State hopes to trim health-care costs through direct negotiations*

Confronting an unprecedented budget shortage, Gov. Arnold Schwarzenegger is scrambling for ways to save money. One possibility: Have the state, not CalPERS, handle negotiations for health-care coverage for state employees. The governor contends that would save the state $132 million, but health-care experts are dubious at best and critics wonder whether it is little more than sleight-of-hand budgeting.

So far, CalPERS isn’t talking about the governor’s plan – at least publicly. The governor’s Department of Finance, in a terse description of the proposal, believes the $132 million savings, which would be realized “by contracting for lower-cost health care coverage directly from an insurer rather than through CalPERS,” would be phased in beginning in January 2010. Despite the language of the proposal, the administration says it hopes to work with CalPERS in designing health plans and getting the most bang for the buck.

Although CalPERS has an array of often-complex health-care options, the bottom line is that opportunities for savings can be limited.
“When you’re paying for health-care coverage, there are three things you can change,” said Marian Mulkey, senior program officer of the California HealthCare Foundation. “You can change the benefits and the services that you cover. You can alter the profile of the people you cover; that is to say, you look at the risks and the characteristics of the people you cover. You can reduce the amount you pay for the services.”

CalPERS, she noted, negotiates health care not just for state employees but for some other government employees as well. Would severing the state-local component save the state money?

“By splitting the pool, you might have some impact on state workers but at the expense of the others covered. If state and local employees were split apart, it (their coverage) might not necessarily cost more. Both are large groups, and even if they are split they are still larger than most employer groups in the state. If there is data to suggest that the state employees themselves are less costly – a little less old, a little less likely to use health-care services than the others – then by splitting the two you could perhaps lower costs,” Mulkey added.

The state does think there is room to cut costs. Several Capitol staffers familiar with the issue agree, at least in part. For example, by eliminating the fiscal intermediaries and other middlemen in the PPO system, the state could save money, they contend. And the state thinks it should help design health coverage.

“We want to make sure that the employees’ coverage still meets their needs, but that they are getting choices that don’t cost as much,” said Lynelle Jolley, a spokeswoman for the Department of Personnel Administration. The DPA represents the administration in collective bargaining negotiations with state employees.

“Sometimes it’s a tradeoff between deductibles and premiums, sometimes it’s a trade off between components of the plan itself. The point of the proposal is to redefine the health care choices that employees have.”

The bulk of the 240,000-member state government workforce, plus an array of local government employees, are covered by health management organizations under agreements negotiated by CalPERS on behalf of its 1.3 million members.

CalPERS, the nation’s largest public pension fund, is the third-largest purchaser of health benefits and the largest in California.
CalPERS buys about $5.7 billion a year worth of coverage. The pension fund has experience in health-care contracting, and because it negotiates large amounts of coverage, it is able to leverage favorable rates, according to experts. Even increases, if modest, are viewed as desirable at a time when health-care costs are increasing sharply.

This year, CalPERS’ members health care coverage costs increased about 4.8 percent overall, the smallest increase in more than a decade and less than a third of the increase in 2004. Rates solely for HMO coverage increased nearly 6.6 percent. Rates for preferred provider organizations, or PPOs, declined slightly.

Calpers, working with Blue Shield, also noted that it was able to save about $200 million by, among other things, removing high-cost hospitals from the network, adding a lower-cost health plan called NetValue and extending the  contract through December 2010.
But any increase at all in a tight home budget is painful for the employee. An interactive health-care coverage database called a Health Plan Chooser that the Pacific Business Group on Health provided for CalPERS’ Web site, allows employees to consider the differences between their health plans and calculate the cost of each.

But whether the administration could work out similar money-saving deals remains unclear.

“It was weird when he first announced it, and it continues to be a head scratcher,” said Anthony Wright, executive director of Health Access, a grass-roots health advocacy group with strong ties to organized labor. “The assumption of most of us in health care is that CalPERS actually does as good a job as anybody because it has negotiated on behalf of so many. Bulk purchasing tends to work.”

“Given who it is that they are actually covering, CalPERS does a better job than most. The idea of breaking up the pool of local and state workers seems to be more of power or control than in actually saving any money,” Wright added. “It’s not clear how they would save money. I haven’t seen how they arrive at that.”

*Editor's Note: This story corrects an earlier version with the title and affiliation of Marian Mulkey, senior program officer of the California HealthCare Foundation.

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