The California Public Employees' Retirement System plans a major overhaul of its health program that could reduce fees for state workers by increasing fees paid by city, county and school district employees in Northern California.
In the Sacramento region, roughly 40,000 local government workers could see their share of out-of-pocket health costs rise next year in order to help trim premium increases for about 190,000 state employees and retirees who also live here.
CalPERS' vote Tuesday to restructure its health program comes as the 1.3 million-member pension plan finds it can no longer use its leverage in the marketplace to command lower premiums from HMOs.
"It is clear to all of us at this point in time that the old tricks no longer work," said Allen Feezor, CalPERS' health benefits administrator. "We need to get serious about making substantial changes to CalPERS if we want to remain a viable force in the marketplace and continue delivering quality care to our members at a reasonable price."
Once an advantage, CalPERS' size now presents a problem.
The pension fund has always required health plans to set a single premium to insure all state workers and retirees, as well as any local government agencies that chose to enroll in CalPERS. Every CalPERS member got the same benefits at the same price.
This worked well when CalPERS had the market power to demand lower premiums than anybody else in the state. But now that its leverage is waning, local governments in Southern California have started leaving the CalPERS health program because they can get better insurance rates by going it alone.
"We are trying to come up with choices that will get better pricing and better benefits for every CalPERS member," said Feezor of CalPERS.
As early as 2004, CalPERS might reduce premiums for public agencies in Southern California and raise them for Northern California governments, in an attempt to mirror the difference in hospital costs and HMO rates around the state. The exact cost of premiums will not be disclosed until at least June, the earliest CalPERS is expected to set its HMO rates for 2004.
CalPERS might also create a new preferred provider organization plan for its public agency members, with different benefits or premiums from the PPOs currently available to all members, PERS Care and PERS Choice.
These proposals, raised before, have re-emerged with new urgency this spring because CalPERS needs to retain the younger, healthier local government workers in Southern California to offset the high cost of insuring the typically older, sicker state workers and retirees in Northern California.
The California State Employees Association, the largest state workers' union in CalPERS, has blocked past attempts by the pension fund to charge state workers different insurance premiums based on the cost of coverage where they live.
Public agency employees, who account for about 40 percent of CalPERS' members, don't have a statewide union to represent their interests.
Around the Sacramento region, local government officials appreciate CalPERS' financial bind but fear increased premiums and out-of-pocket fees would be too expensive for some area workers to bear.
"In these economic times when employees are not getting enormous salary increases, we certainly don't want to be in a position of making them pay more for health benefits," said Stacey Haney, human resources director for the city of Roseville.
In Citrus Heights, city officials explored leaving CalPERS after the pension fund whittled down its HMO options last year. But with only 54 employees, city officials found no broker able to give them a quote to offer Kaiser plus one additional HMO, said Cathy Capriola, administrative services director for the city.
"I think our rates would be lower than CalPERS if we could get somebody to bid on us, but we're just too small," Capriola said.
Down south, things look much different.
Riverside County took its 11,000 workers out of CalPERS this year after rates went up and the pension fund dropped Health Net and Pacificare from its HMO offerings, said Barbara Olivier, assistant human resources director for the county.
"We started looking for bids outside of PERS in 2001," Olivier said. "With PERS, we had no control over the benefits, no control over the HMOs they chose, and no control over the price."
By leaving, Olivier said the county trimmed its health benefits costs by $2.5 million. "I don't know why we'd go back," she said.
Many more local governments in Southern California are prepared to leave CalPERS if it doesn't overhaul its health benefits program, said Gordon Youngs, personnel services director for the city of Brea.
"CalPERS has started being driven by the state workers' unions at the expense of Southern California agencies," Youngs said.
Brea officials already have bids from other HMOs for next year with premiums 15 to 20 percent lower than the current cost of CalPERS, Youngs said.
"I don't know if the changes PERS proposed will be enough incentive for us to remain in the system next year," Youngs said.
Times have changed for CalPERS and other large employers who purchase health insurance on behalf of the vast majority of Californians.
CalPERS, the second-largest purchaser of health benefits behind the federal government, a decade ago led the charge of employers nationwide that seized on managed care as a means to cut insurance costs by controlling the doctors patients used and the treatments they received.
For many years in the mid-1990s, CalPERS got annual premium reductions from HMOs as insurers pressed hospitals and doctors to slash their fees.
But the savings didn't last.
Hospitals fought back by consolidating into large chains to get higher payments from HMOs. Patients, meanwhile, revolted against HMOs, pressing insurers to offer a broader choice of doctors and treatments.
Due in large part to the soaring cost of hospitals and prescription drugs, CalPERS last year had an average premium increase of 25 percent -- twice the national average for large firms.
Though they may still get a better deal on insurance through CalPERS than they would on their own, many local government officials in the Sacramento region said they could be priced out of CalPERS if their rates rise too much.
"We have an obligation and a responsibility to our workers," said Joanne Narloch, human resources director for the city of Lodi. "We are looking at bids from other HMOs, but our hope is that CalPERS will come up with an option that works for us."