The California Public Employees' Retirement System's health insurance operation, held up as a model for group purchasers under President Clinton's health care proposal, could end up being dismantled by it.
The linchpin of President Clinton's plan to overhaul the nation's health care system is the creation of large regional groups whose huge buying power could wring out savings from health maintenance organizations, doctors' networks and hospitals.
"It seems to me that Clinton's objective is to put out of business the very organizations that have all the skills he says will be needed in the future - large purchasing pools with skilled staff and motivated to hold down costs," said Glenn Smith, managing consultant in the San Francisco office of A. Foster Higgins & Co. Inc., who has been advising CalPERS for the past five years.
Under Mr. Clinton's plan, only one group could purchase health insurance on behalf of all employees in a specified region. States could create one or several regional alliances within their borders. These regional health care alliances would be supervised by government-appointed officials. Corporations or unions representing 5,000 or more workers, could, however, set up their own groups to purchase health insurance.
But public employers - irrespective of the numbers of employees - would have to join the regional alliances and could not maintain their own health care programs.
Thus, systems like CalPERS, the North Dakota Public Employees' Retirement Board, the Employees Retirement System of Texas, the Department of Employee Trust Funds for the State of Wisconsin and a few other state retirement systems that administer health care benefits to employees and retirees, would no longer be able to do so.
And a number of these plans have, in recent years, become savvy at holding costs down through negotiations with health care providers, standardization of benefits and a shift toward lower-cost managed care programs.
The $80 billion California system, which provides retirement and health care benefits to approximately 930,000 public employees and their families, recently won an average 1.1% rate reduction from its 18 HMOs. Nationwide, HMO premiums increased 6.5% last year, according to a new survey by Foster Higgins.
The system also won a rate freeze from its preferred provider organizations.
CalPERS pays out $1.6 billion a year in health insurance premiums. But by keeping health care rate increases down to 6.4% over the past three years, compared with the national average of 30.1%, it expects to save $321 million for the 1994-'95 contract year, said Tom Elkin, assistant executive director.
The tiny North Dakota PERS, which provides health care benefits to 46,000 state government employees and families, has not seen a rate increase in four years, said Starb Collins, executive director.
The system has managed to keep monthly insurance premiums down to $254 per person during that period, he said, using doctors' networks; a plan to encourage employees to use cheaper, generic prescription drugs; and preventive care programs, Mr. Collins said. The system is now also offering HMO-type networks on an experimental basis, he said.
"We've been lucky" in keeping costs down, Mr. Collins said.
That could very well change under the Clinton plan.
By being rolled into regional alliances, these state retirement systems could see their health care costs soar because these groups would negotiate a flat rate with health care providers. If the group has a larger number of older or sick people than in the state retirement system plans, the health care costs would be higher to reflect the increased cost of insuring those people.
Moreover, the Clinton plan calls for all employers to pick up 80% of the tab for their employees' health insurance premiums, up to a limit of 7.9% of their total payroll costs. But this cap on premium expenses would not become effective for another eight years for government employers.
Meanwhile, CalPERS and organizations representing public employers are lobbying the White House and members of Congress to remove these troublesome provisions from the president's health care plan.
"We are very concerned. We have got a viable model here of group purchasing and we would hate to be eliminated," California's Mr. Elkin said.
Perry Plumart, an aide to Rep. Fortney "Pete" Stark, D-Calif., said it is almost certain the regional alliance provision in Mr. Clinton's plan will be dropped. But adopting universal health care coverage under a government-run plan, for example - a popular alternative proposed by Rep. Jim McDermott, D-Wash. - could have the same effect of eliminating CalPERS' ability to purchase group health insurance coverage.
The Government Finance Officers Association has formed a coalition with the National League of Cities, the National Conference of Public Employee Retirement Systems and others to push for these changes, said Cathy Eitelberg, director of the GFOA's Pension and Benefits Center, Washington.
"GFOA's policy is that participation in the regional alliances should be voluntary, and public employers should be treated with parity to corporate employers," she said.
White House staffers did not return calls seeking comments.
But a senior government official who declined to be named said the reason for folding in the public group health care purchasers is to ensure there are enough young, healthy, lower risk people in the regional alliances to keep health care costs down.
But not all health care administrators at state retirement plans are concerned about President Clinton's health care plan, reckoning there's a good chance some or all of the plan will fall by the wayside before Congress is finished with it.
"Pick a plan. There are a zillion options out there. The exact impact of health care reform? I couldn't say," said William H. Kox, assistant director of health and disability benefits at the Department of Employee Trust Funds for the State of Wisconsin, Madison.
The plan, which administers health care benefits to 58,000 employees and 13,000 retirees, managed to hold down cost increases to 3.6% in 1994, just above the inflation rate, compared with a 4.8% increase the previous year, and a 13.7% hike in 1992, Mr. Kox said.
It renegotiates contracts with providers annually, and paid $247 million in premiums for employees and $44 million for retirees in 1993, he said.
For the first time, the state also employed a strategy of pressing for a standard benefits package from its 26 HMOs and aggressively negotiating rates with them for this year, he said.
