Retired state workers have a great health insurance deal - nearly free for life.

Meanwhile the first wave to contribute during their working years to their future retiree health benefits hasn't yet retired. It's a benefit that most private-sector workers don't come close to having.

The state pays most of the bill and, even with concessions negotiated in 2011, could be paying $16.2 billion between 2007 and 2037. Only 0.31 percent of that cost has been set aside so far.

Using a pay-as-you-go, self-insured system, Connecticut depends on annual budgets and investment revenue to carry the burden of retiree health care costs that in fiscal year 2012 reached $620 million for 73,846 beneficiaries, according to the Office of the State Comptroller.

The state outsources the processing of claims to insurers such as Anthem and UnitedHealthCare. Eligible retirees include most state employees, those both under 65 and old enough to qualify for Medicare. Retired teachers for the most part participate in the health insurance plan of their last school district or in the Teachers' Retirement Board Medicare supplement plan. For the most part employees qualify for health benefits after 10 years of service.

As of July 1, 2013 nearly every state employee has to contribute to the retiree health insurance fund for 10 years. The 2011 State Employees Bargaining Agent Coalition (SEBAC) agreement increased the required years of service for retiree health insurance to 15 years for new employees, among other significant changes to contributions and required preventive care.

The state could be spending $145,158 on the average active employee's retiree health benefits over his or her lifetime, based on a 2011 report by The Segal Co., an actuarial firm, and lifetime expectancy from the Centers for Disease Control and Prevention.

The actuaries recommended the state set aside $475 million in 2012 for active employees' future retiree health benefits. That means the state would have to set aside $8,390 for an employee making the average salary of $68,836, or 12 percent of their annual salary.

That plus pension benefits, would bring the average employee's compensation to $82,224, not including health insurance benefits for the person while he or she is still employed.

"They have been offering these benefits to these people and haven't taxed them any money related to this liability," said Brian Kost, a CPA for Aetna, a CFO for Aetna's pharmacy department and a member of Suffield's finance board. "My kids will be paying for it."

No annual required contribution

The state does not contribute to the retired state employees' health insurance fund based on actuarial annual required contributions, but it has agreed to match what state employees contribute to the fund starting July 1, 2017. The state's contribution that year is estimated to be $129.5 million, according to the Office of Policy and Management.

The changes made in the 2011 SEBAC agreement have put Connecticut ahead of many states when it comes to employee contributions, but there are other solutions Connecticut's governor, unions and legislature could consider if they wish to reduce the state's liability.

Gov. Dannel P. Malloy said he doesn't plan to reopen the SEBAC agreement in the next four years. Rather, he plans to execute the changes his administration and the unions made in 2011 and 2012.

Senate Minority Leader John McKinney, R-Fairfield, a candidate for governor, has said the next governor must open the contract because the state can't afford to continue to make promises it can't keep.

"You can talk to anyone in the private sector and realize the significant changes made in the last 10 to 20 years," McKinney said. "The pension system has gone away and health care contributions (from employees) have increased."

Connecticut's unfunded liability for Other Post-Employment Benefits (OPEB), which are health care costs and life insurance, was the fourth highest in the country per capita, according to a 2013 report by the Center for State and Local Government Excellence in Washington, D.C., and the National Association of State Retirement Administrators.

Had the state been committed to paying an annual required contribution, the amount contributed to the Retiree Health Care Trust Fund in 2012 would have been about twice as much as it was under the pay-as-you-go principle.

About 25 states, including Connecticut, were starting to contribute to retiree health funds as of 2011 and 2012, said Joshua Franzel, vice president of research for the Center for State and Local Government Excellence. But they don't necessarily make the annual required contribution, he said.

Connecticut hasn't committed itself to an annual required contribution in part because it would put an additional strain on the state's $19 billion 2014 budget.

"There should be more dedicated to OPEB, of course," said Comptroller Kevin Lembo. "But there should be more dedicated to retirement and the Rainy Day Fund first, where we have legacy costs that need to be satisfied and are not easy to wrangle with."

The Malloy administration, state comptroller's office and actuaries have reported about $15 billion in savings from the SEBAC agreement, counting reduced claims and increasing the assumed investment rate of return.

About $6.2 billion of the projected savings reflect initiatives among agencies and the creation of the Retiree Health Care Trust Fund, which allows actuaries to use an assumed investment rate of return of 5 percent instead of 4.5 percent.

Analysts at the nonprofit, nonpartisan Connecticut Policy Institute disagreed with calling this a savings, saying "it does nothing to change the state's actual underlying financial stability."

Other projected savings include $2.12 billion from raising the assumed investment rate again to 5.7 percent and $4.94 billion to reflect changes in the insurance plan.

Thomas Woodruff, director of health care and benefit services in the comptroller's office, said costs for the retiree health plan decreased 7 percent in 2013 compared to 2012 in part because the new Health Enhancement Program requires retirees to get their prescriptions filled in designated ways. HEP also requires preventive care measures such as a certain number of wellness exams.

In the same period, health care costs nationally were estimated to increase at 7.5 percent, according to the comptroller's office.

About another $1.7 billion in savings is projected to come from a new prescription drug contract and a recalculation of claims paid to retirees, according to a 2013 actuarial report.

Kost, from Aetna, said he is concerned about some of the assumptions for projected health care liability. For instance, if the medical inflation rate turns out to be higher than 5 percent, the liability will be greater. The rate was about 7.5 percent in 2013 and is projected to slow to 6.5 percent this year, according to PricewaterhouseCoopers' Health Research Institute.

Since the state began the Health Enhancement Program, emergency room visits have declined for employees who are participating in the program but continued to rise for retirees, according to the state comptroller's 2013 year-in-review report. For other groups, the state is continuing to see a rise in emergency room visits, Woodruff said.

Getting hospital visits down is important because they are expensive, he said. A hospital visit on average costs $1,200 versus a doctor's appointment, which costs $150, Woodruff added.

Compared to other states

Other states are using tactics Connecticut could adopt, such as requiring all retirees to pay a portion of their "premium share," having deductibles in all plans and requiring higher co-payments.

Many states are getting rid of their retiree health plans altogether for new hires. From 2002 to 2011 the percentage of state government units that offered health care to retirees under age 65 dropped to 69 percent from 92 percent, and those offering health care to retirees 65 or older decreased to 61 percent from 86 percent, according to the Center for State and Local Government Excellence and NASRA.

It would be difficult to reduce promised health benefits, but a federal judge might consider allowing the state to impose something like an additional co-payment for retirees, said state Rep. Arthur O'Neill, R-Southbury.

In Illinois, where retired state workers historically paid deductibles and other health insurance costs, Gov. Pat Quinn signed a bill into law in 2012 that requires retired state workers and future retirees to pay a portion of the premiums. The bill had bipartisan support.

In a ruling on a suit brought by labor unions, an Illinois circuit court ruled the retiree health insurance plan was not protected by the state Constitution's pension protection clause "because health insurance benefits are not a retirement benefit and are negotiated by state officials and organized labor."

In Connecticut, state employees pensions and retiree health benefits are part of a collectively bargained agreement with the state and are not explicitly a part of the state's constitution.

j.somers@theday.com