2 Pension Funds May Bypass Health Insurers

Two of California’s largest and most influential pension funds are considering dumping the managed care plans that provide their members with health insurance and contracting directly with doctors and hospitals instead.

If enacted, such moves by the California State Teachers Retirement System and the California Public Employees’ Retirement System, which together represent about 1.5 million people, would change the face of health care in California and perhaps across the nation.

“I think it’s something we absolutely ought to pursue very seriously,” said state Treasurer Phil Angelides, who sits on the boards of both pension funds and chairs the health benefits committee at CalPERS. “We have to look at how we can shift the marketplace. And with direct contracting, we can provide services in a more economical fashion.”

The teachers fund, with about 500,000 members, could implement a pilot program as early as January, when its board is expected to vote on the matter. Meanwhile, the mammoth CalPERS, which is the second-biggest buyer of health insurance behind the federal government, has been studying the topic for about a year and is closely watching how the teachers fund proceeds. Its health benefits committee will hear a progress report on the teachers’ effort at a meeting in Sacramento today.

The idea, believed by many to represent the next configuration for the nation’s troubled and ever-evolving health care system, is to facilitate a sort of end-run around health maintenance organizations and other managed care plans. By eliminating the middleman, the theory goes, employers, pension funds and others who purchase health insurance can better control the cost of premiums and more directly monitor the quality of care provided to patients.

“In the next three years, we are going to see a complete reshaping of the health care system,” predicted state Controller Kathleen Connell, who also serves on the boards of both pension funds and has been spearheading efforts to improve health benefits for retired teachers. “As we pioneer a direct-care alternative for teachers, we may be coming into the marketplace at the right time.”

Already, direct contracting has shown promise in smaller markets. A Minnesota business group found that its health care costs dropped 11% after it began paying doctors and hospitals directly to care for about 150,000 employees.

In California, proponents hope that a move to direct contracting would allow the retirement systems to sidestep some of the problems of today’s managed care while also insulating retirees from changes in the marketplace.

Just this year, health care premiums paid by large employers in Los Angeles increased by 4.7%, according to a report issued today by the consulting firm William M. Mercer, and nationwide they rose 7%. At the same time, the health care market in California is in turmoil, with many hospitals and physician groups on the verge of bankruptcy, and continuing financial trouble at some of the health insurance plans.

“This may be an opportunity in the California market to really try this and see if it works,” said Bob Blum, a principal at Mercer, which advised the teachers fund on direct contracting and other ways of improving health care for retirees.

Health plans, not surprisingly, have not responded warmly to the idea.

The president of the California Assn. of Health Plans expressed skepticism that such a plan would take root here, saying that it would be too difficult for physicians to take on the administrative tasks associated with running a managed care plan.

“Sometimes physicians think we can do all of those things--until they try to do them,” said Walter Zelman, president and chief executive of the Sacramento-based trade organization. “And they’re not very good at doing them. And they don’t want to do them. They want to partner with good managed care plans.”

In Minnesota, plans complained that the physician groups participating in direct contracting amounted to unfair competition because they were able to provide care without adhering to state regulations governing health maintenance organizations and other insurers. Their contention has not yet been tested in court, a fact that organizers of the Minnesota plan attribute to the relatively small numbers of people covered by their program.

To be sure, a plan in California to eliminate HMOs and contract directly with doctors will have to overcome many hurdles, not the least of which would be opposition from the health plans themselves. It would eventually require the support of Gov. Gray Davis, who just last week pledged that in reforming managed care he would not attempt to hurt the state’s HMOs.

At CalPERS, moreover, the larger and more influential of the two pension funds, the idea is still in its infancy, the subject of a long investigation but not yet included in a formal proposal. A move toward adopting such a policy would signal a dramatic change in direction for the retirement system, which has long negotiated directly with managed care plans to obtain the lowest premiums for its 1 million members.

In addition, such a plan could not be put in place without first developing a solid infrastructure of doctors and hospitals, so that there are cohesive and responsible organizations with which the funds could contract to provide care.

Still, a task force headed by Connell at the teachers fund intends to strongly recommend that the organization look at direct contracting as a way to provide health care for as many as 500,000 retired teachers in the state.

“The overwhelming choice is for CalSTRS to obtain the [health care] services through direct contracting with hospitals, physician groups, labs, etc.,” reads the task force report, to be presented to the CalPERS committee today and the CalSTRS board next month.

Because there are significant questions to be worked out, the task force plans to recommend three pilot programs: one in a rural area, one in an urban area and one in the suburbs.

Like the program in Minnesota, the California model would likely require doctors and hospitals to organize themselves into consortia for providing care, and agree to abide by strict quality and price controls. At the same time, they would receive some protections uncommon in managed care. For example, their budgets would be increased if their members are sicker than anticipated. And consumers would be provided detailed information about each organization’s finances and medical outcomes.

“By contracting for their health care directly, [the teachers] will have a provider base that is beholden only to them,” said Dr. Denard Fobbs, a Fresno obstetrician-gynecologist who serves on the CalSTRS task force. “There is great potential to benefit economically by eliminating this huge middleman structure, and they get direct access to their physician-contractors. It makes all the sense in the world to me.”

Even if the idea is not, in the end, adopted by either retirement system, the very fact that direct contracting is under consideration is sure to shake up the health care market in the state, health care experts and political insiders said.

In Minnesota, for example, health plans have adopted many of the practices of the direct-contract organizations, said Steve Wetzell, executive director of policy and public affairs at the Buyers Health Care Action Group, the Minnesota consortium that pioneered the concept.

But, Wetzell said, because the Minnesota program is relatively small, health plans have not been forced to adopt some rather significant aspects of the direct-contracting plan, such as full disclosure of finances and medical outcomes.

If organizations as large as the California pension funds adopt the program, however, the marketplace would likely force much more dramatic changes, he said.

“It certainly would fundamentally change the rules they would play by in the community if this became the prevailing practice,” Wetzell said. “If this is a better mousetrap, then the market will decide.”