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CalPERS has dual goals for health investments


SACRAMENTO--The California Public Employees' Retirement System--one of the largest U.S. health care purchasers--hopes that a new investment strategy will drive down its own health care spending.

CalPERS is partnering with a new private equity fund that will invest up to $700 million of CalPERS' pension fund assets in ventures that are working to improve the quality and cost-efficiency of the nation's health care system. CalPERS has around $235 billion in invested assets and will spend about $4.9 billion on health care this year.

The objective of CalPERS' strategy is twofold: to "invest in companies that will make the health care system operate better and then possibly buy products and services of those companies and save money," said Rob Feckner, president of the pension fund's board of administration, according to a transcript of his remarks from a press conference last Tuesday in Sacramento.

The fund, Health Evolution Partners, was created by Dr. David J. Brailer, the former health information technology czar for the Bush administration (see story, page 29).

Dr. Brailer and his San Francisco-based staff will analyze and advise CalPERS on investments that will create efficiencies in health care and generate market rate returns, which the CalPERS spokesman said are expected to be as high as 20% annually. Health Evolution Partners will also manage, coordinate and monitor the investments.

CalPERS will be the exclusive investor in the fund for the first 12 months, contributing $500 million initially and eventually up to $200 million more. After the first year, other investors will be invited to join Health Evolution Partners.

Although Dr. Brailer once served as the national coordinator for health information technology under the Bush administration, he said the fund will not invest in electronic health records--a key administration priority--which he called "a saturated market" at last week's press conference.

Rather, Health Evolution Partners will invest in other businesses that are working to "reduce the crushing costs of health care" by developing innovative products that assist with remote patient monitoring, chronic disease management, telemedicine and drug prescribing, as well as Internet marketplaces for services such as reading chest X-rays, said Dr. Brailer.

Dr. Brailer added that the fund is the start of Health Evolution Partners' 10-year strategy aimed at changing incentives in the U.S. health care system to encourage long-term cost-cutting strategies.

While some employer groups hailed CalPERS' effort, some observers expressed skepticism, including questioning whether the pension fund could realistically achieve the "double bottom line benefit" that Mr. Feckner suggested.

"I think it is a good idea, and I am glad that CalPERS is making the investment," said Helen Darling, president of the National Business Group on Health in Washington, a consortium of the nation's largest employers.

"We need every possible good idea and many new ones to control costs, and such a fund might move us along a little faster on the innovation curve," she said.

Moreover, "David Brailer is a very smart man, so I am glad he is turning his attention to the cost crisis," Ms. Darling said.

Peter Lee, president of the San Francisco-based Pacific Business Group on Health, one of the nation's largest employer health care coalitions, also applauded the CalPERS' initiative.

He called the CalPERS connection to the fund a "breakthrough investment" that "can be a market shaper," and he hailed the decision to have Dr. Brailer run the program.

However, some observers were skeptical about the potential impact of CalPERS' effort.

"It makes sense that CalPERS would try to put some of its resources into part of the health care system that is doing the kind of things that they would encourage, but, boy oh boy, is that ever going to be a hard thing to do," said Grace-Marie Turner, president of the Galen Institute Inc., a public policy research organization based in Alexandria, Va. "There are so many people trying different things that it's really not clear at this point what's going to work and who is doing the right thing," she said.

"You're not going to simultaneously drive down health care costs and at the same time return enormous shareholder returns," said Paul Hackleman, director of benefits for San Mateo County, Calif.

Although CalPERS' move is not the first time a health care purchaser has attempted to benefit financially by investing in the health care business, it is the largest such venture to date.

In 2005, Bentonville, Ark.-based Wal-Mart Stores Inc. pledged to donate $5 million over three years to help build that nation's first state-of-the-art digital hospital which would serve many Wal-Mart employees (BI, April 11, 2005).

And last year, a group of five large employers announced they were providing the seed money to develop the technological infrastructure that would facilitate sharing electronic medical records over the Internet. Dubbed "Dossia," the development project is being collectively funded by Applied Materials, BP America Inc., Intel Corp., Pitney Bowes Inc. and Wal-Mart (BI, Dec. 11, 2006).