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SAN FRANCISCO-Pacific Business Group on Health members will see their 1998 HMO premium rates rise an average of 1%, far lower than projected cost increases for other health plans nationwide.

For the first time, the purchasing coalition also procured rate guarantees from two health maintenance organizations for two additional years.

In another first, the coalition negotiated rates in Arizona. PBGH negotiated for 25,000 covered lives and 12 member companies, compared with about 500,000 lives for 19 member companies in California. But, members with employees in Arizona will see a 3% increase over 1997 rates, and the additional two years of rate guarantees do not apply.

The rate increase will be higher in Arizona because the market is not as mature and employers have been experiencing greater cost increases than California employers, observers said.

The 1% rise in 1998 premiums marks the first rate increase PBGH has had since 1994, when it began negotiating rates.

For coverage in 1997, PBGH members saw flat rates after enjoying an average 4.3% decrease for 1996 coverage and a 9% reduction for 1995. PBGH members must have at least 2,000 employees. A national survey of employer-sponsored health plans by A. Foster Higgins & Co. Inc. found employers with at least 2,000 workers paid $3,373 in HMO costs per active employee in 1996. In 1995, that figure was $3,432 and in 1994 was $3,510.

Members are "very pleased because all of the other negotiations we had heard about around the country involved much higher increases than we experienced," said James C. Franklin, chair of PBGH's Health Negotiating Alliance and associate vp for total compensation at Stanford University.

The 1% rate hike is below industry predictions in nationwide health care premiums, which range from 4% to as high as 10% for next year (BI, April 21). It also trails a 2.9% increase in the medical cost component of the consumer price index.

Neither PBGH nor its health plans would release data on the price guarantees arranged through 2000. Contracts allow for rate increases, but they will be reasonable, said Patricia E. Powers, PBGH executive director.

The extended price guarantees were obtained from Cypress, Calif.-based PacifiCare Health Systems Inc. and Woodland Hills, Calif.-based Health Net. The two HMOs, along with Kaiser Foundation Health Plan of Oakland, Calif., provide coverage for "the lion's share" of PBGH members. PBGH negotiated with a total of 15 HMOs that receive more than $500 million in premiums from the business group's members.

Price guarantees will let PBGH focus more on new cost-cutting measures and less on rate negotiations. However, achieving further cost reductions will take PBGH into areas that are more complex, and those reductions will be tougher to bring about, Ms. Powers said. Those areas include things such as prescription consumption, disability management and the staffing of physician offices.

"The easy squeezing has been done," she said. "To get to the next level will require much more difficult activity on both the plan provider's and the purchaser's side. The issue is, how quickly can we get to the next level?"

That work will take more time and increased cooperation among purchasers, health plans and the providers than did rate negotiations. If carried out improperly, the health care system's infrastructure could suffer, Ms. Powers said.

PBGH announced its new rates last week. In April, the California Public Employees' Retirement System said it negotiated a 2.7% health premium increase for 1998. More than 1 million lives are covered under CalPERS' negotiated plans.

"We held it far below expected increases," a CalPERS spokesman said. "Almost every plan is expected to hit inflationary pressure next year."

The rate hike was the first in five years for CalPERS. Last year, it obtained a 2.5% average rate reduction during 1997. That followed a 5.3% rate reduction the previous year.

The upturn came about in part because the easy cuts-waste and inefficiencies- have been made. Those factors still exist, "but those savings are getting harder to find and harder to bring about," the spokesman said, echoing the PBGH's perspective.

Rising drug costs are one of the top expense drivers HMOs cite, PBGH and CalPERS representatives said.

HMOs that contract with CalPERS saw drug expenses rise 13% in the past year, while one PPO saw a 20% increase, the CalPERS spokesman said. PBGH's HMOs also saw a double-digit increases, Mr. Franklin said.

A proliferation of advertisements by pharmaceutical companies suggesting consumers ask their doctors about specific prescriptions is part of the problem, the spokesman said.

Consumers are pressuring doctors to prescribe more expensive drugs, he said. "We feel one indication of this is the advertising. Obviously they wouldn't be putting that many full-page ads in major magazines if it wasn't working for them."

Advertising could be one of several factors driving drugs' expense, Ms. Powers said. But, both health care payers and providers must deal with other factors in drug usage.

The substitution of prescriptions for other forms of medical treatment is among the areas requiring further study, she said.

That remains a confusing area, agreed Glenn Meister, health care practice leader for William M. Mercer Inc. in Los Angeles. Costly drug treatment can be beneficial and reduce other medical costs, such as hospitalization. Yet prescriptions also can mask problems that will require more attention later if not treated properly.

"I think we are at a point right now where there is a real need to try to evaluate the dynamics of that," he said. "You are not capturing the entire picture if all you are doing is looking at the drug costs alone. Everyone is trying to get their arms around that."

One PBGH member says greater investigation of prescription usage will be a key to health care cost control.

Sherrie Matza, vp of benefits for Bank of America in San Francisco, said the bank makes the health plan responsible for monitoring drug formularies. Employers cannot micromanage drug use, but they can insist more be learned about it, she said.

Other employers may benefit from the negotiating efforts of the PBGH and CalPERS.

PBGH and CalPERS typically conclude their HMO negotiations earlier in the year than most employers, Mr. Meister said. Large employers in California that still must negotiate 1998 coverage are likely to see similar-sized rate hikes. But the coalitions generally gain more in services from the HMOs, such as dedicated resources and quality initiative reporting.

To prepare for its negotiations, PBGH evaluates requests for proposals, all the financial information publicly available on the HMOs, and physician surveys that rate how well the health plans partner with their doctors, Ms. Powers said. The information is compiled and weighed for variations in service and performance.

"We look at it much more from a competitive perspective rather than from listening to what consultants say the trend should be, because I don't think anyone knows what the trend should be," Ms. Powers said