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American Health Line

The California Public Employees’ Retirement System, the second-largest purchaser of health care behind the federal government, is expected today to approve a “historic” 25% increase in health insurance premiums for next year, the San Jose
Mercury News reports.

CalPERS is also expected to drop contracts with two of its largest managed care plans in an attempt to achieve savings through consolidation (Ostrov, San Jose Mercury News, 4/17). The system, which serves 1.2 million employees, retirees and dependents, announced last week that its seven current health plans had submitted bids for 2003 that contained premium increases ranging from 15.1% to 41.1%.

Yesterday, CalPERS’ health benefits committee recommended that the system’s full board, which will vote on the proposals today, approve an average rate increase of 25.1% for HMO contracts and up to 22.1% for its preferred provider options (Rundle/Bennett, Wall Street Journal, 4/17). Overall, CalPERS’ annual premiums are expected to increase $458 million next year to $2.21 billion. If the proposal is approved, some members would see their monthly costs rise by 50% (Lee, Los Angeles Times, 4/17). But the proposal would not affect members’ benefit levels or copayments for physician visits and prescription drugs (San Jose Mercury News, 4/17).

The health benefits committee also voted to remove PacifiCare and Health Net — two of CalPERS’ four largest managed care plans — from the system. Without this consolidation, officials said that health premiums would increase more than 30% next year (Los Angeles Times, 4/17).


The 25% premium hike indicates that the leverage CalPERS once had because of its size has been outstripped by the same forces that are driving up health care costs around the country, such as higher drug costs and tougher negotiations by providers, the Contra Costa Times reports (Silber, Contra Costa Times, 4/17).

Last year, after the CalPERS board rejected the first round of managed care bids and eliminated three of its health plans, it managed to hold premium increases to 6%. When increases in copays were included, members saw a 13% rise in their actual health costs last year (American Health Line, 4/16). But William Crist, president of the board, said that negotiations with managed care plans this year failed to win any concessions and that CalPERS was reluctant to raise copays again. “We’re just out of options,” he said (Connolly, Washington Post, 4/17).

In proposing to drop Health Net and PacifiCare, which would leave five managed care plans in the system, CalPERS is continuing to
shift away from a previous strategy of “play[ing] numerous plans off each other” to a new tactic of allowing fewer plans to pool more patients, according to Peter Lee, CEO of the Pacific Business Group on Health (San Jose Mercury News, 4/17). The move would force 350,000 Health Net and PacifiCare members to switch health plans, although only about 10% would have to find new doctors because of overlap between the plans, CalPERS officials said (Contra Costa Times, 4/17)


CalPERS officials said that the problems it faces are emblematic of those facing employers nationwide. “Employer-based coverage and the way our nation has chosen to provide health care to its citizens is imperiled,” Allen Feezor, CalPERS’ health benefits administrator, said, adding, “We are saying to our enrollees that their sound coverage and good value will continue. But to our health plan providers and plans, we are saying it’s no longer enough to leverage prices, and to national policy makers that it’s time for a larger public policy debate — immediately” (Wall Street Journal, 4/17).

Because of its size and the fact that it renews its contracts early in the year, CalPERS is often seen as a bellwether for employer health care trends. “It’s depressing if CalPERS, with all its members and sophistication, is seeing increases this large,” Kaiser Family Foundation Vice President Larry Levitt said, adding,

“Small business better hold on to their wallets.” Jamie Court, executive director of the California-based watchdog group Foundation for Taxpayer and Consumer Rights, added, “If Goliath is getting stepped on in terms of premium increases, then you can bet David is going to be obliterated.”

Some analysts, however, were more optimistic. John Small, who heads the health care division at Towers Perrin consulting, said, “Companies with different demographics, different geographics and a different plan design” might be able to hold down increases (Washington Post, 4/17). And the Wall Street Journal reports that because CalPERs has managed to hold down premium increases in the past, “it appears to be playing catch-up after shielding employers from the true rise in health care costs” (Wall Street Journal, 4/17).


“When the single most important player in the showcase of managed care sees its bills going up [25%], it says unmistakably
that time has run out for this dysfunctional, disjointed thing we call health care,” David Broder writes in his Washington Post column. Broder quotes Crist, CalPERS’ president, who says that as premiums continue to rise, more people will become uninsured in a “kind of downward death cycle.” Broder predicts that as a result, health care “will be as big an issue in the 2004 presidential election as it was in 1992,” as the hope that managed care could control health care costs and reduce the uninsured has now faded. He notes that several “major players,” including the National Coalition on Health Care, of which CalPERS is a member, are challenging the prevailing view in Washington that the nation’s health care problems should be tackled incrementally.

Dr. Henry Simmons, president of the coalition, said, “The message is that the problem is far more serious than anybody in the political process is acknowledging. The incremental strategy is bankrupt. We need a big debate on how to get a grip on this system.” Broder concludes that such a debate “can’t be postponed for long” (Broder, Washington Post, 4/17).

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