October 23, 2025 | Brian J. Miller et al.

The North Carolina State Health Plan (SHP) serves as the self-insured, government-run health insurer for employees of state agencies, local governments, universities, and other agencies. Covering a little more than 750,000 lives, the SHP spends between plan costs and employee contributions nearly $4.5 billion annually, making it the third-largest sole source of health financing in the state of North Carolina after Medicare and Medicaid.

The combination of monopoly health systems and medical spend trends have resulted in significant financial challenges for the SHP, which faces an estimated deficit of greater than $500 million for Calendar Year (CY) 2026 and a total projected deficit of $949 million by the end of CY2027.

In this article, we review the challenges that drove the fiscal instability of the North Carolina SHP. As part of the team leading the plan’s operational and policy response to those challenges, we then describe the dynamic, market-driven tools that we are applying to efficiently and effectively control costs with sensitivity to the varied needs of more than 750,000 SHP members.

Multiple Factors Created A Large Fiscal Deficit

A confluence of factors including provider consolidation, trends in medical spending, outdated benefit design, and natural disasters jointly drove a large and growing deficit.

North Carolina faces significant challenges resulting from health system consolidation. Large national systems are growing into the market, including Hospital Corporation of America’s controversial acquisition of Mission Health, Risant Health’s purchase of Cone Health, and Atrium Health, which acquired WakeForest Baptist before subsequently merging with Advocate Aurora, an out-of-state health system.

In tandem, local health systems have become regionally dominant through mergers. UNC Health attempted to exempt itself from federal antitrust oversight through state action after two decades of mergers including the acquisitions of Rex Healthcare, High Point Regional, Southeastern Health, Johnston Health, Blue Ridge, and many others. Duke University Health System has continued to purchase hospitals all over the state including Lake Norman Regional Medical Center, while Novant Health attempted to buy two hospitals from Community Health Systems subsequent to other growth such as its 2021 acquisition of New Hanover Hospital. The consequences are real: A longstanding body of research demonstrates that hospital consolidation raises costs, resulting in higher insurance premiums, worsening of patient experience, and no improvement in quality.

The plan’s financial challenges were worsened by negative trends in medical spending as the population’s health worsened, with more than 60 percent of members having at least one chronic condition and 40 percent with multiple chronic conditions. According to internal plan data, among covered individuals diabetes prevalence reached 11.4 percent in 2023, driving 23.0 percent of medical spend and 37.0 percent of prescription drug spend while mental health encounters rose from 21.2 percent of members in 2019 to 28.0 percent post-pandemic; costs rose 24.0 percent. Certain drug category costs rose significantly, with biologics reaching 35 percent of drug spend, and $130 million alone spent on Humira in 2023.

The SHP also did not keep pace with Marketplace changes in benefit design and premiums. Despite health care inflation reaching at one point 6 percent per annum, the SHP did not change premiums and had de minimis cost-sharing changes for nearly a decade. Prior policy efforts through the Clear Pricing Project attempted to manage costs and instead unintentionally raised plan costs: The plan offered any willing provider 160 percent of Medicare rates and deep cost-sharing reductions for members. Consequently, the SHP experienced adverse selection wherein the majority of providers who signed up were previously making far less than 160 percent of Medicare, worsened by increased use as member cost sharing went down to $0 in many cases.

Finally, Hurricane Helene in September 2024 devastated North Carolina with total damages and economic cost estimated at $59.6 billion, with recovery costs and concomitant unemployment stressing the state budget. State revenue growth is estimated at 0.5 percent for Fiscal Year (FY) 2026, far below the health care cost trend of 7.1 percent growth in 2025 and 5.6 percent in 2026.

Immediate Measures To Achieve Financial Stability

With the state budget facing sluggish revenue growth and massive fiscal pressures from the Hurricane Helene recovery, the SHP needed to work independently to restore fiscal order. In 2025, the treasurer, SHP staff, and the board of trustees prioritized ensuring near-term financial stability through updating the benefit design and premiums for active employees for the subsequent year, as they had not been adjusted in a decade. Care was taken not to overtly penalize those with chronic illness or serious disease and ongoing conditions by ensuring minimal changes in the maximum out-of-pocket limit. Furthermore, tier 1 and tier 2 pharmacy products experienced minimal changes in cost sharing while behavioral health and habilitative services copayments decreased to expand access and help members struggling to get back on their feet. Mirroring a best practice in the Medicare program, premiums were also newly tiered by salary (exhibit 1), with a goal to keep premiums to a similar percentage of salary across bands and over time.

Exhibit 1: New salary bands and associated 2026 premiums for a single employee member (previously $25/month)

Source: The North Carolina State Health Plan.

