If the California Public Employees Retirement System is any barometer, California's managed-care market is in for a shake-up.
In an effort to save millions of dollars in premium increases, the nation's second-largest purchaser of health benefits severed ties last month with its two largest for-profit HMOs, Health Net and PacifiCare Health Systems, requiring 350,000 of its beneficiaries to switch next year to Kaiser Permanente, Blue Shield of California or three smaller regional HMOs-all of which are not-for-profit except one.
As a result, roughly 90% of CalPERS' 960,000 HMO enrollees will be covered by not-for-profit health plans in 2003, up from 57% this year. And with the Sacramento-based pension fund often considered a bellwether for the entire industry, some experts are now wondering how its decision will influence other large purchasers' health-coverage choices.
"This is an exciting time for not-for-profits," said Lisa Rubino, chief executive of individual and government health plans at Blue Shield, which is expected to benefit most from the move. "Next year, two of the state's three largest health plans will be not-for-profit."
CalPERS has agreed to funnel the bulk of its dislodged beneficiaries into Blue Shield, which in exchange will provide the pension fund with important data on the types of treatments and drugs its members use. The San Francisco-based HMO's expansive statewide provider network also allows roughly 90% of its new CalPERS members to move into the plan without having to change their primary-care physicians.
"We wanted to consolidate our lineup of insurers with the least amount of disruption to our employees and their families as possible," said CalPERS spokesman Clark McKinley.
With a projected influx of 200,000 new members, Blue Shield would cover nearly a third of CalPERS' HMO beneficiaries and would overtake Health Net as California's third-largest HMO, with total enrollment of 2.5 million (See chart).
McKinley says profit status was never a "direct factor" in CalPERS' contracting decision. But the fact that the pension fund has gone from offering six for-profit HMOs in 2001 to three this year and just one in 2003 "does seem to describe an interesting trend," he added.
CalPERS began paring its number of HMO offerings last year, when it said farewell to four insurers: for-profits Aetna, Cigna and Maxicare and not-for-profit Lifeguard. The pension fund also offers two self-funded PPOs, but roughly 80% of its 1.2 million covered lives are in HMOs.
"The ballgame had changed," McKinley said. "We realized that we'd wrung out what we could through competition, so it was time to narrow the playing field" and work more closely with a just a handful of HMOs.
Glenn Smith, a healthcare consultant for Watson Wyatt in San Francisco, said some large employers will follow CalPERS' lead.
"The idea is: The more members you can send a health plan's way, the more leverage you have with that insurer and the better your chances of negotiating lower rates," Smith said.
That would be an about-face from recent years, when employers have responded to consumer demand for increased choice by allowing several health plans to compete for members.
Smith said health-plan quality and service would grow increasingly important as employers become more selective. "They will be looking at the value of healthcare delivery," he said.
Not-for-profit plans may have the upper hand, at least when it comes to the perception of better quality.
According to a survey released last month by the Washington-based Center for Studying Health System Change, people enrolled in for-profit health plans were less likely to be "very satisfied" with their care than people in not-for-profit plans-58% vs. 64% (April 29, p. 9). Another report released this year by the California Medical Association found that the majority of the state's for-profit health plans spend 12% to 33% of every dollar on profits and administration rather than patient care.
Blue Cross, California's largest for-profit plan, spent just 76% of every premium dollar on medical care in 2000, while Kaiser, the state's largest not-for-profit plan, spent 96% on medical care. Officials in several states have pointed to similar statistics in their efforts to prevent insurers from converting to for-profit status.
But Walter Zelman, president of the California Association of Health Plans, argues that so-called medical-cost ratios are highly misleading and do not reflect anything about a health plan's quality or efficiency.
"If a health plan develops a new, highly efficient customer-service center or decides to implement a quality-improvement program among its physicians, its administrative costs are going to go up. But that doesn't mean it's doing any less for the patient," Zelman said. "When you're buying a new computer, you don't consider the manufacturer's administrative costs or profits. You look at which product provides the best quality and best fits your needs."'
Meanwhile, PacifiCare and Health Net aren't shedding many tears over the loss of their CalPERS accounts.
Both health plans were losing money on CalPERS members, and each said its bottom line would benefit next year from losing the business. The companies had sought premium increases of 41% and 39%, respectively, from CalPERS, then refused to bid down, even though it meant losing the business.
Santa Ana, Calif.-based PacifiCare will lose 187,000 CalPERS beneficiaries, which make up 11% of its California HMO membership. Woodland Hills, Calif.-based Health Net will lose 181,000 CalPERS members, or about 7% of its HMO enrollment.