SACRAMENTO, Calif. — In a novel move, CalPERS is wielding its investment bucks to drive down the fund’s health-care costs after five straight years of double-digit premium increases.
The pension fund is committing $700 million with a private equity firm targeting investments in companies that help bring down the cost of health care.
This would mark the first time the $247.9 billion California Public Employees’ Retirement System, Sacramento, has used its investment portfolio to address its spiraling health-care costs.
As the third-largest purchaser of health care in the nation — spending $5 billion a year — CalPERS already has a lot of clout in that industry.
Some pension and health-care industry observers say this is the first time a public pension fund has used its investments to try to control health-care costs. Not all public pension systems include a health-care system, and those that do might not have the economies of scale to make an impact.
CalPERS officials announced last week that the pension fund would invest $700 million with Health Evolution Partners, a new private equity firm run by David Brailer, a former senior health official in the Bush administration. Mr. Brailer will target early stage companies that develop solutions to counter the increasing costs of health care.
“Many projects are under way already today across the U.S. at a local level … but they lack the capital, they lack the expertise and capabilities to get to a national scale,” said Mr. Brailer.
Mr. Brailer said he eventually plans to bring in co-investors and grow the fund; he didn’t elaborate.
Great potential
The pension fund plans to earmark $500 million for direct investments and $200 million for funds of funds.
“The fact that the (health-care) industry business model is fragmented and inefficient presents a wonderful climate for investment potential,” Russell Read, CalPERS’ CIO, said during a teleconference with reporters on June 5. The fund invests billion of dollars in the health-care industry through passive investments and in more than 800 health-care companies through its $15.1 billion private equity program.
The investment is part of CalPERS’ new Healthcare Investment Initiative, which officials hope will bring in above-market returns. Officials did not specify what that target would be, but within its private equity portfolio, the fund targets long-term returns of 300 basis points above the Wilshire 2500 index, according to its investment policy.
“There are going to be some large-scale investments that we might be faced with — ones where investment partners could be useful, and that would be a real sign of success,” Mr. Read told Pensions & Investments.
Likely investments include home health service providers that would prevent a patient from moving into a nursing home or new technology that enables electronic medical record keeping and integrates the systems of various clinics and departments.
‘Very long-term’
“It’s obviously a very long-term play,” said Michael Fleiner, principal consultant at investment consulting firm Bidart & Ross Inc., Reno, Nev. The fund already looks at long-term solutions for its pension liabilities, so it is natural to also look at long-term solutions to address health care costs, he said.
Despite its clout, CalPERS officials have struggled to keep a lid on health-care costs, Rob Feckner, president of CalPERS’ board of administration, said during the media conference call.
Increasing health premiums have been a bugbear for CalPERS. In 2007 alone, the system was hit with increases as high as almost 25%, although most were in the teens.
CalPERS and other retirement systems that provide both pension and health-care benefits have been under tremendous pressure from both members and the state to keep health-care costs down, said Dave Low, assistant director of government relations at the California School Employees Association, a San Jose, Calif.-based labor union.
Mr. Low is a commissioner at the California Public Employee Post-Employment Benefits Commission, a group established by Gov. Arnold Schwarzenegger in December to address the state’s growing pension liabilities, estimated around $47.9 billion.
“The jury’s still out,” he said of CalPERS’ commitment to invest with Health Evolution Partners. “We’ll have to see what kind of returns they get, but we’re generally for anything that will drive costs down.”
‘Transitional investments’
Mr. Read likens the program to the fund’s corporate governance initiative; both are “transitional investments” meant to promote change in an industry while garnering above-benchmark investment returns. The pension fund’s five-year-old, $4.9 billion corporate governance investment program outperformed its Corporate Governance Weighted benchmark by 805 basis points since its 2002 inception.
Said Will Pryor, a pension trustee at the $34 billion Los Angeles County Employees Retirement Association, Pasadena, Calif.: “This is an interesting tactic, trying to get a double bang.”
“It’s genius in a way. The political pressure all over the country is to provide cheaper health care, so maybe they’re ahead of the curve by investing in companies that reduce health-care costs,” Mr. Pryor said.
