Plan to Bypass HMOs May Be Shelved for State Workers, Retirees

An innovative proposal to bypass health maintenance organizations and contract directly with doctors could be shelved by the California Public Employees Retirement System today.

The proposal, which some had believed could revolutionize managed care in California, has been under study by the huge pension and benefits manager for two years. Modeled on a similar system used by employers in Minnesota, it would eliminate a profit-making middleman in the quest for high quality, cost-effective health care for 1.2 million active and retired public employees in California.

But CALPERS, faced with rapidly escalating health care costs, is set to reevaluate all of its health care offerings next year. And amid concerns that the Minnesota-style approach would not save money, the administrators of CALPERS’ health benefits say that direct contracting should either be discussed in concert with next year’s evaluation, or shelved altogether.

Because CALPERS is the second-largest purchaser of health benefits in the nation, its move toward direct contracting in the last two years was seen as a sign of things to come. Similarly, a decision to drop the plan would be significant.

“You could make a case that this is the death knell for direct contracting in California,” said Peter Boland, a health care consultant based in Berkeley. “If CALPERS decides it’s not for them, who else is going to step up to the plate? There are no other players.”

State Treasurer Phil Angelides, a backer of direct contracting and a member of the board, said he plans to propose that CALPERS reconsider the idea next year, as part of the agency’s plan to reevaluate its strategy for providing health benefits.

“We have to look at how we deliver health care, and I personally believe that direct contracting should be in the mix,” Angelides said.

Supporters of direct contracting say that although it would not reduce the cost of health insurance, it would give employers better control over the quality of care offered to workers. Elimination of the profit and expenses of an HMO--which range from executive salaries to advertising budgets--would create enough wiggle room in the budget to pay more for doctors and drugs.

But CALPERS’ staff, in recommending that the health benefits committee of its board of directors vote down the proposal, say the program is too complicated--and too expensive.

It would cost $3 million to set up the program, according to a report by Allen Feezor, assistant executive officer for health benefits. And it would require tremendous oversight by CALPERS, which would essentially have to run its own HMO.

In addition, members surveyed about the proposal said they would support it only if it were offered in addition to the current HMOs offered, not as a replacement. And the members said they would not leave their current health plan to sign up for the direct contracting plan unless its premiums and co-pays were significantly lower.