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New Jersey Treasury Department officials are warning about rising costs and spiraling structural deficiencies in the State Health Benefits Program, which provides health care coverage used by hundreds of thousands of state and local public employees.

In a report released May 20, Treasury officials say the program is facing challenges because rising costs of health care coverage are driving some local governments to seek cheaper benefits alternatives. That exodus is creating what Treasury officials call a “systemic unraveling” of the SHBP.

There are 689 local government agencies using the State Health Benefits Program, and participants have seen premiums increase by nearly 60% since 2022, the report says. The plan covers more than 700,000 public employees statewide.

Premium increases are expected this year as well.

What does the report say?

The local government plan — the portion of the SHBP that covers local government employees — faces legitimate financial concerns right now, the report notes.

In October 2024, Gov. Phil Murphy signed legislation to allow funds to be temporarily transferred from the state plan to the local government plan to cover shortfalls. In five months, transfers of $258 million were approved. About $138 million has been repaid, and an outstanding balance of $120 million remains.

The plan faces what actuaries refer to as a “death spiral,” the report says.

“This dynamic arises when the financial sustainability of a health benefits program deteriorates in a self-reinforcing cycle, each worsening cycle compounding the next,” it says.

As healthier local governments leave the plan for cheaper options, those left behind with higher medical use see premiums go up. This leads to more local governments leaving the plan. In turn, having fewer participants leads to a smaller buffer to mitigate premium spikes, actuarial losses or cash flow needs, the report explains.

About 45% of the state’s 1,200 eligible local public entities are currently using health benefit programs outside the state’s plan.

This is “not merely facing a financial problem” but a “structural unraveling that, left unaddressed, will lead to collapse,” Treasury officials say in the report.

What comes next?

With the report, prepared at the direction of the administration of Gov. Phil Murphy, Treasury is urging the Legislature to intervene. That said, the report doesn’t make any specific recommendations as to what comes next but offers policy options because of the urgent nature of the problem.

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Even the options provided have no real time frame of implementation but rather depend on the specific initiatives considered by the Legislature.

Those options include a “phased and orderly closing” of the local government health benefits plan to allow “local entities to transition into self-governed collectives.”

Alternative policy options for short-term stabilization could also be implemented, but they “will not fully resolve the structural deficiencies or halt the death spiral.”

They include a installing a minimum lock-in period of three to five years for agencies participating in the program, reforming the Plan Design Committee to include a delegated authority to the treasurer or director of the Division of Pensions and Benefits so that routine plan changes could be made, and rebuilding the claims stabilization reserve to the recommended two-month level.

“These short-term measures are independent of the more comprehensive solution of dissolution,” the report said. “The simultaneous introduction of all of the three short-term measures will have a cumulative positive effect, since governance modernization alone cannot succeed.”

Katie Sobko covers the New Jersey Statehouse. Email: sobko@northjersey.com