Stocks of health maintenance organizations took a lashing Wednesday after California's giant public employee pension fund said it would seek a 5% reduction in insurance premiums for its members next year.
While some analysts expressed doubts that the California Public Employees Retirement System will be able to negotiate such a large reduction, the news sparked a broad selloff among managed care stocks, even among firms that do not do business in California.
Among California-based HMOs that contract with CalPERS: Pacificare Health Systems Inc.'s Class A shares sank $2.50 to $40.50, Takecare Inc. was down $2.25 to $40.50, FHP International Inc. was off 75 cents to $20.75 and Foundation Health Corp. lost $1.25 to $23.125.
Outside California, shares of Connecticut-based Oxford Health Plans Inc. were off $6 to $72.50, and Pennsylvania-based U.S. Healthcare Inc. fell $2.125 to close at $42.875.
CalPERS on Tuesday disclosed its intent to seek premium reductions in a meeting with representatives of 18 HMOs serving close to 1 million public employees and their families. CalPERS, which buys health care for state, municipal and school district employees, cited California's economic problems and its belief that there is more fat to cut from health care costs.
"This is the initial shot across the bow," said Thomas E. Hodapp, health care analyst at Robertson, Stephens & Co., a San Francisco investment bank. "None of the HMOs I've talked to today expect to come back with a 5% rate cut."
Hodapp said the CalPERS request will set off "a little game of chicken" among the health plans, which now must submit contract bids to the giant employee group. "If an Aetna or Cigna, for example, goes in with a low-ball bid for market share, it could be a pressure year for HMOs," he said.
Last year, CalPERS asked the HMOs to freeze rates and eventually negotiated a 1.4% increase in premiums.
Bert B. Wagener, president of Glendale-based Cigna Health Care of California, said he asked CalPERS directors Tuesday whether the 5% rollback is a goal or an ultimatum to be considered as a contractor. "They made it very clear that this is the goal to be in the game," he said.
John W. Baxter, executive director of Santa Rosa-based Health Plan of the Redwoods, said CalPERS' rate reduction would "intensify the pressure . . . to administer ourself more efficiently, make less generous payments to providers and develop more efficient patient care processes." CalPERS is an important customer to the Northern California health plan, accounting for 8% of its 82,000 members.
Kurt Davis, director of investor relations for Foundation Health, said the CalPERS request demonstrates the need for HMOs to look outside their traditional business for growth. The Rancho Cordova, Calif.-based health plan, for example, has recently expanded into managed care programs for vision, dental, pharmaceutical and mental health services.
"This will probably hasten the consolidation trend," Davis said. "For some small HMOs that are living on the edge, this is the sort of thing that could push them over the edge."
L. Jerome Ashford, vice president and health plan manager for Kaiser Permanente of Southern California, called the CalPERS request a "formidable challenge."
"We all expected we would be asked to assist them in controlling rate increases, but we did not expect them to request a rollback of this magnitude," Ashford said.