Major State Pension Fund OKs Hike in Health Coverage Costs

The California Public Employees’ Retirement System, in a closely watched vote Wednesday, approved a 13% hike in health insurance costs, signaling that U.S. workers and their employers can expect dramatic increases in the amount they pay for medical benefits in coming years.

The action by the huge pension fund suggests that a bigger portion of health insurance costs will be shifted to consumers.

CalPERS voted 6 to 2 to double members’ out-of-pocket expenses for doctor visits while raising the pension fund’s costs by just 6%.

Because it negotiates health benefits for 1.2 million members, making it the nation’s second-largest buyer of health insurance after the federal government, what CalPERS does generally sets the pace for employers across the country.

“I don’t think there is any question now that we are back to double-digit inflation” in the cost of health insurance, said Helen Schauffler, director of the Center for Health and Public Policy Studies at UC Berkeley.

Over the last two years, CalPERS had been able to hold down premium increases to under 10% and keep a lid on members’ out-of-pocket expenses, called co-payments. Premiums rose 9.2% this year and 9.7% in 2000 while co-payments remained steady. CalPERS’ members include state employees, their dependents and retired state workers.

The pension fund’s decision was criticized by some for raising prices on its sickest members and those who can afford increases the least, namely its retirees on fixed incomes. But analysts said the action, which came after months of negotiations with eight health maintenance organizations, was inevitable.

Many hospitals and doctor groups in the state are in financial trouble, a result of their fees being hammered by managed care.

At the same time, experts noted, HMOs have been unable to efficiently squeeze other costs from the managed-care system, thus setting the stage for significantly higher costs for consumers.

CalPERS “had to accept it,” said Uwe Reinhardt, Princeton University professor and health policy expert. “The only other way is to uninsure employees.”

Benefits experts said the spike in health insurance costs couldn’t come at a worse time. A slower economy is forcing many employers to reduce expenses and lay off workers.

Higher health insurance premiums could trigger another round of job cuts at many companies, particularly those that don’t want to pass on the added insurance costs to their employees, these experts said.

“My concern is this may lead to job layoffs in the long term, and that long term may only be in 12 months,” said Lee Exton, vice president of Segal Co., a benefits consulting firm.

The CalPERS action “is the first indication of what’s out there on the horizon, and it’s certainly sent up some red flags for us,” he said.

Most employers are in the process of requesting health-care cost bids that would take effect Jan. 1, Exton said.

CalPERS’ action marks a continuation of steadily rising insurance premiums in California and throughout the country.

Nationally, premiums rose 8.3% last year and 4.8% in 1999, according to a recent survey by the nonprofit Henry J. Kaiser Family Foundation. Insurance premiums were flat in 1998.

The increase approved Wednesday is twofold. It raises by an average of 6% how much it will pay to provide health insurance to its members. But it doubles the cost of members’ doctor visits from a $5 co-payment to $10.

It also increases the cost of prescriptions drugs for members. Together, the overall increase is 13.2% for HMO benefits effective Jan. 1.

The newly approved rates do not include CalPERS’ less-restrictive preferred provider organizations, or PPOs, which together cover about 200,000 members.

Late last year, CalPERS raised deductibles and other costs for members belonging to PPOs.

The effect of CalPERS’ move is to shift a significant portion of the health cost increases to its members, especially those who use health insurance most.

Schauffler, the UC Berkeley expert, called the action “equitable.”

“It is a clever way to split the burden between employer and employee,” she said. “And it reduces the burden of the increase on healthy people who don’t need to use their insurance often.”

But groups that represent state workers said those employees who need medical care most are least likely to be able afford the increases in co-payments for doctor visits and medications.

Analysts said HMOs would benefit from the double-digit boost.

Goldman Sachs & Co. health care analyst Charles Boorady likened the CalPERS action to “putting fewer diapers in a box and charging the same price per box. It may result in less of an increase in dollars for CalPERS and still allow . . . health plans to earn more profit per member.” He expects medical costs to rise 10% next year.

Princeton’s Reinhardt said the hike could boost the HMOs’ profit margins on their CalPERS business by 2 percentage points.

William D. Crist, president of the CalPERS board of administration, called the health insurance coverage “the very best we can present to our members at this time.”

But Crist added that CalPERS plans to develop a long-term strategy that will give it “more control over health-care costs.”

In the negotiations, CalPERS struggled to ratchet down insurance costs.

It initially threw out bids from 11 HMOs because they were too high. It said it would deal with seven HMOs in order to raise the level of competition for CalPERS business. It later added an eighth HMO, Western Health Advantage, which covers underserved portions of Northern California.

CalPERS said the package will cost $1.76 billion, compared with an estimated $1.65 billion for this year. But it said the final amount is $308 million less than the initial proposals that it received.

Under the plan, prescription drug co-payments are tiered to encourage members to use generics and to order them through the mail.

Only 11% of employers in California use a three-tiered co-payment formula for prescription drugs, according to a recent Kaiser Foundation survey. Observers said the CalPERS decision to adopt such a program probably would nudge other employers in that direction.

Co-payments for a 30-day supply of drugs from a retail store will be $5 for generics, $15 for brand-name drugs and $30 for drugs that are not on the HMO-approved list. For a 90-day mail-order prescription, co-pays will be $10 for generics, $25 for brand-name drugs and $45 for non-listed drugs.

The co-payment currently is $5 for all prescriptions.

Walter Zelman, president and chief executive of the California Assn. of Health Plans, an industry lobbying group, said the co-pay increases bring CalPERS in line with industry standards.

“The cost-sharing in CalPERS is way below what most employers ask of their employees,” he said. “The co-payments have been very low in CalPERS for many years.

“I think it helps all of us. It helps the system as a whole, and it helps people to have a better understanding” of health costs, Zelman added.

The Kaiser Foundation survey of California employers found that last year co-payments averaged $7 for generic drugs and $11 for brand-name drugs. The average co-payment for a doctor visit was $10.

CalPERS also accepted bids for its Medicare program, in which premiums are rising by an average of 16.5%. Co-payments in the Medicare program will be the same as in the non-Medicare HMOs.

CalPERS approved bids from Blue Shield HMO, Health Net, HP Redwoods, Kaiser Permanente, Maxicare, PacifiCare Health Systems in California, Nevada and Arizona, Universal Care and Western Health Advantage.

But in accepting Health Net’s bid, CalPERS called for an audit of the Woodland Hills-based company.

The demand was triggered by Health Net’s decision to withdraw from Medicare in five California counties--Butte, Humboldt, Lake, Sutter and Yuba--for financial reasons. CalPERS also placed a freeze on Health Net’s membership, although spouses and new dependents of current enrollees will be covered.