State employees and retirees have financial reason to be concerned about what is happening inside their giant pension and health system. But the political paralysis of the system's leadership should have everybody who buys health care worried. That's all of us, in one way or another.
The 1.3-million member California Public Employees Retirement System, with its enormous purchasing clout, can end up shaping the entire marketplace. Although in the past it has been a force for positive change -- squeezing fat out of a bloated system and promoting measurements of quality -- at the moment it seems incapable of dealing with rising costs. That means higher costs within CalPERS, which is ominous for the private sector as well.

The worrisome incident of immediate concern has to do with a no-brainer of a decision that the Cal-PERS board recently botched. At the moment CalPERS charges a retiree in Redding in Northern California the same premiums for the same health insurance as a retiree in Southern California, even though the actual cost of providing that care could be dramatically different.

It may seem counter-intuitive, but health care costs in the southland are higher than in Northern California. This is a function of greater competition in the southland among the groups of hospitals and doctors. In the commercial marketplace, the difference in premiums between regions can be as much as 20 percent to 25 percent.

The local governments and school districts throughout Southern California that are part of Cal-PERS are, in effect, now subsidizing the health insurance of fellow Cal-PERS members north of the Tehachapis. They are beginning to ask themselves the obvious question: Why be a part of CalPERS if it is cheaper to go it alone?

The obvious solution for CalPERS was to begin to move to a pricing system that better reflects the actual differences in cost of the local care between north and south. CalPERS staff had a modest solution to differentiate the health care premiums paid by local government members (not state employees) in the south and north. But local governments in Northern California objected, balking at paying more of the true cost of their care even though the proposal still financially favored the expensive northland. So the CalPERS board threw up its hands. It stayed with the status quo, which actually could lead to huge changes inside this system.

Look for an exodus of local governments in the southland from CalPERS. Following that, look for even higher health care costs for the rest of the state employees and northern governments that are left in CalPERS. And with a smaller, paralyzed CalPERS, look for the cost-drivers of the health care -- the hospitals, doctor groups and drug companies -- to have even greater market power in California.