The board of the state system providing health and retirement benefits to more than 1.2 million public employees voted Wednesday against making its Northern California members pay higher health care premiums than those in the southern part of the state.

The California Public Employees' Retirement System (CalPERS) board ultimately decided -- in a 7-5 vote against the recommendation by its health committee -- that such regional pricing would unfairly penalize workers in the Bay Area and other parts of Northern California, who make up at least 60 percent of total membership.

Still, members will likely face health premium percentage increases in the "high teens or low 20s" when 2004 rates are announced next month, a spokesman said. Members also could face fewer health plan options as CalPERS seeks to renegotiate its contracts.

The regional pricing plan was put forth to set higher premiums for northern members because hospital and other care expenses are more costly than in Southern California.

The board will seek legislation to give itself authority to set prices by region if it chooses to in the future, and it could potentially take up the issue again at next month's board meeting, said Clark McKinley, spokesman for CalPERS.

"The contention with most of the board members is that regional pricing is inherently unfair and an arbitrary distinction," McKinley said. "You would have two workers doing the same job in the state but one pays more for health care."

CalPERS is the third-largest purchaser of employee health benefits in the nation -- after the federal government and General Motors -- and the largest purchaser in the state. It spends $3.4 billion a year on its health program.

But over the past few years, health insurance premiums for CalPERS members have climbed, showing that despite its considerable leverage, it is not immune to the nationwide problem of rising health care costs. Last year, member HMO premiums increased 25 percent.

"The underlying forces driving health care premiums in recent years are killing prospects for affordable health care," said Sid Abrams, chair-man of CalPERS health benefits committee, in a release citing the high costs of chronic conditions like diabetes and asthma, and escalating hospital and prescription drug costs.

The CalPERS board admitted that it would lose members if prices rise, thus reducing the pool of workers and further hiking up costs.

Walter Johnson, director of personnel for the city of Oakland, which provides health insurance to 3,000 employees through CalPERS, said the city, like many other public employers, could potentially take its business elsewhere if CalPERS costs continue to rise. The city absorbs all of the costs of the least expensive health plan offered by CalPERS -- Kaiser Permanente -- but shares premium increases with employees on other plans.

"We are always looking at ways to reduce costs," Johnson said.

Perry Kenny, president of the California State Employees Association, which opposed the regional pricing plan, said CalPERS should change the way it does business to keep prices in check.

"CalPERS needs to be aggressively negotiating with providers and be more educated in prescription drug purchases," Kenny said.

The centerpiece of the CalPERS strategic plan for health care, approved Wednesday by the board of administration, is a negotiated three-year contract with Blue Shield of California. Cal-PERS will seek multiyear contracts with other health care providers as well, a spokesman said.

"We feel multiyear contracts are the way to go, so we can spread out the price spikes and have more predictability in pricing," McKinley said.

But Kenny is not convinced that this strategy will bring prices under control.

"I'm sure we're not going to see any cost savings," Kenny said.

In other efforts to reduce costs, CalPERS will require health plan partners to have at least three care management programs to identify high risk individuals, saying chronic care will make up 60 percent of future program costs. It also will explore forming a coalition with other large health care purchasers.