Projected Savings From CalPERS Move To Drop Hospitals Might Have Been Overstated, State Audit Says
CalPERS might have overstated projected savings by more than $10 million when it moved last year to drop some hospitals from its health care provider networks, according to a state audit released Tuesday, the Sacramento Bee reports (Rapaport/Ortiz, Sacramento Bee, 3/30).
CalPERS in May 2004 voted to drop some hospitals from its Blue Shield of California provider networks to help control premium rate increases. The move was expected to save CalPERS $36 million in 2005 and $50 million annually after that (California Healthline, 12/20/04).
In June 2004, Sen. Deborah Ortiz (D-Sacramento) requested an audit to examine the financial data CalPERS used to make its savings projections.
In its report, the Bureau of State Audits concluded that CalPERS did not have a "credible basis" for evaluating whether the projected savings would materialize. The report said that Blue Shield was barred by nondisclosure agreements in its contracts with health care providers from sharing with CalPERS data on exact prices paid for care.
As a result, CalPERS was unable to independently verify the savings Blue Shield said CalPERS would achieve by eliminating some hospitals from its provider networks, according to State Auditor Elaine Howle. She added that financial analysts hired by CalPERS could not verify the accuracy of the savings estimates because they did not have data on actual prices even though the analysts concluded that Blue Shield used "sound methodology" to arrive at its savings estimates (Sacramento Bee, 3/30).
In addition, Howle said that CalPERS did not consider how many HMO patients might change insurance plans to remain with their current doctors (San Francisco Chronicle, 3/30).
To avoid similar problems in the future, Howle recommended legislation that would allow CalPERS to obtain actual price data from HMOs. Ortiz said she has introduced a bill (SB 545) to do that.
CalPERS spokesperson Clark McKinley said trustees of the pension fund "had no objection to this type of legislation."
Ortiz said, "The audit shows that Blue Shield's projected savings ... did not take into consideration the financial -- and emotional -- costs of forcing employees to scramble to find other health care plans when Blue Shield excluded their hospitals from its system."
CalPERS CEO Fred Buenrostro said the audit's conclusions were "unwarranted," adding that CalPERS "independently validated" the savings estimate from Blue Shield.
Blue Shield executive Paul Markovich, who supervised the analysis performed for CalPERS, said, "I stand by our numbers," adding that the current estimated savings for 2005 is $31.4 million. He said, "We did a very rigorous and valid financial analysis. With the provision in the contract to correct any mistake in the savings estimate, there is simply no incentive for us to be wrong" (Sacramento Bee, 3/30). The report is available online.