HMO Deal Signals Slight Cost Hikes

In a sign that health costs aren’t climbing as fast as expected, an influential coalition of major California employers said Tuesday that it has negotiated an average increase of 1% in the cost of health insurance for its employees enrolled in HMOs for next year.

The modest increase, negotiated by the Pacific Business Group on Health, is well below the U.S. inflation rate and significantly lower than the 4% to 6% increases that some experts have predicted for California employers for 1998.

However, the increase--which follows three years of declining or flat medical premiums for the San Francisco-based employer group--confirms a shift toward rising medical costs for the state’s employers. Earlier this year, the California Public Employees Retirement System, another influential purchaser of health insurance, announced a 2.7% rise in HMO premiums for its members next year--its first increase since 1993.

“This wasn’t just a one-year blip upward,” said Peter Boland, a Berkeley-based health-care specialist. “This is a multiyear trend we are seeing.”

The rise in medical costs is being attributed to such factors as higher drug costs, an aging population that requires more care and efforts by HMOs to shore up profits after cutting prices for several years to grab market share.

For several years, the Pacific Business Group has used its purchasing clout to negotiate favorable rates and improvements in services with California’s powerful HMO industry. Its latest negotiations were conducted on behalf of 19 employers--including the Automobile Club of Southern California, Bank of America, Bechtel Corp., Chevron Corp., Pacific Bell and Stanford University--representing 500,000 employees, including 50,000 retirees.

The rate negotiations of CalPERS and the Pacific Business Group are closely watched throughout the state because of their impact on the medical marketplace. Health-care experts say these groups help to set a “floor” for medical premiums.

Put another way, this means that small businesses or larger companies that don’t belong to purchasing coalitions can expect to see their medical costs rise at a faster rate.

For example, small companies of fewer than 50 employees are seeing increases of between 2% to 5% next year, health-care consultants and brokers say. The rates for larger companies can vary widely, often depending on the age and medical histories of their work forces.

Tom Sher, principal at a San Francisco-based insurance brokerage, said the Pacific Business negotiations can have a negative impact on other employers if HMOs seek to shore up profits elsewhere.

“To the extent you have these large block purchasers making good deals for themselves, the costs will be shifted to other employers who aren’t part of these groups,” Sher said.

Sherrie Matza, vice president of benefits for Bank of America, disagreed.

Since the Pacific Business Group began buying medical insurance for its member companies in the mid-1990s, it has sought assurances from HMOs that they would not shift costs to other customers. “I don’t think in the California market that there is cost-shifting going on,” she said.

The San Francisco employers’ group said it also sought agreements with HMOs to ensure that rates stay stable in the future. Two of the state’s largest HMOs, PacifiCare and Health Net, agreed to “rate guarantees” through the year 2000, although the group declined to provide specifics.

The Kaiser Foundation Health Plan--the state’s largest HMO--agreed to a medical premium cut that the business group would describe only as a “very favorable rate.” Excluding the Kaiser rate cut, Matza said the overall rate increase for the HMOs would have been more than 2%.

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On the Rise

Experts say employers’ health-care costs are on the rise. The 1% hike negotiated for next year by the Pacific Business Group is smaller than most of the state’s other employers can expect. Percentage changes in the group’s costs:

1997: no change

1998: +1%

Source: Pacific Business Group on Health