One of the nation's biggest healthcare buyers, the California Public Employees' Retirement System, said its HMO premiums are rising by 7.2% next year as pharmacy costs climb.
Rates for PPO, or preferred provider organization, plans are going up even more at 10.8%, on average, for 2016.
The sharp increases mark a departure from two years of more modest increases of about 3% at the giant pension fund.
The agency's rate increases are closely watched across the country as a harbinger of what big employers and their workers might be facing. CalPERS spends $8 billion annually on medical care for 1.4 million active and retired state and local government employees and their family members.
Almost half the price increase for HMO and PPO policies was the result of drug costs, according to CalPERS. Some of the priciest drugs for the agency, in terms of overall spending, were acid-reflux pill Nexium, asthma inhaler Advair and hepatitis C drug Sovaldi.
The higher costs at CalPERS might be further evidence of an acceleration in U.S. medical spending — after a historic slowdown in recent years. Experts see spending ramping up as the economy strengthens and more people obtain coverage under the Affordable Care Act.
Recent U.S. census data show that health spending grew 7.3% in the first quarter of 2015 compared with the same period last year.
“For many years, CalPERS has been a bellwether of which direction healthcare costs are heading,” said Larry Levitt, senior vice president at the nonprofit Kaiser Family Foundation. “Their premium increases now add to a mounting body of evidence that costs are trending back up.”
But Levitt and other health-policy experts don't see a return to the double-digit increases of the early 1990s because of efforts aimed at eliminating wasteful spending and rewarding quality care.
U.S. workers have a lot at stake over rising insurance premiums because wages have remained fairly stagnant during the economic recovery.
Like CalPERS, many large employers are weighing their health insurance options in preparation for open enrollment for employees this fall.
The Covered California exchange, which has more than 1.3 million individuals enrolled, is preparing to negotiate with health insurers, and 2016 rates will be announced next month. Many analysts expect rate increases to surpass this year's average boost of 4.2% statewide.
The CalPERS Board of Administration gave final approval to its 2016 rates Wednesday, and they take effect Jan. 1.
About two-thirds of CalPERS members are enrolled in an HMO. Actual rates will vary by health plan and region.
Ann Boynton, CalPERS' deputy executive officer for benefits, said the latest premium increases stemmed in large part from bigger pharmacy bills.
She said drug costs accounted for nearly 45% of the overall rate increases for both HMO and PPO plans.
“CalPERS endeavors to keep increases as low as possible for members while still providing quality healthcare, but pharmacy pricing presented a high hurdle to get over,” Boynton said.
The agency listed some of its highest-cost drugs for 2014, and Sovaldi, the new hepatitis C drug priced at $1,000 a pill, was near the top.
CalPERS said it spent nearly $40 million for Sovaldi on plans run by Blue Shield of California, Kaiser Permanente and CVS Health.
The high prices of specialty medications for hepatitis C, cancer and multiple sclerosis have drawn the ire of lawmakers, health insurers and patients.
Among the four biggest CalPERS plans by enrollment, Blue Shield had the biggest premium increase. Its NetValue HMO plan is going up 13.6%, on average, next year and its Access+ HMO is rising 6.9%.
Mia Campitelli, a spokeswoman for Blue Shield, said its rate increases were driven by an uptick in doctor visits, hospital admissions and high-cost specialty drugs such as Sovaldi.
Anthem Blue Cross is raising rates by 11.8% for PERS Choice, the most popular PPO. The company declined to comment.
Kaiser's HMO has the largest CalPERS enrollment with more than 500,000 employees and dependents. Kaiser's premiums are going up 4.5%, on average, statewide.
CalPERS also offers UnitedHealth, Health Net and Sharp Health coverage.
For retirees, CalPERS approved a new Medicare Advantage plan from UnitedHealth and eliminated Medicare coverage from Anthem, Blue Shield, Health Net and Sharp.
Agency officials said the move could save $24 million if at least 40,000 members move into UnitedHealth's Medicare plan.