CALPERS PREMIUMS JUMP HMO COSTS TO SURGE A RECORD 25 PERCENT.

Byline: Evan Pondel Staff Writer

In a pivotal decision that will determine the cost of health-insurance for employers and workers nationwide, the California Public Employees' Retirement System on Wednesday approved a record 25 percent increase in premiums for 2003.

In the final vote, CalPERS delivered a warning to the rest of the nation that the increase in health insurance premiums is a reflection of a fractured industry. The agency also eliminated Health Net Inc. and PacifiCare Health Systems from its network, forcing as many as 150,000 CalPERS families to switch providers.

``This is more than a problem for CalPERS,'' said Rob Feckner, chairman of CalPERS' Health Benefit Committee. ``It was a formidable challenge. Rates are soaring across the nation. We believe a larger policy debate is needed.''

CalPERS, with around 1.2 million members, is the second-largest purchaser of public employee health benefits in the nation - and the largest in California. The agency's decision is usually a benchmark that foreshadows rate changes across the country.

CalPERS' 2003 HMO package has a projected cost of $2.2 billion, around $400 million more than the current year. The agency's HMO lineup will support about three-fourths of its total enrollees. The board also approved premium increases of 18.9 percent for PERS Choice and 22.1 percent for PERSCARE - two of the agency's preferred provider organizations. Starting Jan. 1, CalPERS' array of seven HMOs will be reduced to five in an effort to stave off $77.2 million in additional costs. The partners that will stay include Blue Shield HMO, Kaiser Permanente and three regional plans - Health Plan of the Redwoods, Universal Care and and Western Health Advantage. As for benefits, there will be no change in terms of service areas or co-payments for office visits and prescription drugs.

For CalPERS, the approval of the rate increase is the largest since the late 1980s, signaling a shift in power for the managed-care industry. In the past, CalPERS had the ability to leverage the bids insurance companies were offering, but this year the marketplace proved unbending.

``The pressures that have built to this year's historic rates have been building for a long time,'' said CalPERS' board president, William D. Crist, who doesn't anticipate a recovery in rates for a significant period of time.

That reality may be detrimental to consumers struggling with spiraling health care costs, but for managed-care companies, it's a boon for business.

Shortly after CalPERS announced that Santa Ana-based PacifiCare and Health Net would be removed from the system, Wall Street lauded the decision. Health Net shares gained $1.61, or 6.2 percent, to $27.61, and PacifiCare shares rose 71 cents, or 3.1 percent, to $23.29.

``We view CalPERS decision as positive,'' said Todd Richter, an analyst with Banc of America in New York. ``You have to admire the discipline for these (two excised insurance) companies because they didn't cave this year.''

CalPERS and Woodland Hills-based Health Net began cultivating a relationship in 1986. At the time, the industry was still developing a foundation, attempting to form relationships and secure growth prospects.

David Olson, a spokesman for Health Net, said the companies' relationship wasn't even profitable in the beginning. The initial contracts inked between Health Net and CalPERS were put in place to establish a presence.

By 1995, Health Net began benefiting from CalPERS, bolstering the company's profit margins and adding credibility to the insurer's cause. However, as all businesses are cyclical, Health Net became disenchanted with CalPERS' relationship by the end of the 1990s - a sign for more change soon to come.

When CalPERS' contract with Health Net expires at the end of the year, the insurer will be forced to say goodbye to around 170,000 members. Those members account for roughly $340 million of Health Net's 2002 revenues.

Even so, that's less than 5 percent of Health Net's annual revenue. And while losing those figures has more meaning in an economy on the mend, Health Net remains confident in its ability to prevail - without CalPERS' help.

``I'm not saying we wouldn't welcome talking with CalPERS next year about a new contract,'' Olson said. ``We're just not concerned about this situation.''