Those that work for the state of California or for its cities are likely to be familiar with California’s Public Employees’ Retirement System (CalPERS). CalPERS is a California executive branch agency that manages pension and health plans for nearly 1.6 million active and retired state and public employees. It invests funds that employees, and state and local governments contribute towards pension and health benefits.
CalPERS spends close to $7 billion on health care annually, or over $19 million per day, making it the largest health care spender in the state of California. And nationally, it ranks third to the federal government and General Motors Co. in health care spending.
CalPERS negotiates health premium rates with different health plans, namely, Blue Shield, Kaiser, and Anthem Blue Cross. In recent years, CalPERS health premium rates have been increasing rapidly. In light of the rising health care costs nationwide, the Pension and Health Benefits Committee (PHBC) has proposed a 2013 health care package that will increase health premiums next year by an average of 9.6%. PHBC Chair Priya Mathur contends that although cost controls have been implemented, the increases in premiums are essentially a reflection of current health care cost trends. She states,
“We tried as much as possible to keep the overall increases close to the national health care cost inflation rate of more than 7% projected for next year.”
Since 2006, the Bay Area Blue Shield Access (+) HMO basic member premiums have risen an average of $48 dollars per year from $425 to $711. To illustrate the magnitude of this growth, if every member had this same plan, this would result in an average annual increase of $744 million spent on health care, more than the state cut from the UC system last year. And in 2013, the plan’s premium will increase $62, higher than the average $48 annual increases have been experiencing.
Regional Variation in Health Costs
Furthermore, while all California regions are experiencing health care cost growth, that growth varies throughout the state. Compared to the Bay Area, Los Angeles has much lower CalPERS’s health premiums. For the same Blue Shield plan, the 2012 Basic HMO premium was $511, compared to $711 in the Bay Area. Bay Area premiums are also increasing at slightly higher rates. Compared to the Bay Area’s average $48 annual increase, Los Angeles Blue Shield Access (+) plans have increased by an average of $33 dollars annually since 2006.
Many reasons are cited for health care cost variation. In a 2012 study conducted by CALPIRG, researchers found that differences in the cost of living may account for differences in health costs. They cite a cost of living index that found
“the cost of living in the San Francisco-San Mateo-Redwood city area is 23 percent higher than the Los Angeles-Long Beach and 46% higher than in the Fresno region.”
In addition, market power of hospitals also correlate with the variation of prices. The study finds,
“An analysis of how much money insurers actually paid to hospitals in Los Angeles and San Francisco supports the theory that market power influences how much hospitals charge”.
In other words, hospitals that serve more patients have greater leverage in negotiating prices with insurers. On the other hand, researchers from Dartmouth Atlas found that most of the regional differences in health care spending are from utilization, or the frequency of use of certain types of medical services in various local areas account for the differences in health care costs among those areas.
But regardless of differences in health care premiums throughout the state and nation, we can be certain that California’s budgets are already feeling the pressure of the rising retiree health care costs. We’re in the midst of an upward trend that is showing no signs of leveling off or reversing. Various strategies exist for managing these growing annual costs (e.g. setting aside funding for future costs, restructuring benefits, buying out benefits), but the main priority for California’s governments is that they identify the strategies they want to undertake as soon as possible.