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California Firms Enjoy Rollbacks in Medical Costs


When the city of Sacramento went shopping for medical insurance for its 4,000 employees this year, it got a pleasant surprise: rate rollbacks of up to 22%.

Many other employers across the state--from giant manufacturers to neighborhood retailers--are also enjoying rate cuts, or significantly smaller increases. It is a striking turnabout from just three years ago, when California industry was bemoaning medical cost increases of 10% to 15%--far higher than overall inflation.

"It seems that almost all of our clients are seeing little or no increase in their cost of health care," said Robert B. Cliff, principal at A. Foster Higgins & Co., a Los Angeles employee benefits consultant. "It's remarkable."

And a huge relief, especially in Southern California, where many companies are still struggling with the effects of a prolonged recession. Lower employee medical costs might provide companies with more money for other things, such as hiring more workers, developing new products or simply shoring up profits.

Lower rates "have very significantly taken the pressure off," said Paul Fearer, senior vice president at San Francisco-based Union Bank. "Health insurance is no longer the primary focus it once was. It feels a little more under control."

At some companies, lower insurance costs could mean $10 or $20 extra in paychecks each month, or additional benefits.

But for hospitals, doctors and other health care providers, the cost advantages enjoyed by others are painful--at least in the short term--as they are forced to reduce their prices to win insurance business.

Both the breadth and size of insurance cost reductions in California are virtually unheard of in other parts of the country, but experts disagree on whether this achievement means that California is on the road to long-term reductions in the costs of health care services.

What is clear is that in key California markets medical prices in the consumer price index are rising at a slower pace than the rate of increase for the nation as a whole. Nationally, medical prices rose 4.6% for the 12 months ended Aug. 30. If that trend holds for the rest of 1994, it would bring the lowest national medical cost increase in two decades.

But in the Los Angeles metropolitan area, medical prices rose just 3.9% for the 12-month period. And in San Francisco prices rose 2.9% for the same period, according to the Health Care Price Index, a newsletter based in Santa Cruz. Overall, the U.S. inflation rate is about 3%.

Experts point to several reasons for the California trend. One is the continued growth of thrifty health maintenance organizations and other "managed care" insurers, which promise cost-efficiency in exchange for limits on physician choice. About 12 million Californians--or roughly half of all privately insured residents--now belong to HMOs. Nearly 8 million others belong to other types of managed care health plans.

Also, these insurers have been waging a fierce price war as they compete in bare-knuckled fashion for a piece of the nation's biggest health care market, experts say. That price war has spilled over into the hospital industry, where a severe oversupply of beds has left many hospitals hungry for patients--and willing to sharply discount services to get them.


Moreover, experts say many California employers have become more sophisticated, and tougher, negotiators when shopping for coverage.

Health care executives say the fact that many Californians are paying lower insurance premiums (or seeing smaller increases) is evidence that managed care and free market competition can reduce medical costs without government interference. Many of these executives opposed the large role that government would have had in President Clinton's moribund health reform proposals.

"A lot of us were very disappointed when we started to see government trying to get involved in reforming the health system," said Kurt Davis, head of investor relations for Foundation Health, a Sacramento-based HMO. "If Bill Clinton went to sleep for three or four years, I think he would wake up and find that reform of health care delivery was done."

HMO executive Roger Greaves says the California marketplace "is doing just what it's supposed to do. . . . It's called managed competition and if we can't (reduce costs), then we shouldn't be in business." Greaves is co-chairman and co-chief executive of Woodland Hills-based Health Systems International, which owns the Health Net HMO.


But some health care providers complain that insurers are not shouldering their share of the cost-reduction burden. Instead managed care companies are squeezing the profits of hospitals and doctors, they say.

"Leonard Schaeffer (chairman of Blue Cross of California and its managed care subsidiary, WellPoint Health Networks) made more money last year than my whole hospital did!" said Gary Cottongim, chief executive of Redlands Community Hospital.

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