Kaiser HMO to Seek 11% Increase in Some Rates

Signaling a sharp acceleration of health care costs across the industry, Kaiser Permanente, the nation’s biggest HMO, confirmed Tuesday that it plans to seek double-digit increases in health insurance rates in California.

Kaiser said some small businesses will see their rates rise 11% this year. An industry group quickly warned that a big rise in medical premiums would force some small businesses to drop health coverage for workers and their families.

The impact of Kaiser’s plan will ripple through the health care industry as other HMOs, which have already begun seeking more modest increases, walk through the door opened by Kaiser, traditionally among the least expensive HMOs.

“We’re in complete agreement with Kaiser,” said David Olson, a spokesman for Foundation Health Systems, a large HMO based in Woodland Hills. Premiums hikes “are going to happen and it’s about high time.”

But the HMOs can expect stiff resistance from large purchasers of health care, such as the influential California Public Employees’ Retirement System, which buys health coverage on behalf of more than 1 million Californians.

Nearly all of the state’s major HMOs are seeking increases far in excess of general inflation, but Kaiser’s rate request is “the absolute worst,” according to a source familiar with CalPERS.

Kaiser’s disclosure comes less than three weeks after it startled the health care industry by announcing the first loss in its half-century history--a $270-million deficit for 1997. Kaiser has acknowledged that the loss was partly the result of its own pricing blunders.

While competitors were modestly raising prices last year, Kaiser lowered its rates, prompting a surge in membership. When the HMO’s vast network of clinics and hospitals was unable to accommodate all the growth, Kaiser was forced to send thousands of patients to costlier non-Kaiser hospitals and clinics.

For 1999, Kaiser will ask for premium increases from its employer groups in the “high single digits and low double digits,” Vice President Jack Hudes said.

The price hikes would be Kaiser’s largest since the late 1980s, the period of rampant medical inflation that prompted frustrated employers across the nation to rapidly shift their workers into health maintenance organizations to try to rein in costs.

The increases will come as a shock to many California companies--and their employees--who have grown accustomed to stable or even declining medical premiums during the past five years. The higher rates will place heavy pressure on employers to pass on those extra costs to workers.

“Our people will begin looking at whether this is a benefit they can afford to provide,” said Betty Jo Toccoli, president of the California Small Business Assn.

But HMO officials contend that the rate increases are long overdue after several years of relatively stable prices. One Kaiser official, for example, asserted that the giant HMO’s premiums are “about the same” today as they were five years ago.

Many experts rightfully credit the managed care industry for its role in taming medical inflation by demanding austerity of doctors, hospitals and other providers throughout the nation’s notoriously inefficient health care system.

Oakland-based Kaiser is hardly the only managed care firm seeking to raise prices. Managed care insurers across the country are under pressure to raise premiums, and many are doing so. These companies contend that the increases are justified because rising costs for medical services and prescription drugs are outstripping their ability to hold the line on prices.

Kaiser said it must also shore up its financial health after its $270-million loss last year. The company is also warning of another rough year in 1998.

Kaiser’s Hudes said the HMO is not merely requesting the rate hikes--it is insisting on them.

“It’s not a question of asking. We need this level of increase to adequately take care of our members. . . . We must have rates in place to cover the costs of medical care,” Hudes said.

In addition to rising medical costs, CalPERS spokeswoman Pat Macht contended that HMOs also are yielding to pressures from investors to boost profits and to prepare for federal and state HMO reform legislation that could raise their costs.

CalPERS officials declined to comment directly about Kaiser or to discuss specific details of ongoing negotiations with HMOs over 1999 rates.

“We believe that any large increase in HMO rates across the board is a backward step,” Macht said. “Employers, taxpayers and our members, many of whom haven’t received a pay raise in three years, cannot afford them.”

The renewed demands for higher rates also raise questions about the impact of the flurry of HMO mergers in recent years. Though touted as necessary to reduce costs through consolidation, CalPERS questions whether the mergers have had the opposite effect.

“In fact, the mergers may have increased costs,” Macht said.

Kaiser itself is in for some tough negotiations with large employers who are asking why they are being asked to bail out the HMO for problems that were, in part, of its own making. “They had a bad business plan; they screwed up,” said an official at one large Kaiser customer. “Why should we have to pay for it?”

Other health care experts were questioning whether the financial problems being reported by Kaiser and other HMOs, such as New York-based Oxford Health Plans, carry a broader message.

“We may have oversold the cost savings of managed care,” said Ron Pollack, executive director of Families USA, a Washington-based consumer group that is lobbying for federal managed care reforms.