Calpers Health Plan Faces Exit Of Local Cities

By LAURENCE DARMIENTO

Staff Reporter

An unprecedented number of Southern California cities, strapped for cash and seeking cheaper premiums, are considering leaving the California Public Employees’ Retirement System for health coverage.

More than 100 public agencies throughout the state have been seeking independent quotes in recent weeks to see if they can buy coverage next year for less than what Calpers is offering. Most are in Southern California, where health care costs are generally lower than the state average.

“It looks like there is no end in sight on these increases,” said Bret Plumlee, director of administrative services for El Segundo. “We are looking at alternatives.”

Nearly 1,100 public agencies statewide now obtain their health coverage through Calpers, taking advantage of the state’s massive buying power.

Throughout the 1990s, Calpers was able to hold down costs, but that era came to an end in 2001 when it got hit with its first double-digit increase since 1993.

Last year, Calpers system was forced to accept a 26 percent average rate increase for 2003, and another 17 percent increase will be applied for 2004.

The potential exodus would accelerate a trend that began with last year’s hikes. Riverside County, with 28,000 employees, was among a handful of public agencies that left the Calpers fold then.

“We have heard a lot of noises about public agencies leaving. We are concerned,” said Clark McKinley, a Calpers spokesman.

About 40 percent of the system’s members come from public agencies, with the rest active and retired state employees. (The city and county of Los Angeles have separate systems.) Exiting the health benefit system does not require agencies to also leave Calpers’ retirement plan, which is administered separately.

Size matters

Calpers, with 1.2 million members, is considered a bellwether for state and even national health care costs, and its increases next year are in line with the 15 and 17 percent nationwide rise projected by Aon Consulting.

However, its size these days is working against it for Southern California cities, school districts and other public agencies, who receive coverage through the system from Blue Shield of California and Kaiser Permanente, as well as self-insured preferred provider plans.

Calpers offers its plans at a uniform price, so risks for all geographic areas, agencies and demographics are co-mingled. That’s a problem in Southern California, where health care costs are about 8 to 15 percent lower than the rest of the state, according to Mike Mallory, vice president of large group sales for PacifiCare Health Systems Inc., one of the companies vying to take some of Calpers’ members.

The pricing structure was not as much of a problem in the past, when Calpers was able to keep rates down and had more insurers, allowing members greater choice in benefits.

But to keep costs down in 2001, Calpers cut the number of insurers it carried to seven from 10. Last year it dumped PacifiCare and Health Net Inc. Doing so kept its rate hike to 25 percent, but left members with fewer options.

Now, both PacifiCare and Health Net, as well as Aetna Inc., Cigna Corp. and others, are seeking to pick off public agencies. In Southern California, they say they can provide rates for 2004 far lower than those offered through Calpers.

PacifiCare has provided rate quotes so far for about 100 public agencies statewide, Mallory said. About three quarters of those are in Southern California, he said.

Kaiser is also seeking to insure cities that leave Calpers in an effort to retain its existing membership, even as it continues to serve Calpers statewide. Blue Cross of California is not going after the market since it administrates Calpers’ self-insured PPO plans.

Complications

Many cities began seeking outside quotes last month after the Calpers board finalized its 2004 health benefits package. They have until mid-August to inform Calpers on whether they plan to buy their health coverage from the system.

El Segundo has not yet received quotes from its brokers, but Santa Monica has.

Its first set of bids, from Health Net, PacifiCare, Kaiser, Aetna and Cigna, would have allowed it to essentially hold the line on any increase next year, dropping its costs about 1 percent. It then asked for additional bids based on a benefits plan that raised various co-pays.

The result was a 16 percent reduction in its premiums, though the city won’t disclose the carrier pending final approval by its City Council, said Karen Bancroft, Santa Monica’s director of human resources.

The city was able to reduce costs partly because the average age of its employees and retirees is 45. That is 10 years below that of Calpers, which has a larger number of retirees, Bancroft said.

Meanwhile, other cities such as Inglewood, Torrance and several in the San Gabriel Valley are considering joining consortiums put together by various brokerage and benefits consulting firms. The consortiums are trying to wrest better rates with larger blocks of business, though the cities are being quoted rates individually.

“Some of the cities are looking at cost savings over 10 percent,” said Lee Exton, a vice president at Segal, a benefits consulting firm.

Cities with older workforces may not benefit from leaving Calpers. There is also a concern among cities that they may get a good deal this year from the insurance carriers and then get hit with a big increase later.

“Cities need to look at some sort of guarantee in restricting future increases,” said Plumlee, of El Segundo.

The fact that approval from unions in required may limit the number of cities that actually leave Calpers this year, Exton said. But that would only set the groundwork for an even greater exodus next year.

Such a scenario would leave Calpers with a less desirable risk pool, and as a result, higher rates. Earlier this year, its board considered adopting a regional rate plan that would better reflect varying costs, but the plan was voted down.

But changes are still being considered for next year. Among the proposals: providing more options so public agencies could cut costs by increasing co-pays and decreasing some benefits.

“We won’t know for several weeks yet how this will all play out,” McKinley said.