CalPERS to Let Health Rates Rise 10% in 2000

The California Public Employees’ Retirement System (CalPERS), one of the state’s largest employee groups, has agreed to pay nearly 10% more on average for health care next year, the biggest increase in nine years.

While health plans said the CalPERS decision reflected an understanding that health-care costs are rising, consumer activists and some analysts said that the rate increase could set a pattern across California that would result in increased premiums for workers or dropped coverage altogether.

“HMO patients are paying a lot more for a lot less care,” said Jamie Court, of the Foundation for Taxpayer and Consumer Rights. “Health-care businesses should be required to show the need for rate increases and where and how the money would be used.”

CalPERS, however, which negotiates coverage for some 1 million state and local employees and their dependents, said rising medical costs justified substantially increasing rates for the second year in a row.

“This level of premium increase is necessary to adequately fund our members’ health care in 2000,” said Margaret Stanley, CalPERS’ health benefits administrator, in her recommendation to the CalPERS health benefit committee.

Tuesday’s decision is significant, because the system’s actions are watched by employers and health plans alike.

“Any time an organization like CalPERS does something like this it is significant, because it validates what the health plans have been saying--that they need to have increases,” said Becky Kapustay, senior vice president for commercial accounts at Wellpoint Health Networks Inc., which sells Blue Cross coverage in California.

Geoffrey Harris, a health-care analyst with Warburg, Dillon, Read, said that this latest hike is likely to inspire health plans to raise rates for employers in the private sector as well.

Health plans have been pushing for premium increases for more than a year, saying that rates reached dangerously low levels during a period of intense competition among plans in the early 1990s.

During that time, the plans were so desperate for market share that they kept premiums too low, especially in California, where even with the rate hikes of 1999, rates are lower than the rest of the country. Last year, CalPERS premiums rose 7.3% over 1998.

Kaiser Permanente, CalPERS’ biggest contractor, will raise rates 11.7%. Foundation Health Systems Inc. will be allowed to raise rates 9.9%. The vote by the health benefits committee of CalPERS, the second-largest public buyer of health insurance in the U.S. after the federal government, also affects insurers including PacifiCare Health Systems Inc., Aetna Inc. and Cigna Corp.

The organization, which carefully audits health plans before agreeing to accept rate increases, accepted similar premium hikes for 1999.

Pushing the inflation are two key elements: the rising cost of prescription drugs and pressure from doctors and hospitals to restore some of the discounts forced on them by years of managed care.

Particularly feeling the financial pinch are health-maintenance organizations, the managed-care companies that attempt to control health-care costs by limiting patient access to specialists and some expensive procedures.

“There has been significant medical inflation for the last several years,” said Harris. “But before, it was coming out of the hides of the HMOs.”

If premiums do rise across the board for next year, however, some experts fear a backlash.

“Corporate America can’t absorb 10% a year forever,” said Pat Widner, an analyst with PF Associates in New York.

At most, Widner predicted, employers will accept increases for another year. Then, she said, they are likely to refuse, demanding instead that health plans rein in costs. The most pressure, she ventured, would be on the prices of prescription drugs.

Chuck Hartwig, chief of consulting company William M. Mercer’s health-care practice for the West, warned that the rise in rates--including expected increases of up to 25% in some Western markets--could undercut the overall economy.

“The economy has benefited greatly from low or almost flat inflationary trends” in health costs, said Hartwig. “We see it changing abruptly . . . it could have potentially serious implications.”

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Staff writers Annette Haddad and Jeff Leeds, and Bloomberg News contributed to this report.