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2 CalPERS Plans Hit With $96-Million Loss

Insurance: Shortfall will reduce health fund's reserves to six weeks. Officials attribute deficit to run-up in membership.


The California Public Employees' Retirement System, the second-largest health benefits provider in the nation, will lose $96 million on its self-insured health plans this year, prompting officials to consider double-digit rate hikes and increased co-payments in the next two years.

The losses will reduce the reserves in CalPERS' health plan fund to $73.1 million, enough to last six weeks should unexpected medical costs or other emergencies impair the fund's ability to draw on its regular cash flow to pay for claims. The recommended industry standard is to have at least three months of reserves.

The health fund losses will not affect CalPERS' ability to pay retirement benefits to its members or destabilize the pension fund's other programs.

But the losses point up the ongoing financial pressures faced by health insurers.

CalPERS officials attribute the losses to a huge run-up in membership in its self-funded plans, which are not health maintenance organizations and therefore among the most expensive to administer.

These plans have high premiums and deductibles, but CalPERS members in the state's rural areas have been forced to join them in droves as HMOs have pulled out of the counties where they live, said Allen Feezor, CalPERS assistant executive officer for health.

"This is the only option that is available statewide," said Feezor, particularly in rural areas where there can be higher costs because there are fewer doctors and hospitals.

Unlike HMOs, which can pull up stakes when it becomes too expensive to operate in a community, CalPERS is obligated to provide care for all of its members--no matter where they live. And in California, HMOs that CalPERS offers its members as less-expensive alternatives to its self-funded plans have pulled out of six counties. Several more counties have only one HMO, sometimes with high co-payments or stripped-down services.

As a result, Feezor said, the two plans, PERSCare and PERSChoice, have suffered inordinately from increases in the cost of doctor and hospital visits, as well as high prices and increased demand for prescription drugs.

About 22% of CalPERS' 1.1 million members are now enrolled in the plans, and the number continues to climb, Feezor said.

"They're really stuck," said Ruth Given, a health economist with the consulting firm Deloitte & Touche. "[CalPERS] can't just pull out because they have beneficiaries all over the state."

The problem has been compounded by an increase in patients' use of the system, Feezor said. As the baby-boom generation ages, and seniors continue to live longer, CalPERS members have needed more and more medical care.

For that reason, in part, the number of doctor and hospital visits that the system must pay for has gone up unexpectedly fast. And the visits are more expensive than they might be for an HMO. CalPERS' plans are preferred provider organizations in which there is no primary-care gatekeeper and patients do not need a referral to see a specialist.

CalPERS has already said it will institute huge premium increases for these plans for 2001, charging an average of 19% more than this year.

But Feezor said that it would take an even greater increase--about 24%--to stem the losses and begin rebuilding the reserve.

Feezor said he will present a number of options for dealing with the deficit to the CalPERS board over the next two months.

On the table will be a plan to increase premiums even more in 2002, and to raise deductibles and co-payments.

Another likely option would be to institute a three-tiered co-payment system for prescription drugs. Under such a system, patients who order drugs by mail would pay the least--about $5 for a three-month supply if a similar proposal last year is any guide. Patients who buy prescription drugs at a pharmacy would pay more--possibly $10 or $20 for a 30-day supply--with generics costing less than brand-name drugs.

Another possibility would be to limit the number of drugstores CalPERS members could use, Feezor said. Whereas members can now go to 98% of the pharmacies in the state, CalPERS might limit them to the 80% of California drugstores that are likely to give discounts in exchange for additional business.

CalPERS could also save money by retooling one of the two health plans to resemble an HMO, with tighter controls on the physician network and access to specialists.

To make such a program work in areas where there are no commercial HMOs, CalPERS would look to a model called direct contracting, in which the retirement system itself would manage care and pay doctors, hospitals and pharmacies.

But that would also put CalPERS in the position of having to persuade the same rural and suburban doctors who have refused to contract with commercial HMOs that its program is somehow better.

"They don't have the clout to force the providers to contract with them [and accept lower fees]," Given said. "The doctors and hospitals would still demand more money."

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