New Jersey school district missed $49 million in savings by skipping state health plan, audit finds

State fiscal watchdogs have turned up another example of New Jersey taxpayers being fleeced by public school districts that fail to rein in self-serving insurance brokers.

The Perth Amboy school district in Middlesex County lost $49.1 million in potential savings on employee health care insurance coverage because it failed to pursue cheaper alternatives offered by the State Benefit Health Plan, New Jersey’s largest and least expensive provider of coverage for state and local government workers.

That finding was published last month in a report by State Auditor David Kaschak. This is the third state report in recent months to detail inefficiency and alleged illegality in public employee health insurance procurement in New Jersey.

Kaschak found that the cost of Perth Amboy’s health care was 18 percent higher than necessary from fiscal years 2020 through 2024. The extra cost was passed along to the school district’s 1,700 employees in the form of higher insurance co-pays. Employees’ paycheck contributions were, on average, 33 percent higher than they should have been, Kaschak’s audit found.

State law says that every year, school districts must examine employee health insurance coverage options and choose the cheapest plan. But the state auditors found that Perth Amboy and its broker failed to do a cost comparison from 2020 through 2023. When the district finally ran the comparison in 2024 and found it could save substantially by joining the state health plan, the analysis came too late to switch plans for that year.

The auditors also found that the Perth Amboy health insurance broker was secretly benefiting via back-end sales commissions provided by insurance companies and prescription drug service providers. State law requires that any such payments be disclosed in the broker’s contract. The back-end deals, good-government experts point out, amount to a perverse incentive for brokers to seek more expensive coverage that hurts taxpayers’ pocketbooks.

“While not uncommon in the insurance industry, the commission-based arrangement gives the broker no incentive to recommend less costly alternatives because it earns more when the district pays more for benefits,” according to the audit.

Perth Amboy school officials did not return a call seeking comment Tuesday.

But in a letter to the state released as part of the audit, a top school official said the district was taking steps to reform itself.

“Perth Amboy Public Schools acknowledges the audit’s observations and findings and affirms that appropriate corrective measures have been implemented, with additional actions in progress,” wrote Michael LoBrace, the business administrator and school board secretary for the 9,800-student district.

As part of reform measures, officials said, Perth Amboy has already switched employee insurance coverage to the state health benefits system, which is the state’s largest, covering 800,000 public employees, retirees, and their dependents. The switch is projected to save $27 million, according to the district’s estimate.

The state auditor’s report on Perth Amboy echoes similar findings by state watchdogs going back more than a decade, which show that public insurance procurement in New Jersey remains susceptible to waste, fraud, and a lack of competition.

Public agencies and towns across the state routinely ignore state laws requiring the full disclosure of broker fees. Efforts to draw attention to the problem, which experts say is driven by pay-to-play politics, have gained no traction in Trenton.

As far back as the mid-2000s, good-government groups found taxpayers could save up to $200 million a year by cutting out costly health insurance brokers and requiring brokers to reveal their hidden fees and back-end bonuses from insurance companies.

Last September, when former Comptroller Kevin Walsh issued a sweeping report showing that major public funds managed by private brokers were fraught with illegal procurement practices and ethical conflicts, both outgoing Gov. Phil Murphy and governor-to-be Mikie Sherrill were silent on the findings and declined to publicly back Walsh.

Walsh found that a trio of privately managed health insurance funds covering more than 100,000 public employees were allegedly ignoring public contracting laws. His investigation of the funds, which are managed by the Camden-based brokerage Conner Strong & Buckelew, concluded that the firm steered contracts to preferred vendors, presided over conflicts of interest, and faced little meaningful oversight from local officials. Together, those funds handled $650 million in taxpayer money last year alone.

Conner Strong and an affiliate called Perma even held multiple positions within each of the funds, with one arm of the company essentially managing another, Walsh found. Perma, as “executive director” of the fund, also had a role in evaluating proposals from potential competitors, according to the investigation.

The bottom line, Walsh reported, was a steady stream of taxpayer money flowing to a single private firm operating outside of ethical bounds.

Conner Strong and Perma, during five years working as paid consultants for the Schools Health Insurance Fund, were paid more than $36 million, state investigators found. The fund manages health coverage for employees in 111 school districts throughout New Jersey.

“Without adequate disclosure, competition, or accountability, a for-profit firm has effectively gained control over public health insurance funds,” according to the comptroller’s 34-page report. “The result is an unauthorized takeover of a core public function by a private entity — and a serious risk to public trust and public dollars.”

Conner Strong and some members of the New Jersey legislature pushed back hard on Walsh’s findings, claiming that Walsh had his facts wrong and calling for him to be investigated. Officials with the firm said that state regulators have approved their finances and operations and have cleared any question of ethical conflict surrounding the fund.

The state Department of Banking and Insurance, which regulates the public benefit funds, has declined to answer questions posed by The Jersey Vindicator about its work or the comptroller’s findings.

Walsh, in a social media post last month following the release of the latest audit, asked: “What will it take for public schools and local governments to recognize insurance brokers’ conflicts of interest, for the Legislature to take steps to stop the hemorrhaging of public funds wasted because of conflicts of interest?”