CalPERS aims at health costs
The nation’s largest public pension fund already wields its huge clout to get the lowest possible rates and best healthcare coverage for 1.2 million government workers and retirees.
But now the California Public Employees’ Retirement System wants to drive down soaring medical costs even more by investing $700 million in cutting-edge companies that find new ways to make medical care more efficient.
CalPERS is the nation’s third- largest buyer of health insurance, budgeted to spend $5 billion this year.
“Billions of investment dollars are already in the healthcare market, but what’s missing is the focused investment of those dollars to specifically address the needs of purchasers and consumers,” said CalPERS Chief Executive Fred Buenrostro. He is scheduled to unveil the Healthcare Investment Initiative today.
“We plan to be a catalyst for companies to come up with new solutions to the healthcare crisis,” he said.
Joining CalPERS in the venture is Health Evolution Partners, a San Francisco-based private equity firm run by Dr. David J. Brailer. Brailer resigned in April as President Bush’s chief healthcare information technology officer. During two years in Washington, he pioneered work on a national health information network to convert medical records from paper to digital files.
CalPERS’ Buenrostro said he was looking to Brailer for help in leveraging the fund’s purchasing power and a $250-billion investment portfolio to curb what have been annual double-digit hikes in health insurance costs.
The secret to shaving healthcare costs, Brailer said, is to invest on “a large-enough scale to be really decisive.” Many good ideas, such as using telemedicine to connect isolated rural clinics to regional hospitals, could become cost-effective with an infusion of CalPERS capital, he said.
The healthcare industry is “ripe for innovation,” said Larry Levitt, a spokesman for the Kaiser Family Foundation, a Menlo Park, Calif., think tank. “We’ve used better technology to treat illnesses, but we’ve never harnessed technology to make the system efficient.”
Focusing billions of dollars to boost environmental protection, corporate governance and other special projects is a long-standing practice at CalPERS. Since 1990, the fund invested $15.4 billion in private companies, primarily through limited partnerships. CalPERS’ target for its private equity investments is an annualized rate of return of 20% to 30% over a 10-year period, Buenrostro said.
But earning that kind of profit on the highly speculative Healthcare Investment Initiative could be difficult, warned William Custer, a business professor and director of the Center for Health Services Research at Georgia State University.
“Obviously, it’s a relatively high risk to invest start-up capital in unproven technology,” he said. CalPERS should be lauded for putting money behind socially beneficial medical innovations, but it could come up short making sure that its members got a sufficient return on their investment, Custer said.
Despite the caveat, Custer said CalPERS and Brailer might make a profitable partnership. Brailer “is a wildcatter,” he said. “Some wells are going to be dry, but, hopefully, he’ll hit enough gushers to make it worthwhile.”
