Fund increasing sway over health care costs, delivery.

IT was the kind of display Calpers has become famous for in the health care industry.

While embroiled in a dispute with nonprofit hospital operator Sutter Health, the pension fund recruited a state senator to carry a bill that would allow insurers more flexibility in contracting with hospitals, effectively breaking local operators' grips on regional markets.

It appears to be working. Last month, Sutter officials announced a tentative agreement with Calpers that would cut the system's charges next year.

"We were able to persuade Sutter with gentle and not-so-gentle tactics," said Sid Abrams, the Calpers board member who chairs its benefits committee. "To the extent we can influence our fate at all (in the market) we are trying."

Calpers is more than willing to wield the political weight and market power that comes with its 1.4 million members in order to hold down premiums, becoming a leader on health care cost controls in the process.

In the mid-1990s, it was able to demand lower rates from contracted managed care insurers, with members seeing premiums hold steady or even decrease. Now, it is attacking a new force in rising health care costs: the growing power of hospital systems that exert pricing controls over entire markets.

Unable to buck trend

Calpers' record has been less than stellar in the last few years, as its members have absorbed double-digit premium increases. The fund's new strategy relies less on size and more on innovative programs that would cut costs by better managing diseases and encouraging quality care by medical providers. (The Calpers-backed bill targeting regional health care providers remains in committee.)

Calpers is not the first health care buyer to pursue this strategy but it is the largest, and as such its results will be scrutinized by the health care industry. "Whether they will control costs has yet to be demonstrated," said Mark Smith, president of the California HealthCare Foundation, a non-profit that studies the state's health market.

In the mid-'90s, with more than one dozen health insurers contracted to provide care to its far-flung membership, Calpers would simply demand lower rates from insurers fearful of losing volume.

"It was a time when a number of industries were being rewarded on top-line growth, not the bottom line," Smith said. "Those days are over. Neither Wall Street nor these companies are interested in unprofitable business anymore."

Calpers played out its hand three years ago when its 11 health insurers proposed premium increases as high as 41 percent. That prompted the system to reject all the bids, reopening the process by accepting only the seven lowest proposals.

That cut the average premium increase to 17 percent from 25 percent, but left the system with little leverage the next year, given how few plans were left.

Calpers decided to contract with only two insurers statewide, Kaiser Permanente and Blue Shield, the latter of which was given a three-year contract in exchange for developing new programs that would hold down costs.

Blue Shield has already instituted some programs, including one in which nurses employed directly by the HMO visit hospitals to help manage trauma and other high-cost patients. "It's not the only time it's been done in the industry, but I think it's pretty aggressive," said Paul Markovich, who heads Blue Shield's Calpers unit.

The HMO is also pursuing a "disease management" program in which Calpers members with diabetes, heart disease and other costly conditions are contacted to ensure they are taking their medicine and following other protocols for care.

Also being tested is a program that that will pay members $75 to $200 annually if they quit smoking, exercise or adopt other healthy lifestyle changes that would be expected to lower claims and health care costs.

Smith believes Calpers has made a lot more noise about its new initiative than is warranted, although Abrams defends the fund, saying: "We are starting to be as aggressive as anybody in this area."

Lucia Savage, general counsel of the Pacific Business Group on Health, a consortium of big health care purchasers widely viewed as on the cutting edge, agrees. "I think Calpers is making some very good steps," she said. "Calpers is a big shop, and it has to go at its own speed."

The question is whether that's fast enough. Calpers was forced to accept average premium increases of about 17 percent from Blue Shield and its other plans for this year.

Next year? Possibly in the double digits once again, even if the plan manages to hold down rising hospital costs throughout the state.