The state employee health insurance plan bailed out last week with $675 million from taxpayers also ran into trouble last year because a new offering increased use of medical services and administrators were blind to the expenses passed along by Blue Cross, the state auditor's office reported Thursday.

The State Health Plan - which covers about 667,000 state workers, teachers, retirees and their dependents - missed projections by $137.6 million in the year ending in June 2008, losing $79.7 million when expectations were it would make net income of $57.9 million. The bailout covered losses generated since then.

Most of the reason for the 2008 loss was the introduction of a more affordable, more generous preferred provider plan that led about 76,000 to shift plans and another 30,000 new members to join, the report by Auditor Beth Wood's office said.

The PPO's members took advantage of routine eye and hearing exams and their increased use of medical services overwhelmed the discounts with network hospitals and doctors negotiated by Blue Cross and Blue Shield of North Carolina. The state's largest health insurer administers the PPO plan. Total claims ended up costing nearly $164 million more than projected, the report said.

But Blue Cross's expenses to administer the program were also out of whack, costing $36.3 million more than expected, the report said.

Part of the reason is that the state's contract allows Blue Cross to pass along any costs, plus profit. But Blue Cross is not required to explain how it calculates its costs and what it passes along. This type of contract "provides no incentive to control costs and results in increased revenue to BCBSNC as the state's costs increase," the report said.