Health rates skyrocket to meet boomers' demands
Sacramento Business Journal
May 24, 1999
Kathy Robertson Staff Writer
When the state Public Employees Retirement System said this
week that HMO rates would rise by nearly 10 percent, it
marked a shift of control in the healthcare business.
Through most of the decade, CalPERS had driven rates down.
But health costs have suddenly surged upward, due largely to
the demands of aging baby boomers.
"We want it all -- and we want it now," said Glenn Smith, an
analyst in the San Francisco office of Wyatt Watson
Worldwide.
CalPERS said on Tuesday that prescription drug and medical
technology costs are largely to blame for the average rate
increase of 9.7 percent that the state's largest healthcare
purchaser has agreed to pay to HMOs next year.
The rate hike is likely to ripple and grow in the private sector.
Some see rates rising by 20 percent or more in the next year.
"Underlying all this is an aging population, new technology, new
drugs, more consumer demand and pressure to reduce controls
on access," Smith said.
In part, you can blame Viagra.
Fat guys on Viagra: Among the cost drivers are drugs like
Viagra, the male impotence drug with an average wholesale cost
of $8.75 per pill. Or there's Zenical, the new anti-obesity drug
that prevents fat absorption at a daily cost of about $4.
"Sexual dysfunction drugs mainly target older men, but excess
weight gets almost everybody," Smith said. "These are serious
issues we have to deal with -- and many times, it's played out in
the public sector first."
It's played out in spades in CalPERS' two self-funded health
plans, where there's been intense debate this spring about
whether to include coverage for drugs that treat sexual
dysfunction or to continue to make treatment available for
purchase of Viagra at a discount.
CalPERS approved coverage for the full range of sexual
dysfunction treatment, including Viagra. That benefit alone
jacked up rates by $2 per member per month.
Thanks to Viagra, rates at PERSCare went up an additional 0.6
percent, from a proposed 7.7 percent increase without the
benefit to 8.4 percent with the benefit. At PERSChoice, the
more affordable self-funded plan, Viagra hiked rates from a
proposed increase of 6.1 percent to one of 7.3 percent.
The reason why these items stick out is that much of the fat has
already been wrung out of the healthcare system.
The environment is quite different today than it was in the early
to mid-1990s, when Tom Elkin, operating as chief of healthcare
purchasing for CalPERS, pulled off one impressive rate cut after
another.
His successor as administrator of the CalPERS health benefits
program, Margaret Stanley, saw hikes of more than 5 percent
hit last year, followed by nearly 10 percent this year. But she
faced a whole different set of challenges.
Stanley cries uncle: Wednesday was Stanley's last day at
CalPERS.
Citing personal reasons, she announced a month ago that she
would take a new job as executive director of RegenceCare, an
HMO in Washington state affiliated with Blue Shield.
The impressive rate cuts at CalPERS from 1992 through 1996
came at a time when health plans were tripping over each other
-- and cutting prices -- to get new members.
"Elkin and his team were able to do some hard bargaining
because health plans were skittish about enrollment and gave
concessions," analyst Smith said.
HMOs indeed gained market share. They came to dominate
healthcare, especially in California. But some, like Kaiser
Permanente, grew too fast at rates that were too low and got
clobbered financially. Kaiser lost $228 million last year, bringing
nationwide losses down to $554 million over two years.
There's also been a growing connection between healthcare and
Wall Street. Mergers and acquisitions have led to the
prevalence of for-profit HMOs, causing renewed focus on
bottom-line profits to shareholders rather than impressive
enrollment numbers.
Kaiser and others took their financial woes directly to the
people who buy health insurance last year. Kaiser got a rate
increase of 10.75 percent at CalPERS for 1999, and it just won
another hike of 11.7 percent for the year 2000 -- the largest
increase among HMOs in the CalPERS purchasing pool.
Lifeguard was second, with a 10.9 percent increase. Health
Net, at 9.9 percent, was third among health plans with a big
presence in the Sacramento region. Blue Shield got 8.5 percent;
Aetna/U.S. Healthcare, 6.5 percent; and PacifiCare, 6 percent.
Some point the finger at Kaiser. The biggest health plan in the
state got the green light and others followed with pedals to the
metal.
People will lose benefits: "The almost 10 percent rate average
increase is not unexpected and it will be helpful to the financial
viability of participating health plans -- but it will have an
adverse impact on some employers," said Albert Lowey-Ball, a
Sacramento healthcare consultant.
The rate hike at CalPERS "is not a good omen," of what will
happen to private employers and small businesses with far less
bargaining power, said Fred Main, senior vice president at the
California Chamber of Commerce.
"For large employers, it's a cost issue -- and a shared-cost issue
-- but they will continue to provide coverage" to employees,
Main said. "But for smaller employers and employees, it
becomes an access issue.
For every percentage point increase in premium, Main said,
studies show that 40,000 people lose their insurance.
"As these increases ripple through the system," he said, "we will
have even more people without any insurance at all."
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