Attorney General Mark Bennett told the Hawaii Supreme Court last month that health benefits provided retired state and county workers are not among the retirement benefits the State Constitution protects from being “diminished or impaired”.

Bennett said health benefits are not administered by the Employee Retirement System and therefore fall outside of the benefits provided constitutional protection.

The health benefit plan when it came into existence…was not administered by the Employee Retirement System, was never part of the Employee Retirement System, and is not so now.”

But attorney Paul Alston, representing a group of retirees, said health benefits are constitutionally protected because they are part of a bargain struck between public employees and the state that provided a system of benefits, both cash pensions and health benefits, “both of which are conditioned on membership (in the ERS).”

Public employees took less in salary in exchange for the promise of long-term financial security, including health benefits, Alston argued.

Bennett and Alston appeared before the Supreme Court in a case brought by a group of retirees who say the Hawaii Employer-Union Health Benefits Trust Fund broke the law by failing to provide retirees with health benefits substantially equal to those of active workers.

The case takes on more immediate relevance in light of Governor Lingle’s proposal to cut Medicare reimbursements for spouses of state retirees as part of her plan to balance the state budget.

The lawsuit was filed in 2007 after the EUTF board rejected their claim. Last year, a ruling by Circuit Court Judge Eden Hifo sided with the retirees and overturned the EUTF decision.

In her ruling, Hifo determined that retiree health benefits are constitutionally protected, and must be similar to benefit plans for active employees. The state then appealed to the Supreme Court. Oral arguments were held on November 19.

Much of the argument by both sides focused on the Article 16 Section 2 of the State Constitution.

Section 2. Membership in any employees’ retirement system of the State or any political subdivision thereof shall be a contractual relationship, the accrued benefits of which shall not be diminished or impaired.

Bennett argued the provision doesn’t apply because health benefits should not be considered “accrued benefits” and are not administered directly by the ERS.

Bennett also argued EUTF could not supplement the retirees’ benefits without passing the costs on to retirees.

We wanted to be able to continue past practice of providing coverage to retirees…at no cost.

It was this concern to avoid out-of-pocket costs that drove the EUTF decision, Bennett argued.

But Alston dismissed these concerns about higher retiree premium payments as “fear mongering”, and said the differences between the health plans for active members and retirees was the result EUTF action to separate the two groups.

EUTF contract with Kaiser includes a package of benefits that treats retirees and actives the same, Alston said.

Only for people covered by HMSA is there a difference.

And this only because EUTF decided it would negotiate different rates for active members and retirees, unlike what it did with Kaiser.

Alston argued that providing fewer health benefits or requiring higher fees for retirees is a form of discrimination and should not be allowed.

Alston told the Supreme Court that retirees have have a higher co-payment, higher deductables, and their plans differ in “the quality and breadth of coverage.”

“What the EUTF is arguing is that it can discriminate against retirees as long as all retirees get the same,” Alston told the court.

A second lawsuit seeking damages, including reimbursement for amounts that retirees would not have had to pay if their plans had been the same as active member plans, is on hold pending the outcome of this appeal.