In addition to benefit design and coverage options for active employees, the SHP is also responsible for designing and financing retiree health benefits and maintains two primary product options for retirees: a Medicare Advantage (MA) employer group waiver (EGWP) plan and a Medigap plan. As retirees are on fixed incomes often with few assets, the plan—at no additional cost to active employees, retirees, or North Carolina taxpayers—was able to preserve with de minis changes the relatively rich retiree health benefits in the EGWP plan, which comprises a little more than 180,000 or 86.5 percent of North Carolina SHP Medicare retirees. In the long term, the EGWP MA plan executed in partnership with Humana offers a fixed budget for the SHP, enriched benefits and better cost sharing for members, an open network, and some use review as an alternative to the Medigap plan. In conjunction with these changes and in recognition of the SHP’s efforts to restore financial stability, the state legislature, in July 2025, granted an additional $100 million to help plug the near-term fiscal hole.

Enduring Change Through Modernizing Network Design And Elevating Primary Care

Next, we aimed to transition the plan on to better long-term financial footing, ensuring fiscal sustainability and better value for the more than 750,000 members. To that end, we deployed proven health finance tools.

We started by recognizing flaws in the status quo. For years, the plan had an-any-willing provider network for all services—an outdated insurance design no longer present in most self-sponsored employer health benefits markets or in the large group insurance market. Also, existing use review and prior authorization policies were not focused on health outcomes, provider relationship, or quality. These poorly targeted policies had long ago become a burden on the member experience, creating increasingly adversarial relationships among the plan, providers, and members.

Recognizing that health maintenance organization strategies emulated by managed care companies would be far too restrictive in a state with a large rural population, the plan opted to implement a preferred provider strategy to save money, improve quality, and expand access. For preferred primary care providers, members would see a reduced copay of $10–$15. As a single state health plan with detailed knowledge of its highly localized provider communities, the plan was confident in deciding to eliminate medical prior authorization for preferred primary care physicians; this goes beyond the recently announced process reforms that the health insurance industry announced.

Primary care physicians would also benefit financially, with three categories of bonuses. First, primary care physicians would receive enhanced reimbursement if target care management goals were achieved. Next, primary care physicians could earn shared savings bonuses for sending patients to low-cost imaging centers and labs; this was inspired by an analysis of real-world experience from commercial carriers that saw substantial price variation for shoppable services such as labs and imaging, with a substantial local opportunity. Colonoscopies, for example, were significantly more expensive with wider variation when conducted by hospital outpatient departments compared to freestanding centers (exhibit 2).

Source: North Carolina State Health Plan internal data.

The final prong of primary care physician bonuses aims to promote quality, increase volume-driven access, and reduce member friction by rewarding preferred primary care physicians for partnering with practices engaged in new SHP specialty care bundling programs. As part of its efforts to combat consolidation and support independent practice as a viable small alternative, the plan will work to include low-cost, high-quality independent primary care physicians as preferred providers. Recognizing that adjusting referral patterns and strategy requires administrative effort from providers, the plan is looking to reduce administrative burden in other areas such as removing medical prior authorization, eliminating some downcoding programs, and seeking feedback on other key provider pain points.

Transforming Into An Active Purchaser Of Specialty Care

Specialty care will also experience a transformation from an any-willing-provider network to a preferred provider network. However, instead of contracting by specific health systems for all specialty services, the SHP will look to contract for specialty care bundles targeting procedures and technical specialties for which there is a clear volume-quality relationship such as joint replacements (knees, hips, shoulders), spinal surgery, bariatrics, and cardiology procedures. The SHP has contracted with Lantern to begin the process of building a preferred specialty network including a no-cost surgical benefit for members.

In the future, the SHP will prioritize specialties important to our unique population such as obstetrics to ensure convenient and affordable access for women of child-bearing age and families. Providers will benefit from certainty of volume, stable pricing, and the elimination of medical prior authorization; behavioral health providers specifically will be paid at 140 percent of Medicare rates. For patients, the size of the SHP will allow us to negotiate using scale for both preferential access and pricing and to then selectively drive plan members to high-volume, high-quality, low-cost providers.

Employers Have Agency And Can Use It

Much of the recent health care discussion around affordability has focused on broken markets, with an aim toward interventionist strategies such as price regulation. With price regulation having failed to control medical expenditure growth in the fee-for-service Medicare Marketplace, a turn toward dynamic, market-driven tools is the natural choice.

The North Carolina State Health Plan experience shows us that large, self-insured employers can work to bend the cost curve with dynamic market-driven tools, filtering the complex health care system for beneficiaries and driving competition through the use of volume to purchase high quality and access. We have stepped up to bat, and other employers can too.

Authors’ Note

Brad Briner serves as the treasurer for the state of North Carolina and the chair of the North Carolina State Health Plan Board of Trustees. Brian Miller serves as a trustee of the North Carolina State Health Plan. Thomas Friedman serves as the executive director of the North Carolina State Health Plan. Emma Turner is the director of analysis, finance, and economics for the North Carolina State Treasurer.