A state audit released today calls the oversight of the State Health Plan "inadequate and ineffective."

The audit recommends that the legislature put the plan for teachers and state employees under the executive branch to ensure proper financial oversight.

The health plan is overseen by a legislative body, the Committee on Employee Hospital and Medical Benefits. The committee's influence over the plan may violate the North Carolina State Constitution's separation of powers clause, the audit said, and creates the potential for undue political influence and conflicts of interest.

“There is clearly a problem when the Health Plan is running a deficit and facing tough economic times ahead. North Carolina’s teachers and State employees need to know that the Health Plan that they’re paying for is being properly managed and will be there when they need it,” said State Auditor Les Merritt.

George Stokes, the former health plan administrator, was abruptly fired in July after Senate Majority Leader Tony Rand and House Majority Leader Hugh Holliman said they received information of financial problems with the plan. Stokes challenged his firing, saying it violated state law.

Today's audit is the first of two performance audits on the plan. The second will focus on the financial causes of the State Health Plan’s deficit.

State lawmakers will not try to bail out the health plan that serves roughly 650,000 state workers, teachers, retirees and their families before the 2008 session ends today.

House and Senate leaders could not reach an agreement on how to fix the plan, which they say is paying out more than it is taking in. The House voted Thursday to set aside $100 million from the rainy day fund to cover deficits, but the Senate won't take up the legislation, Dan Kane reports.

Senate leaders wanted to raise co-pays for brand-name prescription drugs and on doctor visits, but House leaders said it was unfair to place that burden on plan members at a time when gas, food and other costs are rising rapidly.

Senate Majority Leader Tony Rand and House Minority Leader Hugh Holliman said if the plan heads deeply into the red, a special legislative session could be called to work out a fix.

"We'll just deal with it on a week-to-week, month-to-month basis," said Holliman, a Lexington Democrat. "If we get into real trouble we'll just have a special session."

The plan currently has about $140 million in it, Holliman said, but he added that the plan spends roughly $50 million a week. The plan's interim administrator, Jack Walker, said it should have more than $200 million in it by early next year to stabilize it.

The plan's troubles only surfaced recently, and led to the abrupt firing of executive administrator George C. Stokes. He said he has steered the plan from serious deficits, and expects it to perform well in the current fiscal year that ends June 30, 2009.

Lawmakers are planning to adjourn this afternoon.

The last big battle between the House and Senate this session may well be how to bail out the N.C. State Health Plan.

The House passed legislation that would provide $100 million from the rainy day fund to cover deficits in the plan, which legislative leaders say could be steep by early next year, Dan Kane reports.

But Senate leaders say they are considering raising co-payments or deductibles for the roughly 650,000 teachers, state employees, retirees and their families to cover deficits.

"I'm sorry that we have to be tweaking this right now, but we have to be prudent so we don't crash the system," said state Sen. Linda Garrou, a Winston-Salem Democrat and chief budget writer.

House leaders say they don't want to hit those on the plan with an increase at a time when gas and food prices are rising.

"It seems to me that this is the only choice among difficult choices," said Rep. Dan Blue, a Raleigh Democrat, after the House rolled out its plan.

More after the jump.

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The former executive administrator of the State Health Plan, who was abruptly fired last week, challenged his removal in a letter released today.

George C. Stokes said the two legislative leaders who effectively fired him gave "invalid, inaccurate and misleading" about the plan's finances, and failed to follow proper procedure in removing him from the position, Dan Kane reports.

"I know for certain that the State Health Plan was in no jeopardy whatsoever and there was absolutely no need for the precipitous action they took," Stokes said in the letter, which was released by his attorney, James E. Ferguson II of Charlotte.

Senate Majority Leader Tony Rand and House Majority Leader Hugh Holliman caused Stokes to be fired after sending a letter to state Insurance Commissioner Jim Long seeking Stokes' removal. The two leaders said that they had received information showing that the plan's finances had swung from $50 million in the black to $65 million in the red.

They said the change in the plan's fortunes could mean higher premiums for those on the plan next year. They also said that legislative staff had a difficult time getting information about the plan's finances.

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The State Health Plan's executive administrator was abruptly fired Tuesday after lawmakers discovered a $115 million loss in the fund that provides health care for roughly 650,000 employees' and retirees' health care.

House Majority Leader Hugh Holliman, a Lexington Democrat, and Senate Majority Leader Tony Rand, a Fayetteville Democrat, sent a letter to state Insurance Commissioner Jim Long "requesting a change in leadership," which led to the dismissal of George Stokes. He had led the plan for roughly three years.

"We just felt that we were not informed in the way we should," said Holliman.

Holliman said lawmakers had expected a $50 million surplus in the plan, but discovered last week that there was a $65 million deficit. He said it would not affect the state budget for the current fiscal year that began on Monday, but would need to be dealt with in next year's state budget.

He said the prior administrator, Jack Walker, has been asked to lead the health plan on an interim basis.

The letter sent to Long said that "we very much appreciate Mr. Stoke's service to the state and regret that this action is necessary, but believe it to be essential."

Chrissy Pearson, a spokeswoman for the state Insurance Department, said Long and other staff had no idea there were problems with the fund or with Stokes' management.

"It has caught us by surprise," she said.