Raleigh, N.C. — An outside consultant hired to review the operations of the health insurance plan for state employees and retirees told state lawmakers Thursday that the plan should be restructured and should rework its contracts to limit expenses.

Rising medical costs have led to significant losses at the State Health Plan, and officials haven't been able to stop the bleeding. Last year, the state spent $300 million in taxpayer money propping up the plan, and its executive director told lawmakers in June that the plan would need another infusion of $400 million to $500 million late next year or early in 2012.

The health plan provides coverage for 667,000 state employees, retirees, teachers and their dependents.

Plan officials paid Navigant Consulting Inc. $1.2 million to find areas for improvement after a state audit last year said mismanagement had led to steep losses in the plan.

The health plan is overseen by lawmakers and a board of directors, but consultants told a legislative task force that the plan should be set up as an independent agency within the Governor's Office and that the existing board should be replaced.

"Bring the appropriate level of accountability and transparency to the process, and to the extent possible, take out some of the politics that may play a role if it's in the legislative branch," consultant Cynthia Knippling said.

Jack Walker, the health plan's executive director, said he had no objection to restructuring the plan within the Governor's Office. But he bristled at Knippling's contention that the plan lacks oversight.

"It's all falling under one person, and it depends on the skills and abilities of that person," she told the task force, referring to Walker.

"I would respectfully challenge that," he responded.

The consultants also recommended reworking contracts with Blue Cross Blue Shield of North Carolina and Medco Health Solutions, which administer medical and pharmacy benefits, respectively, for the plan. Changing how Blue Cross is paid for its services and using more generic drugs and mail-order prescription services would save money, they said.

Blue Cross officials said they have modified their contract to reduce what they charge to the state.

The consultant said some of the same concerns were first brought up in 1994, but lawmakers never remedied the situation.

"If you see a car going over a cliff, you don't take 16 years to study it. You take action," said Erica Baldwin, spokeswoman for the State Employees Association of North Carolina.

Members of the task force said they expect to propose new legislation to fix the health plan in the 2011 legislative session.

"Certainly, all options are on the table," House Majority Leader Hugh Holliman said.