Health-cost surge in California is warning for nation

State employees face 25 percent rise in health costs.

On health insurance rates, you can call California the nation's canary in a coal mine.

The state's employee benefits system, known as Calpers, plans to raise rates for its HMO premiums by 25 percent next year.

As the nation's second-largest provider of health insurance behind the federal government, Calpers has long been a bellwether for employers around the country.

Nationally, experts are predicting health-insurance rates will go up 10 to 30 percent. Rates for small employers, usually hardest hit by hikes, could rise as much as 40 percent.

The upshot is higher out-of-pocket costs for ordinary workers, the prospect that some companies may cut back coverage or drop it altogether – and the likelihood of a bigger uproar about healthcare costs than was seen during the recession of the early 1990s.

"If Calpers is getting scalped, everyone else needs to hold onto their wallet," Ron Pollack of Families USA, a nonpartisan healthcare advocacy group in Washington, said after the price hikes were announced last week.

A variety of factors are fueling the rate hikes, from soaring prescription-drug costs to the consolidation of hospitals and doctors groups – which allows them to demand higher reimbursement – to costly new technology. But underlying the all of the factors, experts say, is a more disturbing trend: the failure of the marketplace and so-called "managed care" providers to control healthcare costs and improve the overall system. These were the tools that were supposed to salvage the healthcare system during the 1990s. And Calpers, with its goliath size, and California, with its large percentage of managed-care companies, were touted as the models for the the nation.

With 1.2 million members, Calpers (short for California Public Employees' Retirement System) was able to leverage its considerable buying power in the marketplace to keep health-insurance rates in check. In 1995, it actually negotiated a drop of about 5 percent in members' insurance costs. But those savings turned out to be a one-time phenomenon. Managed care succeeded in streamlining and squeezing waste out of the traditional medical system, such as by emphasizing preventive medicine to keep individuals healthier. But once those gains were made, all the other factors that fueled healthcare costs in the early 1990s kicked back into high gear, analysts say.

"The underlying pressures that led to this year's historic rates have been building for some time," said Calpers board president William Crist. "We've pretty much wrung out what we can through competition. Now it's time to look at a new model.... We need a long-term solution." In the past year, Calpers, along with dozens of other major companies, has joined the National Coalition on Health Care, which is lobbying for a fundamental overhaul of the nation's healthcare system.

"We have a broken system in cost, coverage, and quality, and you can't patch it anymore," says Henry Simmons of the National Coalition on Health Care.

He sees three possible solutions, none voluntary or popular with everyone: (1) Expand programs like Medicare to cover the whole country; (2) require everyone to buy health insurance and have a small tax to pay for those too poor to afford it; (3) Expand the current employer-based system by requiring employers to provide insurance or pay into a pool that would buy insurance for their employees.

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