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SACRAMENTO, Calif. -- A plan by the California Public Employees' Retirement System to increase competition and hold down rates by contracting with additional health maintenance organizations is a good idea that others may follow, say employers and consultants.
It may be difficult, however, for many other employers to use CalPERS' "managed competition" strategy. The leverage CalPERS has because of its size and geographic concentration in one state, as well as the availability in California of multiple HMO choices to a degree not found elsewhere, make its situation relatively unique.
CalPERS, the nation's second-largest health care buyer behind only the federal government, said last week that as of the Year 2000 it plans to lift a decade-long moratorium on the HMO choices it offers its members to increase competition, with the goal of holding down premium costs and improving the quality and availability of health care.
CalPERS now offers members 10 HMOs, though 80% of its members are enrolled in just three plans:
* Health Net, operated by Woodland Hills, Calif.-based Foundation Health Systems Inc.
* Kaiser Permanente, based in Oakland, Calif.
* PacifiCare Health Systems Inc., based in Santa Ana, Calif.
At the time it introduced its moratorium, CalPERS had offered its members a choice of more than 30 HMOs, but it found that number to be unwieldy and confusing to members. That total has since been whittled down, primarily because of mergers and acquisitions.
CalPERS last month reached a settlement in an HMO rate dispute with Kaiser Permanente, ultimately agreeing to a 10.75% rate hike for next year in exchange for reviews and audits of the HMO (BI, June 15).
"It was not Kaiser specifically that caused us to lift the HMO moratorium. It was the concern about stabilizing health care costs, which are rising across the board," said a Kaiser spokesman.
"Traditionally, the idea of using competition helps stabilize health care rates" and is a policy CalPERS has successfully followed in the past, the spokesman said.
He noted this was an idea that had been promoted by a group of health care policymakers, including Dr. Alain Enthoven and the Jackson Hole Group. The spokesman said CalPERS also is still exploring the issue of direct contracting with medical providers (BI, April 6).
Employers say they believe CalPERS' new strategy is a sound approach.
Assuming there is not a lot of crossover of providers and HMOs, "I would argue for offering more (HMOs) and trying to set up a little competition between them," said Fred Hamacher, vp-compensation and benefits for Minneapolis-based Dayton-Hudson Corp. Mr. Hamacher noted that through a Twin Cities-area employer coalition, Dayton-Hudson and other area employers use 18 health care systems, with one plan design.
Charles P. Slavin, director of the division of state group insurance for the state of Florida in Tallahassee, said for a couple of years there has been a trend for large employers, such as state governments, to decrease the number of HMOs with which they do business.
Now, he said, the pendulum may be swinging in the other direction.
The state of Florida, for example, which now contracts with 15 HMOs, is rethinking its own strategy.
The current policy is to forbid additional HMOs to be offered in a county if the group insurance division thinks there is adequate coverage, Mr. Slavin said.
But now, "I wouldn't be at all surprised to see us emerge with a policy that basically says in market areas that already have a high level of HMO service, if another HMO wants to enter the area and they're offering rates or service that could have a competitive effect in the area, we'll let them in," he said.
This is a strategy known as the "shark in the tank," Mr. Slavin added. If there are many plans in a market that are neither particularly effective nor performing well, the "shark" -- an aggressive, efficient plan -- is thrown into the mix to weed out the poor performers.
"I think other employers are likely to follow" CalPERS' move, said Wanda Jones, president of San Francisco-based New Century Health Institute and a health care analyst.
"You know you have to keep refreshing the gene pool, so opening it up keeps everyone alert, and it keeps everyone reminded the buyers are in charge, not the payers," Ms. Jones observed.
In recent years, with flat or declining HMO rates, there had been no incentive to "shuffle the deck," observed Jeff Klonoff, a consultant in Hewitt Associates L.L.C.'s San Francisco office. But more employers now are likely to consider this approach for the year 2000, as they see what 1999 rate increases will be during negotiations over the next three or four months, he said.
"I think it's a direction that employers should definitely look at doing because. . .managed competition, if it's implemented, can have an impact on price," said Bob Burnett, a principal in Buck Consultants Inc.'s San Francisco office. He said that while administrative costs have been a deterrent to offering multiple HMOs in the past, the use of technology, including online benefit enrollment systems, makes that less of an issue today.
But some consultants do not expect other employers to follow CalPERS' lead.
"I would say most employers that I deal with are not adding options unless existing options are performing very poorly, and they're going to put in a competitive plan. . .with the ultimate goal of getting back to a more manageable number of plans," said Richard B. Sinni, group and health care practice leader for Watson Wyatt Worldwide in New York.
Blaine Bos, a consultant with William M. Mercer Inc. in Chicago, said, "I think the trend is away from more choice and looking at offering the best two or three plans in the market as opposed to increasing the number of HMOs available."
Mr. Bos said that according to the 1997 Mercer/Foster Higgins National Survey of Employer Sponsored Health Plans, the national average of five HMOs per employer and two per location has not deviated during the past three years (BI, Jan. 19). The 10 largest states, the health care purchasers probably most comparable to CalPERS, offer an average of 16 HMOs, with an average of five at any one location.
"CalPERS is such a different animal from the typical employer-sponsored plan," said John Erb, area vp for Gallagher Benefit Services in Boca Raton, Fla. "Just the sheer size of the group sets it apart from everybody else," said Mr. Erb, who added he does not expect employers to follow CalPERS' lead.
"We're not nearly as large as CalPERS," said Michael Pikelny, benefits consultant and corporate actuary for Chicago-based Hartmarx Corp. Because the company has fewer than 2,000 people scattered in about 10 states, "We don't have clout with any one HMO," he said.
Ideally, HartMarx would like to use just one or two national HMOs that feature identical benefits and premiums across its population base, said Mr. Pikelny. "But I've found that something like that doesn't exist.'