CalPERS Board Approves Plan With 11.4% Increase in HMO Premium Rates

The CalPERS board on Wednesday voted to approve a plan that includes an average HMO premium increase for 2005 of 11.4%, which is in line with the estimated national average for the first time in three years, the Sacramento Bee reports. Overall, CalPERS expects to spend $4 billion on health insurance in 2005, an increase of $273 million or 7.3% over 2004. In 2003 and 2004, CalPERS, the third-largest purchaser of health care in the nation, raised HMO premium rates by 25% and 18%, respectively. CalPERS officials said HMO premium rates would have increased by an additional 3% if the pension fund had not decided to drop 38 of the most costly hospitals in its Blue Shield of California HMO network. Spending on health insurance would have increased by an additional $36 million (Rapaport, Sacramento Bee, 6/17). Last month, CalPERS voted to drop the hospitals in 2005 in an effort to control premium rate increases. Almost 35% of CalPERS' $3.9 billion in annual health care spending can be attributed to hospital costs, and the fund's HMO premium rates have increased 57% since 2002. In addition to the $36 million in reduced spending in 2005, the move is expected to save CalPERS $50 million annually beginning in 2006 (California Healthline, 5/20).

Tom Beauregard, a health care consultant with Hewitt Associates, said CalPERS' decision to drop the hospitals helped keep its increase in HMO premium rates consistent with other large employers (Sacramento Bee, 6/17). Earlier this month, Hewitt estimated that HMOs will seek premium rate increases for large employers averaging 13.7% in 2005 (California Healthline, 6/4). Hewitt expects some companies to make changes to health plans -- such as passing more costs on to employees, increasing drug copayments or dropping hospitals -- that will lower the average rate increase to between 10.5% and 12.5%. However, Paul Fronstin, director of the health research and education program at the Employee Benefits Research Institute, said that he expects large companies nationwide to raise HMO premium rates by about 10% or less, and "[F]rom that perspective, CalPERS' rate hike looks much higher than other companies." Still, he added, "CalPERS has put a stake in the ground that tells hospitals to play by their rules or lose their business. They have done it in a way where it saves money for everybody but also gives patients who want those expensive hospitals an option to pay more and go where they want."

Sean Harrigan, CalPERS' board president, said, "We have dealt with some extremely tough issues, but the overall result is fabulous." Peter Lee, president of the Pacific Business Group on Health, a consortium of large employers, said that California has a number of factors that have been driving up health care costs in the state faster than the rest of the nation, including state-mandated nurse staffing rules, seismic safety rules that require hospital upgrades and low Medicaid reimbursement rates. He said, "Given all the troubles particular to California, it's a major accomplishment for CalPERS to end up with a rate hike that some people think is in line with the national average." According to the Bee, "opinions were mixed" on whether the projected savings from CalPERS' decision to drop the hospitals were "enough to justify a move that will require 53,000 HMO patients ... to switch hospitals" and doctors or enroll in a preferred provider organization (Sacramento Bee, 6/17).

KPBS' "KPBS News" on Wednesday reported on the CalPERS health committee's recommendation. The segment includes comments from CalPERS spokesperson Clark McKinley (Goldberg, "KPBS News," KPBS, 6/16). The complete transcript of the segment is available online. The complete segment is available online in RealPlayer.