Gov. Chris Gregoire Monday proposed modernizing the state’s health care and pension systems to reduce costs as part of her work to transform Washington’s budget. If enacted, her reforms to the pension system alone could save more than $400 million during the 2011-2013 biennium.

“The proposals I’ve developed will make a significant difference in the budget shortfall we face today,” Gregoire said. “Just as importantly, they will free the state to make better use of its resources for years to come.”

Gregoire announced she will ask the Legislature to end the automatic annual pay increases now provided for those under the PERS and TRS 1 pension plans. While intended to protect against inflation, the increase itself is not linked to inflation, which in recent years has been low. The proposal would save $368 million during the 2011-2013 biennium, and would immediately cut the state’s unfunded pension liability of $7 billion by nearly 60 percent. The Legislature would still have the authority to provide inflation-related increases, as it did prior to 1995.

“I realize these benefits are important to thousands of Washingtonians who spent their careers serving the public,” Gregoire said. “But as we’ve asked all sectors of government to sacrifice, ending the automatic nature of these increases would save the state $2 billion through 2015, and $9 billion over the next 25 years.”

Gregoire also proposed saving $2.2 billion over the next 25 years by ending early retirement incentives for future employees who choose to retire before the age of 65. Additionally, Gregoire will seek legislation to help equalize retirement benefits for college and university employees so they more closely match that of all state employees, as well as propose legislation to end retire-rehire exemptions that allow retirees to draw pension benefits as they earn a salary from a college or city. Ending the retire-rehire exemption was a favored idea by both Washingtonians who submitted ideas on the governor’s budget website, as well as the Transforming Washington’s Budget committee.

Gregoire also announced actions to limit the overall increase in health care costs in Washington state to no more than five percent a year by 2014, while maintaining quality care for the 1.2 million low-income children and adults and 335,000 public employees, retirees and their families who rely on it. By holding health care inflation low, Gregoire expects all Washingtonians to save a combined $26 billion on health care over the next 10 years.

“In the past decade, the amount the state pays for health care each year has doubled to more than $5 billion,” Gregoire said. “Keeping up with that growth is nearly impossible. This fiscal year, we’ve already had to eliminate preventative dental care, eliminate medical coverage for 27,000 children through state insurance programs, and reduce personal care for long-term care clients. If we want to continue a meaningful level of care for our citizens in the future, we have to address health care inflation, which far exceeds economy-wide inflation.”

The governor will do this in part by ramping up strategies that have already proven to be successful, like her “generics first” prescription drug initiative and more monitoring of clients with a history of overusing high-cost services, such as emergency room services and prescription drugs.

Gregoire will also pursue legislation to consolidate a majority of the state’s health care purchasing into a single agency to ensure that cost-saving strategies are applied consistently across all state programs. It will also position the state to use its full purchasing power to get the most value out of tax-payer dollars.

Gregoire also announced an aggressive shift toward a system that pays based on the quality of outcomes instead of the number of office visits. Working in partnership with the federal Department of Health and Human Services, Gregoire is pushing Washington as a pilot state for this new model of health care.

“The promise of reform is a day when no one goes without health care coverage – but making that promise real will require us to drive down the costs of coverage,” Gregoire said. “Although we will employ multiple strategies to do that, our goal is simple. We want to contain health care inflation while delivering higher-quality care.”