State lawmakers have known for a while that putting next year's budget together in the face of a $3 billion shortfall would be a challenge.

Wednesday the fiscal outlook got even bleaker and legislators learned they have a budget emergency now, in the current year's budget.

The State Health Plan that covers 669,000 state employees, dependents, and retirees will run out of money March 31 unless the General Assembly comes up with $300 million.

The news was delivered at a briefing by Mark Trogdon of the legislative fiscal research staff who also reported that the health plan faces a $1.2 billion shortfall over the next two years if benefits and premiums stay the same. There is already talk of increasing premiums for family coverage as much as 37 percent, to $640 a month.

It's the latest twist in a confusing saga that began as the 2008 legislative session was ending, when lawmakers learned the health plan was $100,000 in the hole. That led to the firing of the plan's administrator George Stokes, who lawmakers said hadn't kept them informed about the financial problems.

The House quickly passed legislation to take the money out of the state's savings account, but the Senate ignored the House and the health plan's problems and the session adjourned. Things have only gotten worse since then.

Dr. Jack Walker, the new administrator, reported to the plan's Board of Trustees in September that lawmakers would need to spend close to a billion dollars next year to keep the plan operating at current levels.

Former State Auditor Les Merritt released a report on the management of the State Health Plan in October that found it suffered from inadequate and ineffective oversight. He recommended that lawmakers move the plan under an executive branch agency. 

The Board of Trustees has no power to authorize contracts or hire or fire the administrator. Merritt pointed out that a 1994 audit raised the same concerns but nothing changed. The auditor's office is also working on a financial audit of the health plan that has yet to be released.

People covered by the plan may have seen news accounts of the financial problems, but letters to members on the plan's website downplayed the crisis, announcing as late as December that finances were "slightly better than expected" even though it also mentioned that money would run out early in 2009.

Lawmakers were told Tuesday that the shortfall in the plan was $800 million for the next two years, well below Trogdon's $1.2 billion figure presented the next day. 

The explanations for the financial crisis are just as confusing as the numbers. Some of the problem dates back to 2007 when lawmakers ended an indemnity plan option for state workers and retirees and began covering all the enrollees in a Blue Cross Blue Shield preferred provider organization or PPO.

That was supposed to save the state $20 million a year, but health plan officials say they overestimated the savings from provider discounts by 52 percent. It's hard to know what happened, as the contract with Blue Cross for administration of the plan is apparently not a public record.

Other reasons given for the shortfall include inaccurate projections of the utilization of medical services and out-of-pocket cost sharing by policyholders. Projections also did not include an accurate assessment of administrative costs.

All that seems to support the claims that the previous management of the State Health Plan made serious mistakes, but there are still plenty of questions unanswered. Family premiums now cost $489 month and that has prompted younger, healthy families to buy policies for their spouse and children, generally from Blue Cross.

That has prompted some legislators to propose forcing Blue Cross to consider its individual policyholders and enrollees in the state plan as part of the same insurance pool to reduce the cost for state workers.  Blue Cross' profits are up five percent and the company has more than a billion dollars in reserve, not bad for a nonprofit.

It is not clear how much of next year's shortfall can be traced to the wildly inaccurate projections and how much is due to the nine percent increase in costs expected next year.  The plan is designed to be self-sustaining, so it's likely that benefits will be reduced and premiums increased to make up next year's deficit.

But why can't the General Assembly subsidize the coverage for a year or two to avoid raising family premiums to $640 a month ,while lawmakers make long term changes in the structure of the plan?  

Just over 58 percent of state workers make less than $40,000 a year and can't afford to pay $7860 a year on insurance, not including co-pays and deductibles. 

Lawmakers have to come up with $300 million soon to keep the doors open. But addressing next year's shortfall in the health plan isn't so cut and dried.

State employees and retirees didn't mismanage anything or negotiate the administrative contract with Blue Cross. They had nothing to do with the current crisis. And they shouldn't be the only ones who pay to fix it.