CalPERS Faces Sharply Higher Health-Care Costs

In a sign that health-care costs will continue to soar for employers, the California Public Employees’ Retirement System said Tuesday that it received bids from health-care providers that would increase average premiums by 15% to 18%.

The agency is hoping to hammer down those increases in further negotiations. It also said it plans to drop three of its 10 health-care providers, part of a previously announced plan to increase competition for its business.

CalPERS, the nation’s second-largest purchaser of health insurance, is considering dropping Aetna, Cigna Health Care of California and Lifeguard after the three health maintenance organizations ranked last in a bidding war for the system’s 2002 health-care coverage. Together, the three HMOs insure 9% of CalPERS’ 1.1 million covered employees, dependents and retirees.

CalPERS’ annual negotiations on health-care costs are closely watched by employers as a leading indicator of health-care trends. The outcome so far bodes ill for companies that are struggling to restrain soaring costs, as well as for health-care organizations trying to boost profits, analysts said.

“This is bad news for everybody,” said health-care consultant Peter Boland of Berkeley-based Boland Healthcare.

The companies’ proposals were the second round of bidding. CalPERS in February rejected bids by all 10 of its HMOs, saying the premium rate increases the organizations requested were too high. The proposed increases ranged from 5% to 41%, with an average of about 25%, said Pat Macht, a CalPERS spokeswoman.

As an incentive to lower costs, CalPERS said it would accept only the best seven bids, based on price, service, member access and management.

After reviewing the new bids, CalPERS’ health benefits committee recommended Tuesday that further negotiations begin with six existing HMOs--Blue Shield, Health Plan of the Redwoods, Kaiser, Maxicare, PacifiCare and Universal Care--and one new carrier, Western Health Advantage.

CalPERS also rejected a bid from Health Net, saying the Woodland Hills-based HMO failed to comply with bidding rules. CalPERS gave the HMO, which insures about 240,000 CalPERS members, 48 hours to resubmit its proposal.

CalPERS said dropping the three insurers would cause some disruptions to members, but most--92.5% of the 95,000 affected--would be able to keep their current physicians since most doctors belong to more than one CalPERS-approved plan.

CalPERS’ hardball tactics in rejecting the first bids succeeded in trimming the HMOs’ requested price increase by about $148.5 million, but the average premium rate boost contained was still in the 15%-to-18% range, Macht said.

Macht said CalPERS wants to trim the price hikes--perhaps “to get it back to single digits”--by negotiating further with the seven winning bidders and perhaps revamping plan designs.

In fact, CalPERS may reconsider a proposal, rejected last year, that would boost the amount that members pay for drugs and doctor visits, Macht said. The agency’s staff suggested that increasing such co-pays from $5 to $10 or more could shave an additional $143 million, Macht said. Union leaders protested last year that the increases would force the sickest workers to bear the brunt of increased costs.

CalPERS, which provides health and retirement plans for government workers and their dependents, helped contain premium increases statewide in the mid-1990s through tough negotiating tactics with its HMOs. Competition also helped keep prices down, as employers switched to lower-cost HMOs from more costly traditional plans.

But health-care costs continued to rise at 5% to 7% a year, and CalPERS finally agreed to higher premiums. CalPERS agreed to a 2.7% HMO premium rate increase in 1999, a 9.7% increase in 2000 and a 9.2% increase in 2001.

“Health plans have been dealing with very thin profit margins--1% to 2% is the average profit margin in the state,” said Bobby Pena, spokesman for the California Assn. of Health Plans, a trade group.

Meanwhile, a slowing economy is likely to put pressure on employers to either cut benefits or pass more health-care expenses on to their employees, said John Szabo, an analyst with CIBC World Markets.

Consumer advocates complain that insurers should be better regulated and not allowed to raise costs without proof the higher premiums are warranted. They also worry that small employers may drop coverage rather than pay higher premiums, leaving more people uninsured.

Health-care analysts say an increase in consumer demand for heavily advertised drugs and treatments is leading to higher costs, as are legislative mandates that HMOs add services and treatments to their coverage. California, for example, requires insurers to cover certain mental health conditions and birth control.

Doctors also are demanding more money, after nearly one-third of their medical groups have gone bankrupt in California, due in large part to insurer payment policies, Boland said.