Solutions for CalPERS health insurance rate hikes

and The California Public Employees’ Retirement System recently raised health insurance premiums for nearly 1.3 million workers and retirees an average of 9.6 percent for 2013, more than three times the rate of general inflation over the past year. The rate hikes include 8.7 percent increases for basic health maintenance organization coverage and 13.9 percent increases for basic preferred provider organization (PPO) plans.

Last year’s rate increase of 4.1 percent was an anomaly because the program received more than $200 million from the federal Early Retirement Reinsurance program under the Affordable Care Act. That program has now ended. So high rate increases are back.

CalPERS says it has introduced a number of initiatives in recent years to help stabilize rates, but none of these initiatives has included the one strategy proven to “bend the cost curve” down – consumer-driven health plans. Recent studies show that some types of health insurance are contain costs better than the mandate-laden policies such as those preferred by Obamacare. And, they do not reduce the quality of care.

The most well-known of these plans offer consumers comprehensive health coverage by combining a high-deductible insurance plan to cover major costs with tax-preferred accounts – either health savings accounts (HSAs) or employer-funded health reimbursement accounts (HRAs) – used to cover routine medical expenses.

Unlike traditional insurance options, consumers covered by these plans know exactly what they have budgeted for health expenses and see exactly how much and how quickly they are spending their account funds. Any money left over at the end of the year rolls over tax-free to the next year.

Consumers enrolled in these plans tend to spend their money more prudently. For example, patients tend to use the less-expensive generic, rather than a name-brand drug. Similarly, they are more likely to use primary-care physicians instead of specialists.

A 2010 study by the human resources consulting firm Mercer Health and Benefits, concluded that consumer-driven health plans in Indiana had generated huge savings because of “better use of health care resources and more cost-conscious decision making.”

Mercer examined the effects of Indiana’s 2006 switch to HSAs as a coverage option for state employees and their families. It compared the costs of the two new state savings accounts with the long-established, PPO option. The plans had comparable actuarial value, but average premiums for the PPO were far higher than either HSA plan.

From 2006-09, average costs for the PPO were more than double those of the savings account with the highest deductible ($12,317 versus $5,462). Even accounts with the lower deductible cost, on average, nearly $3,000 less than the PPO.

That translated to major savings for the state as well as for state workers and their families. Mercer estimated that, in 2010 – when fully 70 percent of all state employees would have opted for HSA coverage – the state would save in the neighborhood of $20 million. Enrolled consumers would save $7 million to $8 million.

All of these savings were realized without sacrificing the quality of care, and Mercer found no evidence that consumers were avoiding care to conserve funds.

So why is CalPERS ignoring these research findings? Do state employees like foregoing pay raises every year because their health benefit costs gobble them up?

We assume there are plenty of intelligent people at CalPERS who could figure this all out on their own if they were open to new ideas. HSAs are a viable option.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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