CalPERS considers scrapping health plans to lower its medical tab California's biggest healthcare buyer isn't happy about its $7-billion annual medical bill climbing almost 10% next year, and the state's big insurers may be feeling the heat. The California Public Employees' Retirement System is preparing to rebid its health insurance business this fall for 1.3 million members, and two of its current plans, Anthem Blue Cross and Blue Shield of California, are likely to face intense competition as the giant pension fund considers its options. Perhaps the boldest move under consideration for 2014 would be to bypass insurers altogether in some areas of the state and begin contracting for medical services directly with large physician groups. This month, CalPERS said its health premiums will rise 9.6% next year, or nearly triple the current rate of medical inflation. Ann Boynton, deputy executive officer for benefits at CalPERS, said the agency isn't satisfied with the status quo, and it's seeking fresh ideas in this next round of contracts that start January 2014. "We continue to see that our members' health does not improve in a significant way, and we have continual increases in our cost trend," she said. We think more can be done. Other employers and healthcare companies are watching closely to see what direction CalPERS goes. "CalPERS is a bellwether by virtue of its sheer size, and people follow what it does," said Donald Crane, chief executive of the California Assn. of Physician Groups. There is no mistaking they want a new version of healthcare. CalPERS spends about $7 billion annually to provide care to active and retired state and local government employees and their families. That makes it the largest buyer nationwide after the federal government and General Motors, respectively. Ultimately, state and local taxpayers foot the bill for most of these health benefits, and government budgets are already under severe strain. The agency relies on the state's three biggest insurers: Kaiser Permanente, Anthem and Blue Shield. Those contracts all expire in December 2013. Kaiser provides a standard health maintenance organization, while Blue Shield offers two other HMO plans. Anthem administers three preferred provider organization plans self-funded by CalPERS. CalPERS says it intends to renew its HMO contract with Kaiser, which serves more than 500,000 of its members. Experts say CalPERS would be reluctant to drop Kaiser and force so many patients to switch doctors because Kaiser operates its own hospitals and physician practices. Blue Shield serves about 400,000 HMO customers, and Anthem has 350,000 people in PPO plans. The agency got an early peek at some new contenders when a dozen health plans and physician groups responded to a list of questions CalPERS posed to the industry this year. Major insurers such as UnitedHealth Group, Aetna and Cigna touted their capabilities along with some regional players such as Sharp Health Plan in San Diego. The California Assn. of Physician Groups responded on behalf of its 155 members. Boynton said CalPERS is open to working directly with big medical groups, but these organizations would have to take on many of the administrative functions insurers handle. Federal officials, trying to cut Medicare costs, are taking a similar approach by signing up some of these California physician practices to coordinate care for seniors. "There are some quite innovative and interesting things coming out of those larger physician groups," Boynton said. This CalPERS option could put large medical groups in direct competition with insurers that they work with now. Meantime, insurers such as UnitedHealth are trying to stay ahead of this trend by acquiring physician groups across Southern California, including Monarch HealthCare in Irvine. Blue Shield has cautioned CalPERS against diluting its clout by splitting up its membership among regional plans. "It is critical that CalPERS continue its strategy of maximizing its purchasing clout with providers by consolidating its large membership pool among a few plans," the company said in a response to CalPERS' request for information. CalPERS and other employers are searching for doctors and health plans that can best control the escalating costs incurred by patients with chronic conditions, such as diabetes and congestive heart failure. In a survey last year, 47% of CalPERS members reported being overweight but only 13% said they were enrolled in a weight-loss program. Overall, 23% of CalPERS members have a chronic condition, and they account for half of the medical costs, or about $3.5 billion a year. CalPERS has launched numerous initiatives aimed at curbing some of those costs and improving patients' health. It removed some higher-cost hospitals from its insurance networks, steered members to lower-cost surgery centers for knee and hip replacements, and encouraged members to use cheaper generic drugs. In three Northern California counties, Blue Shield worked with the Hill Physicians Medical Group and Dignity Health, the state's largest hospital chain, to closely manage about 40,000 CalPERS patients, and together they saved about $37 million in the last two years. CalPERS is expanding that integrated approach to Los Angeles, Orange and Santa Cruz counties. Some health-policy experts say there's a limit to how much CalPERS can achieve, particularly in less competitive markets. CalPERS said its costs are 30% higher in some rural areas of the state compared with Los Angeles. "Even for the biggest purchasers," said Glenn Melnick, a Rand Corp. health economist and USC health-policy professor, "they can't restructure the market alone."