The CalPERS committee initially focused the strategic planning process on increasing the value and effectiveness of its health benefits program over the longer term. However, because of anticipated continued cost increases and potential market disruptions in 2004, there are a number of strategic plan elements the board felt offered opportunities to lower costs and enhance stability and value in the near term, according to the strategic plan prepared for the board meeting.

The committee is seeking near- and long-term cost reduction programs when the CalPERS Board of Administration adopts health plan contracts for 2004 at its June meeting. Those programs include:

• multi-year incentive-laden contracts
• regional rate variations
• tiered and/or exclusive provider networks
• centers of expertise/excellence programs
• alternatives for restoring benefit equity/benefit modification.

Pay For Performance

This long-term proposition will seek to contract with fewer plans over longer periods in order to increase plan stability and, at the same time, customize networks and services and offer targeted disease-management programs. CalPERS has already taken steps in recent years, narrowing its list of HMO contractors from 10 to five. Only two plans, Blue Shield and Kaiser Permanente, serve as statewide health plans, with the remaining three providing regional service: Western Health Advantage, Health Plan of the Redwoods, and Universal Care.

The committee says such contracts with incentive-laden rate suppression, provider continuity, and improved care management provide value in the ability of plans to smooth or amortize losses over the longer term. The strategic plan also proposes that CalPERS endorse a pay-for-performance system developed by the Integrated Health Association (IHA), which gives medical groups financial bonuses based on performance standards in the areas of preventive and chronic care, consumer satisfaction, and implementation of an electronic medical records system.

Regionalize It

The committee will consider setting regional premium rates, at least for schools and local agencies that belong to CalPERS, to reflect regional differences in health care costs. However, the board is concerned that local agencies in areas with lower health care costs may pull out of the system and buy less expensive health benefits on their own, weakening the CalPERS risk pool.

Standing in opposition to the plan is the California State Employees Association (CSEA), which represents more than 100,000 state workers. During its discussion of the plan, the association said it would support setting regional rates to keep local agencies from leaving CalPERS, but opposes the setting of regional rates for state employees.

Tiered Plan

The committee points to tiering, or a super selective network, as a means of reducing the rising cost trend in the near term and focusing providers and patients more on value in the longer term. The current proposal includes a shift from a one-year contract to a three-year contract with Blue Shield. The three-year contract would not set a premium rate covering the entire period. Rather, the contract would set the rate for 2004 and would include a method for adjusting the rate in 2005 and 2006. The contract would commit CalPERS to having Blue Shield as the exclusive statewide network HMO in 2004 through 2006.

The committee said it moved to the single provider because it did not see obtaining better value by having multiple HMOs contracting with the same network providers. Additionally, the board saw advantages of a longer-term relationship with a statewide network partner that include:

• stability and predictability of the provider network
• potential for smoothing rate increases and administrative costs
• opportunity to develop performance criteria based on value as well as cost.

In exchange for this commitment, Blue Shield would be expected to:

• continue to provide transparency of cost and utilization data
• improve disease management programs targeted at CalPERS members
• maintain a stable selective provider network within a prescribed CalPERS service area
• provide annually negotiated rate concessions to CalPERS as consideration for the three-year contract
• cooperate with CalPERS to develop new products and/or benefit designs.

Blue Shield’s proposal based on a three-year commitment will be presented to the Health Benefits Committee in closed session at the May 2003 meeting as part of the committee’s deliberations over Blue Shield’s 2004 contract. At that time, staff will provide the committee with an analysis of the pros and cons of Blue Shield’s proposal and prototype language for a three-year contract containing Blue Shield’s performance requirements.

It is not clear whether CalPERS will also seek long-term contracts with the other health plans in its current system.

Expert Opinion

The committee aims to analyze data and identify hospitals that have better outcomes for certain procedures based on volume, cost, and quality of care.

This information would then be provided to members and give them incentives to have the specified procedures performed in these “centers of expertise.” Incentives could involve transportation and/or “family accompaniment” allowances.

Alternative Benefit Equity

Responding to employers’ concerns that the current benefits packages are not set up competitively with local labor markets, the committee is considering offering lower-cost plan options to enrollees who do not enjoy significant employer contributions and for whom the current CalPERS benefit plans are increasingly prohibitively expensive. These changes include a variety of alternatives with the current plan partners and other members of the medical community.

One such alternative is direct contracting, by which CalPERS would launch pilot projects to set up networks in specific geographic areas, especially in rural areas where only one or a few providers are available. However, CalPERS cautions that its purchasing power alone may not be enough to outweigh the benefit of purchasing benefits from existing health plans. Additionally, the board said it does not have enough staff to administer such a network, and needs to study the possibility of a third-party administrator more carefully. To weigh these concerns, CalPERS will convene an advisory panel of 12 to 16 members to weigh the idea of direct contracting and other benefit design changes in the next few months.

Other long-term changes the plan envisions is a shift from open enrollment once a year to once every three years, and a possible carve out of pharmacy benefits and joining other large pharmaceutical purchasers to save money through bulk purchasing. Additionally being floated is the option of reimbursing providers on an existing established-fee schedule.

The strategic plan and supporting documents are available online at www.calpers.ca.gov . Click on Board Meeting Information, and the Health Benefits Committee agenda for the March 2003 meeting.