As a desperate measure to cut skyrocketing hospital costs, the California Public Employees Retirement System has decided to reduce its offerings with Sutter Health, one of its more expensive networks. But first, CalPERS must get the Schwarzenegger administration's approval via the Department of Managed Health Care.

Absent any glaring and unknown problems with this proposal, the department needs to approve it. Otherwise CalPERS, the largest government buyer of health insurance in the state, will have lost its one remaining weapon to control costs - its ability to adjust its network of hospitals and doctors based on their payment demands.

This decision by CalPERS to reduce the Sutter network available through its Blue Shield HMO will impact approximately 30,000 of its members in the Sacramento region. Sutter General, Sutter Memorial and Sutter Davis hospitals are among those that CalPERS Blue Shield HMO would no longer carry (actually, they're fine with keeping Sutter Davis and have asked Sutter for permission to keep them).

There is a potential for patient disruption, but patients still have a choice. For CalPERS members who decide that the higher-cost Sutter is worth more money, they can buy a higher-priced health plan (not an HMO). But for those who decide to migrate to another doctor group and hospital group, Blue Shield has to make sure the local system can handle such a migration. That is where the state Department of Managed Health Care comes in. Its job is to make sure that the HMOs can back up the coverage with actual care.

If the department says no, then CalPERS will lose any negotiating leverage it has with a major hospital/doctor chain. The group will be able to demand higher and higher prices, and CalPERS will have no choice but to pay. This will either eat up more of the state budget or of the paychecks for state and local employees who depend on CalPERS for health care.

This whole unfortunate episode with CalPERS and Sutter illustrates how dysfunctional the whole health-care system is. But getting rid of a necessary constraint on costs - CalPERS' ability to adjust its stable of hospitals and doctors - would make a bad system even worse.