CalPERS to Raise Health Premiums 25%

In a dramatic sign of health-insurance cost increases ahead for employers and workers across the country, the California Public Employees’ Retirement System is expected today to approve a stunning 25% increase in health insurance premiums next year.

The move could cause coverage disruption for tens of thousands of Californians and sharply raise the out-of-pocket costs for many of the state’s 1.2 million government workers and their families as well as retirees.

The premium increase, approved Tuesday by a key panel of CalPERS, would be the largest for the pension fund since at least the late 1980s. It was a stark acknowledgment that even a powerful buyer like CalPERS--the nation’s second-largest purchaser of health insurance--was helpless in the face of spiraling health-care costs.

“Looking forward to next year, it’s even worse,” said CalPERS’ board president, William D. Crist, noting that he expected the panel’s recommendations to be accepted by the full board today.

“I don’t think we’re going to get something better, it’s our best option.”

Overall, CalPERS’ annual HMO premiums are expected to rise by $458 million next year, to $2.21 billion.

A precise figure on how much of this increase would be borne by workers and retirees was not available, but monthly out-of-pocket costs to some CalPERS members would rise by more than 50%.

This year, CalPERS’ overall HMO premiums went up about 6%, although an increase in co-pay for office visits to $10 from $5 and a multi-tiered prescription drug plan put the actual health-care cost increase at 13%.

“In the end, some may have a pay cut,” said Perry Kenny, president of the California State Employees Assn., referring to what’s in store for next year. The association represents 140,000 active and retired CalPERS members.

Nationally, health insurance premiums went up by more than double digits in the last two years, after relatively moderate increases or flat rates in preceding years.

At CalPERS, part of the big rate increase was seen as payback for flat and declining premiums during the mid-1990s, when HMOs kept rate hikes down in a mad scramble for volume. Next year’s increase also reflects rising costs driven by factors such as drug advertising, new medical technology, and greater clout by hospital companies and doctors groups that have boosted reimbursements.

The reality of the new health-cost environment was evident Tuesday at CalPERS headquarters, where the fund’s health panel voted 6 to 1 in favor of the changes amid a throng of disheartened government workers and retirees.

The panel also approved a controversial plan to eliminate two of its four major health maintenance organizations next year.

The removal of PacifiCare and Health Net--which cover about 350,000 CalPERS members--came despite strong opposition from executives of those two HMOs and some government worker representatives who voiced fears about disruptions in coverage and the consequences of dwindling health plan choices for its members.

CalPERS officials defended the move, saying that without the consolidation, health premiums would rise more than 30% next year.

CalPERS staff also sought to allay concerns about coverage, citing figures that about 90% of the PacifiCare and Health Net enrollees would be able to maintain their existing doctors through the remaining plans--Kaiser Permanente and Blue Shield, as well as three smaller regional HMOs.

The consolidation of health maintenance organizations reflects a sharp reversal of strategy from past years when CalPERS sought multiple competing plans as a way to play them off one another.

But given the recent acceleration in health-care costs and significant overlap in doctors and hospitals served by HMOs, CalPERS officials said it made more sense to align with fewer health plans, despite the risk of relying heavily on just a couple.

“It has never been done on quite this scale,” said Dr. Mark Smith, president of California’s Healthcare Foundation in Oakland, noting that CalPERS’ success in holding down rates during much of the 1990s was based largely on competitive health plans.

Smith said it remains to be seen whether this new strategy will pay off or ultimately hurt CalPERS during negotiations, as some are predicting.

In recommending the consolidation and the 25% premium increase, CalPERS staff decided against other changes in the health plan, such as higher co-pays for doctor visits and prescription drugs.

For state government employees enrolled with Blue Shield, next year’s premium increase will raise out-of-pocket costs for active employees to $41.25 a month for single coverage, from $26.66 a month this year, and to $107.86 a month for family coverage, up from $69.32.

For the almost 400,000 CalPERS’ enrollees with Kaiser, basic single coverage costs to employees would rise to $33.21, from $20.17 this year. Family coverage at Kaiser would go to $86.95, from $52.44 a month.

Comparable figures for retirees were not available, but their rate increases are generally much lower.