SACRAMENTO, Calif.—Employers that purchase health care coverage through the California Public Employees' Retirement System will see their rates go up an average of 6.3% in 2008—the smallest increase in a decade.

The increase compares with a 2007 average rate increase of 12.1% and is nearly a quarter of the peak rate hike of 23.3% in 2003.

CalPERS' administration credits the overall moderate increase to a strategy the organization adopted in 2003 aimed at lowering premium increases and improving the stability of its risk pool, while still providing meaningful choice to members and ensuring accessibility to effective high-quality care.

After shaving $144 million off of initial proposals from its health plans through negotiations, CalPERS plans to spend $5.3 billion to purchase benefits for more than 1.2 million state and local government employees, retirees and their families next year, up from $4.9 billion in 2007.

An additional $30.6 million in savings came from increased cost-sharing with plan members, with higher copayments beginning in May 2007. The elimination of high-cost hospitals from the CalPERS Blue Shield Provider Network in 2005 is expected to garner another $57 million in savings, according to a CalPERS spokeswoman.

But CalPERS expects the greatest impact on costs will come from the introduction of two new high-performance networks of physician groups that have demonstrated the ability to provide quality health care more efficiently, according to the board. Overall savings could range from $2 million to $17 million, depending on how many CalPERS plan members migrate to the new networks, according to projections Blue Shield representatives presented to CalPERS' Health Benefits Committee on April 17. The Blue Shield High Performance Physician Networks, which will be offered alongside CalPERS' other health plan options, will be available in 17 California counties beginning Jan. 1, 2008.

"We recognize that in this tough health care marketplace, a combination of approaches is necessary to keep rate hikes low and quality high," George Diehr, chairman of the Health Benefits Committee, said in a statement.

"We will continue to pursue innovative, aggressive approaches with our health plans to get better value for our dollars and provide our members with opportunities and incentives to obtain the highest quality of care at the most affordable price," Mr. Diehr said.

While they responded positively to CalPERS' good news, health benefits experts were divided as to whether the savings achieved for 2008 can be sustained.

Emma Hoo, director of value-based purchasing at the Pacific Business Group on Health, a large-employer coalition based in San Francisco, predicts CalPERS' use of high-performance networks should help keep future rate increases in check if a sizable proportion of plan members migrate to the new networks.

"One of the key distinctions about the CalPERS strategy is the introduction of high-performance networks, (which) create an opportunity for differentiating some of the value among medical groups that are being offered in the network HMO," she said.

"In some of the prior board meetings, they did some analysis around what-if scenarios—if they increased the proportion of members in high-performance networks," Ms. Hoo said.

She added that the benefit design changes, including eliminating the copayments for preventive services, "will have some beneficial impact on long-term health status and improving compliance" with treatment regimens.

However, Bill Custer, director of the Center for Health Services Research at Georgia State University in Atlanta, was skeptical that CalPERS' latest actions will have any impact on medical inflation, which is the major factor driving increases in employers' health care costs nationally.

"Rate increases fluctuate quite a bit and there's what's called regression to the mean. That is, you would expect that there is a trend and that individual plans or groups of plans will cycle around that trend. And when you go from 24% to 6%, part of that difference statistically is simply moving back toward the long-term trend," Mr. Custer said.

"The question is: Is the change that CalPERS is seeing moving back toward the trend in health care costs, or is it a function of plan changes that they made? And, to the extent it's the result of plan change that they've made, are they one-time savings or are they real changes to the trend?" he said.

Mr. Custer compared the current situation with the late 1990s, when employers moved rapidly into managed care.

"There were real savings there by moving to managed care, but they really don't seem to have affected the overall trend very much," he said.

"There's very little that any single employer group—even a group as large as CalPERS—can do about the overall trend in health care costs. It takes a systemwide change. Employers as a whole could affect that change, but individually, they all have to move in the same direction," Mr. Custer said.