The Public Employees' Benefit Board broke its deadlock about how to pay for state workers' health insurance rate increases, voting 4-3 to tap the system's reserves despite the objections of its consultants.

SALEM — The Public Employees' Benefit Board broke its deadlock about how to pay for state workers' health insurance rate increases, voting 4-3 to tap the system's reserves despite the objections of its consultants.

Vice chairman Barney Speight voted with union representatives on the board Tuesday to liquidate a $33.2 million fund that had been providing a $20,000 supplemental life insurance benefit for all state workers.

PEBB will direct $14.7 million of the money from that fund to cover part of the cost of 2011 health insurance rates, which came in $34 million above the 5 percent increase built into the Oregon state budget.

The remainder of the money from the liquidated fund will go into the PEBB reserve fund, and the $20,000 life insurance benefit will go away at the end of the year.

Speight said he decided to vote with the union representatives when they agreed to liquidate the life insurance fund — created as part of a 2007 settlement with the Standard Insurance Co. — to help bolster reserves along with covering part of the rate increases.

The move covers only the unbudgeted insurance rate increases for general-fund employees, however. The state still has to cover more than $18 million in health insurance increases for workers paid through other funds.

State agencies will have to scrape together money to pay for the rest of the rate increase through program cuts, layoffs or other budget trimming.

"We have the 9 percent reductions going on across the board already," said board member Dr. Jeanene Smith, administrator of the state's Office for Oregon Health Policy and Research. "I am concerned as to what the impact will be on non-general-fund agencies to make up the difference between a 5 percent increase and a 10 percent increase because that's not part of their budget."

PEBB's actions defied the wishes of Gov. Ted Kulongoski, who had asked the board to hold the line on cost increases to help the state deal with a $577 million budget shortfall.

The governor's office on Tuesday said the board's decision to liquidate the life insurance fund did help matters by paying part of the health premium increase and placing the remainder of money into the general reserves.

But the decision kicked down the road all of the tough decisions that will have to be made to contain skyrocketing health care costs, governor's spokeswoman Jillian Schoene said.

"They didn't take cost-containment and cost-sharing steps, and those are definitely approaches that will require attention and action going forward," she said.

Union representatives on PEBB said they voted to tap the reserves because such action was promised as part of current union contracts with state government.

Under the contracts, the state Department of Administrative Services had agreed to petition PEBB to fund through reserves any rate increases between 5 percent and 10 percent.

"There was a collective bargaining agreement the governor agreed to that had to be upheld," said Diane Lovell, a board member who represents AFSCME Council 75 at PEBB.

Lovell noted that the agreement to absorb these health care costs was part of an overall cost-saving package in which state workers agreed to forgo wage increases and take 10 to 14 unpaid furlough days during the current biennium.

The three PEBB board members who voted against tapping the reserves argued that such a move was irresponsible, given that health care costs are expected to increase about 10 percent every year.

They felt PEBB should have covered at least part of the increase by instituting evidence-based design changes that would have increased co-pays for medical procedures that are expensive and of questionable medical benefit compared with less-pricey options. Such a move could have saved more than $7 million, and similar cost-saving tactics already have been adopted by the Oregon Educators Benefit Board, PEBB's sister agency.

"We have done nothing in terms of reducing claim-cost trends," said board member Rocky King, who works as a policy adviser on health reform in the state Consumer and Business Services Department. "What we've done is plug with money the difference between 5 percent and 10 percent. A year from now, we are starting 5 percent in the hole.

"You've really just postponed some of the difficult decisions you have to make, and because you have postponed that decision, whatever action you will have to take in the future will be more pronounced," King said.

Those decisions will come sooner rather than later. In July, the board will begin discussing changes to its health plans that will be part of the bid request it sends to health insurers for the 2012 plan year.

Deductibles, increases in out-of-pocket maximums and more expensive co-payments and coinsurance will be on the table as possible cost-sharing measures. PEBB also will consider whether to break retirees out into a separate coverage pool, which would lead to an increase in their premiums.