 10 years, with the understanding that additional funding or benefit changes would be necessary to maintain the plan. Prior to the recent legislative changes to TRS-Care, however, the funding formula had not changed since 2005, requiring periodic supplemental appropriations to maintain benefits.³¹

In 2003, for instance, the Legislature appropriated $516 million from the Texas Economic Stabilization Fund (ESF) to maintain TRS-Care benefits. The program also received more than $487.1 million in supplemental appropriations from general revenue between 2003 and 2005. Since 2013, the Legislature has made supplemental appropriations to TRS-Care nearly annually (Exhibit 5). Most recently, the Legislature made a supplemental appropriation of $182.6 million for fiscal 2018 and then, during the 2017 special session, added another supplemental appropriation of $212 million to reduce the TRS-Care Standard plan deductible from $3,000 to $1,500 and reduce premiums for dependents.³²

EXHIBIT 5: STATE GENERAL REVENUE CONTRIBUTIONS FOR TRS-CARE, FISCAL 2003 to 2017 (IN MILLIONS)

State General Revenue Contributions for TRS-Care,
Fiscal 2003 to 2017 (in millions)

Fiscal Year	State Formula Contributions*	Supplemental Appropriations
2003	$98.30	$124.70
2004	$198.6	$298.2
2005	$202.4	$64.2
2006	$215.7	$0.0
2007	$238.2	$0.0
2008	$234.0	$0.0
2009	$245.6	$0.0
2010	$253.6	$0.0
2011	$257.0	$0.0
2012	$247.5	$0.0
2013	$127.4	$102.4
2014	$267.5	$36.1
2015	$281.1	$768.1
2016	$297.0	$0.0
2017	$303.8	$15.6

* Based on a percentage of payroll

Source: Teacher Retirement System of Texas

---

Cost Drivers

The rising cost of health care is directly tied to the impact of chronic health conditions and increasing drug prices.

A small share of TRS plan participants accounts for a disproportionate amount of health care spending, largely due to chronic health conditions needing frequent care. Compared with the rest of the population, persons with chronic diseases such as diabetes have a much higher rate of emergency room visits, more frequent hospital admissions, longer hospital stays and higher readmission rates.

Price inflation among “specialty” medications — expensive new drugs generally under patent — also drives up costs. TRS-Care participants using specialty medications made up just 7.3 percent of all TRS-Care enrollees in fiscal 2017, but their specialty drugs accounted for 30.9 percent of all covered drug costs before rebates. For example, the amount TRS-Care spent on two specialty medications, Humira and Enbrel, rose by nearly 14.5 percent in fiscal 2017, even though the number of patients using them increased by less than 2 percent.

Even with the changes to the plan design and contribution rates, TRS’ July 2018 Legislative Appropriations Request estimated that TRS-Care would need an additional $400 million to $600 million for fiscal 2020 and 2021 to maintain premiums and benefits at current levels. Subsequent contract negotiations reduced the projected need to an additional $240 million to $410 million.³³

Related:

• Texas State Government and Long-Term Obligations (March 2017)
• 2017 Legislative Wrap-Up (September 2017)
• The Fiscal Noting Process (January 2017)
• Hurricane Harvey and the Texas Economy: Economic Impact (February 2018)