CalPERS Asks HMOs to Cut Insurance Prices

In a move likely to accelerate cost-cutting efforts throughout the state’s health care industry, the California Public Employees Retirement System has asked 18 health maintenance organizations to cut their insurance premiums by 5% next year.

The requested rate rollback, which would affect nearly 1 million Californians, is the boldest move yet by CalPERS to use its clout as one of the nation’s largest health care purchasing groups to pressure HMOs to rein in costs. If CalPERS is successful, it would also provide a clear example of the potential impact of the big state purchasing alliances outlined in the Clinton health care reform plan.

CalPERS estimates that the rate reduction would save its members and taxpayers $178 million. However, the move would put enormous pressure on HMOs to squeeze costs out of their suppliers--affecting hospitals, doctors and medical equipment companies.

“There are many areas of waste, over-utilization, excessive payments and profits that managed care companies should be able to control,” said Tom J. Elkin, chief of the CalPERS health program.

Peter Boland, a Berkeley-based health care management consultant, described CalPERS’ action as “the first shoe to fall in health reform.” The rates that CalPERS negotiates with HMOs are “the single biggest factor” in determining the contracts that HMOs reach with their suppliers, he said.

“No one will be able to ignore this,” Boland said. “The HMOs will have to pass those cost reductions all the way down the line.”

Other large employers may also use CalPERS’ rollback request as an example to seek lower premiums from HMOs.

President Clinton has held out CalPERS as a model of health care reform that works. His reform plan would create health insurance alliances, or state-based agencies, that would arrange insurance for businesses and individuals. These alliances would enforce spending ceilings and limit premium increases.

Critics of CalPERS have said in the past that the organization does little more than shift health care costs to suppliers.

CalPERS, whose main function is to manage public employee pension funds, is also the purchaser of health care for workers in state and local governments.

Top CalPERS officials met in Sacramento on Tuesday with senior executives of 18 HMOs to alert them to the rollback request, which would go into effect next August.

“The California taxpayer is in no position to fund additional money for health care costs for public employees and retirees,” Elkin said, noting the state’s budgetary problems. “We’re challenging the managed care industry in California to step up and help us in a difficult time.”