Raleigh, N.C. — Inaccurate forecasts of medical expenses and a bad contract with Blue Cross Blue Shield of North Carolina led to huge losses in the health insurance plan for state workers and teachers, according to an audit released Thursday.

The State Auditor's Office said State Health Plan officials need to keep closer tabs on medical costs racked up by members and called on lawmakers to look at changing oversight of the plan and at preventing similar contracts with vendors like Blue Cross.

Projections of a $57.9 million surplus at the end of the 2008 fiscal year last June quickly morphed into a $79.7 million deficit because claims and administrative expenses were underestimated, the audit said.

The shortfall continued to balloon in recent months, resulting in a $250 million taxpayer-funded bailout approved last week by lawmakers and Gov. Beverly Perdue. The bailout also calls for higher deductibles and co-payments for members, an 8.9 percent increase on premiums for dependent coverage and cuts in benefits for people who smoke or are obese.

State Auditor Beth Wood also accused former plan director George Stokes of covering up the deficit for several months, which she said compounded the problem.

"If it had been discovered in January of 2008, the governor would not have had to bail out the health plan for $250 million. The state could have gotten on top of this a lot sooner," Wood said.

Stokes told WRAL News that the allegation that he hid the sinking financials from lawmakers was "absolutely wrong." He said he shared monthly reports with lawmakers, fiscal research analysts and auditors.

A surge in enrollment in the plan's PPO option and the resulting growth in check-ups and procedures led to expenses running $163.8 million ahead of projections for the 2007-08 fiscal year, according to the audit. Plan administrators also overestimated the discounts they would receive from hospitals and physician groups, the audit said.

Projections of administrative expenses were off by $36.3 million, primarily because State Health Plan administrators couldn't forecast Blue Cross' fees for handling claims, the audit found. Actuaries couldn't review the contract to try to determine the insurer's costs because of a confidentiality agreement, the audit said.

"The State Health Plan has agreed to a contract that requires the plan to reimburse (Blue Cross) its costs, but does not allow the plan to verify those costs or even know what they are," the audit states.

Also, Blue Cross was reimbursed for its costs and received a percentage of its costs under the contract, which auditors said didn't encourage any savings effort by the insurer. The federal government outlawed such contracts in 1941, and auditors recommended that the General Assembly do likewise for state contracts.

"There were aspects of the contract that were not in the best interest of the state," Wood said.

Blue Cross released a statement saying the health plan had the authority to share its contract with actuaries. The insurer didn't comment specifically on criticisms in the audit, however, except to say company officials weren't interviewed.

Dana Cope, executive director of the State Employees Association of North Carolina, backed the audit's call for shifting oversight of the State Health Plan from lawmakers to an executive branch agency.

"(The plan's financial problems are) absolutely outrageous. It's a no-bid contract that will cost the state billions of dollars," Cope said.

The State Health Plan provides medical insurance for almost 650,000 state workers, public school teachers and retirees. It also administers N.C. Health Choice, which covers 122,000 uninsured children statewide.