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CalPERS to Let Health Rates Rise 9.7% in 2000

Insurance: Increase is largest in 9 years. Agency's decision could portend similar increases for private companies.

May 19, 1999| From Times Staff and Wire Reports

The California Public Employees' Retirement System's health benefits committee on Tuesday agreed to let insurers raise rates for its members an average of 9.7% next year, in the biggest increase in nine years.

CalPERS, whose members' premiums rose an average of 7.3% this year, is the first big purchaser of health benefits to set premiums for next year. The CalPERS action is being closely watched because insurers are expected to push for similar rate increases in their dealings with private employers and consumers.

"This level of premium increase is necessary to adequately fund our members' health care in 2000," said Margaret Stanley, CalPERS' health benefits administrator, in her recommendation to the CalPERS health benefit committee.

She added that she expects rates to "return to moderation" in the coming years, and that CalPERS was able to renegotiate contracts with five of the 10 health-maintenance organizations to ensure stable premiums through 2004.

Kaiser Permanente, CalPERS' biggest contractor and California's largest HMO, will raise rates 11.7%. Foundation Health Systems Inc. will be allowed to raise rates 9.9%. The vote by the health benefits committee of CalPERS, the second-largest public buyer of health insurance in the U.S. after the federal government, also affects insurers that include PacifiCare Health Systems Inc., Aetna Inc. and Cigna Corp.

CalPERS, which negotiates coverage for about 1 million state and local employees and their dependents, said rising medical costs justify substantially increasing rates for a second year. The Sacramento-based fund's average rate rose 2.8% in 1998 after declining in the four previous years.

U.S. medical costs seem to be on track to increase by about 4% to 6% this year and next, said Sheryl Skolnick, a BancBoston Robertson Stephens analyst who follows health insurers.

Skolnick said, though, that large employers who negotiate their 2000 rates later this year may be more resistant than CalPERS to big premium increases.

If insurers "have as good a year as they seem to be having, I think their employer customers are going to be looking at their profit margins and saying, 'I want some of my money back, thank you,' " Skolnick said.

Investors pushed HMO stocks higher on Tuesday, with PacifiCare Class A shares rising $3.38 to $85.88, WellPoint Health up $1.75 to $75.75 and Foundation Health up 44 cents to $17.13.

Other experts warned that the rise in rates--including expected increases of up to 25% in some Western markets--could be a drag on the booming U.S. economy.

"The economy has benefited greatly from low or almost flat inflationary trends" in health costs, said Chuck Hartwig, chief of consulting firm William M. Mercer's health-care practice for the West. "We see it changing abruptly . . . it could have potentially serious implications."

CalPERS let Kaiser raise rates 10.7% for this year, after refusing to agree to its original request for a 12% increase. Foundation raised its rates with CalPERS for this year by 5.9%.

A health-maintenance organization is a form of health insurance in which the insurer limits coverage of doctors, hospitals and procedures in order to hold down medical costs.

CalPERS said rates for its self-funded preferred-provider organizations, another form of restricted health coverage, will be raised by about 7% in 2000.

The rate increases go to CalPERs' board for formal approval today.

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