Calpers insurance deal seen signaling ongoing rate hikes. (Up Front).

Health care inflation is rising more rapidly than was projected even a few months ago, and the pace isn't expected to subside anytime in the near future.

That's the grim outlook for businesses and their employees after the California Public Employees' Retirement System was forced last week to accept a whopping 25 percent hike in health care premiums for 2003.

The Calpers system, with 1.2 million members, long has been considered a bellwether in health care costs, given its size as the second largest purchaser of health care after the U.S. government.

"This is a huge wake up call for everybody," said Lee Exton, health care practice leader for the Los Angeles office of Segal, an employee benefits firm. "This is the largest magnitude increase anyone has seen for 15 years."

Segal had been predicting a 15 percent increase in healthcare premiums next year but is now considering raising that projection, Exton said.

Calpers' board voted to accept the increase after it failed to convince its insurers to lower initial bids. Calpers trimmed $77 million off the hike by dropping two insurers, Health Net Inc. and PacifiCare Health Systems Inc. Nevertheless, Calpers' annual HMO premiums will rise by $458 million, to $2.2 billion.

Clout curtailed

Last year, when faced with proposed premium rate hikes of 25 percent, Calpers forced all 10 of its insurers to re-bid, saying it would only sign contracts with the cheapest seven. That cut the rate hike nearly in half.

Analysts say that the large, for-profit HIMOs weren't willing to go along this year. On one side, they're being squeezed by Wall Street, which demands increased profits, and on the other by rising health care costs. Their leverage to extract reimbursement concessions from health care providers is waning.

"We are going to lose money on Calpers this year," conceded Davis Olson, Health Net's senior vice president of investor relations.

Calpers' move leaves it with two non-profit statewide insurers, Blue Shield of California and Kaiser Permanente, as well as three regional players, including Signal Hill-based Universal Care.

David Pockell, chief program officer for the California Healthcare Foundation, a non-profit think tank, said the rate hike was surprising in its magnitude, but only underscored health care cost trends that have emerged over the last few years.

Chief among those is the inability of managed care to control costs, something it was able to do when first introduced on a mass scale in the early 1990s. Gatekeepers limited access to costly specialists and hospitals and doctors accepted lower payment while wringing inefficiencies out of the systems, allowing insurers to keep premiums down.

But patients bristled at the restrictions while medical groups went belly up. Health care providers now demand more payments and have been able to get it as hospital consolidators like Tenet Healthcare Corp. and Catholic Healthcare West increased their negotiating leverage.

"Providers just said they were not going to absorb it anymore," said Pockell, who believes it will get worse before it gets better.

Costs rise

Hospitals have huge capital needs because of a state law requiring they retrofit for seismic purposes by 2008, while the costs for new medical technology and drugs keeps rising at double-digit rates. Moreover, hospital admissions are on the rise as the massive Baby Boomer generation ages.

"The trends that have resulted in these rate increases are just starting," agreed Clark Miller, a spokesman for the Pacific Business Group on Health, which purchases health care for 45 large businesses.

In anticipation of these trends, Calpers will be re-evaluating how it provides health care in the future. The system once had over 20 insurers and after this year's consolidation will have five. That number may shrink more in 2004, or Calpers may become completely self-insured.

Doing so would allow the system to attempt to wring out more savings by working with fewer insurers on a new trend in health care: disease management, which involves ensuring that enrollees with chronic illnesses, the heaviest users of healthcare, are following treatment protocols.

"You still will need managed care to control case management, but the new savings will come one dollar at a time through care management," said Calpers spokesman Clark McKinley.

Pockell said disease management may exert a downward pressure on premiums. Rising co-payments will also make employees think twice before seeking care, he said. Still, the underlying cost pressures will be hard to overcome.

"There is nothing about all this that says, 'Don't worry and in a couple of years it will be all right,"' Pockell said. "No one has a solution."

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