Over the years, CalPERS has implemented numerous strategies to help reduce cost increases without jeopardising coverage and quality. We know that in order to make systemic changes there has to be reform and improvement of the prevailing models of healthcare delivery. New models have to be developed and their growth nurtured to reduce costs and maintain quality of care. Driving system changes that lead to improving our members' health is most important to us.
As one of the largest healthcare purchasers in the country, the California Public Employees’ Retirement System (CalPERS) is on the front line of finding better, more cost-effective ways of providing quality healthcare for its members. CalPERS provides healthcare benefits to active and retired members and their families, more than 1.3 million covered lives, at a cost of more than US$7 billion a year. We have two Health Maintenance Organization (HMO) plans provided by Kaiser Permanente and Blue Shield of California, and a self-funded Preferred Provider Organization (PPO) plan using Anthem Blue Cross as our third party administrator.
Over the years, CalPERS has implemented numerous strategies to help reduce cost increases without jeopardising coverage and quality. Still, we realise that the current rate of cost increases is unsustainable. The Kaiser Family Foundation reports that healthcare costs in the US were close to US$2.6 trillion in 2010. Those costs have grown at seven to eight per cent annually, exceeding the rate of inflation. Net premium payments have risen seven to 10 per cent per year.
We know that in order to make systemic changes there has to be reform and improvement of the prevailing models of healthcare delivery. New models have to be developed and their growth nurtured to reduce costs and maintain quality of care. Driving system changes that lead to improving our members’ health is most important to us.
The complexity of the California’s healthcare market makes change challenging. There exist a myriad of commercial and non-commercial coverage plans, insurers, providers, physician payment methods and pharmacy benefit plans, and that is before considering compliance with numerous state and federal regulations.
As a major healthcare purchaser, CalPERS has been able to overcome some of those hurdles by implementing market innovations to improve the current healthcare models and keep us on a road to more cost-effective, quality healthcare. Many of those innovations are based on a health benefits purchasing initiative CalPERS developed that includes strategies designed to influence healthcare delivery, improve health outcomes, and deliver sustainable programmes.
We have incorporated efficient networks of care, began incentivised value-based purchasing programmes (reference pricing), implemented integrated healthcare systems and sponsored worksite wellness projects. Following are examples of some of the steps taken to improve care delivery and make it more effective for our members.
In January 2005, CalPERS initiated an exclusive provider network within our Blue Shield of California Health Maintenance Organization (HMO) plan. This ‘narrow network’ of providers included only hospitals that met certain efficiency and quality standards. We removed 24 high-cost hospitals from the network, used lower-cost, high quality centers of care, and saw savings of US$31 million in 2005 and as much as US$45 million in ongoing savings.
In January 2008, we offered our CalPERS Blue Shield HMO and Anthem Preferred Provider Organization (PPO) subscribers new plans that provided an option of using smaller, lower-cost, high performance provider networks. The networks included in the Blue Shield NetValue and Anthem PERS Select plans met criteria showing they could provide quality physicians and maintain high quality care at a lower cost. Members subscribing to these plans reduced their premiums without sacrificing coverage or quality. Through 2011, CalPERS has achieved an estimated health programme savings of US$68 million using this model.
Reference pricing—a set price for a specific procedure—is another strategy we employ. Our Value-Based Design (VBD) purchase pricing strategy involves making changes with providers to deliver efficient, high-quality services at lower costs, for health plans to create access to value-based purchasing, and for our members to make better-informed, wiser purchasing decisions.
For example, we found that within our PPO health plan, facilities cost for elective knee and hip replacement surgeries ranged between US$15,000 and US$110,000. In 2011, based on the average costs for such surgeries (US$31,000-US$33,000), CalPERS set a threshold of US$30,000 and identified 46 high-quality facilities—designated as ‘value-based purchasing centers’—that performed these surgeries at or below that threshold. When members use a designated hospital, they incur only the usual co-payment and co-insurance costs. Should they choose a non-designated facility, they are responsible for any charges in excess of the threshold.
The result was a cost reduction of just over 26 per cent, or about US$9,000 less per allowed surgical charge from 2010 to 2011. At least five other hospitals have revised their pricing for us and joined the programme since then. We implemented a similar programme within our Blue Shield HMO plans for the 2012 benefit year.
Equally important, however, is the fact that the programme got the attention of orthopedic surgeons, some of whom had no idea how much each hospital charged for those surgeries. It helped encourage the surgeons to become more engaged in understanding how greatly they influence the cost of healthcare. It had the catalytic effect of people paying attention to the fact that healthcare purchasers have to figure out the hospital financing question overall.
Continuing the reference pricing / value-based design strategy, in 2011 we established a programme with Anthem that encouraged our members to use lower-cost ambulatory surgery centers for colonoscopies, cataract surgeries and arthroscopies. As a result, the costs of colonoscopies were down 10 per cent, cataract surgeries nearly 20 per cent, and arthroscopies 3.5 per cent, for a savings of about US$7.6 million for 2011.
We believe very strongly in the value and benefit of worksite wellness, and have invested much time and effort in developing ways to test and deliver these programmes. Worksite wellness programmes have resulted not only in better overall employee health, but also in lower employee absenteeism, improved morale and higher productivity.
One successful worksite wellness example is the collaborative endeavor we embarked upon with Santa Cruz County in central California called “Cruzin’ to Health.” The California Association of Physician Groups was a primary sponsor of this 12-week project in which county employees modified their exercise and diet behavior. The participating employees dropped an average five pounds, lost an average 1.4 inches from their waistlines and reduced their potential for chronic diseases. Key to the success of this programme was the enthusiastic response of county employees who began to take more responsibility for their own state of health. An estimated 88 per cent of the participants continue to follow their fitness regimens.
Looking at the rising cost of prescription drugs, CalPERS took steps to emphasize using lower-cost, evidence-based generic substitutions for selected prescription drugs wherever feasible. In 2009, we launched California’s largest electronic prescription initiative, working with participating physician and pharmacists to determine and employ the best ways to use e-Prescribing technology.
In 2011, we specifically examined nine classes of drugs and, using benchmark prescribing patterns, we identified a potential savings of 44 per cent, or US$56 million of US$128 million spent on prescriptions.
CalPERS also initiated pharmacy benefit changes that increased the brand name copayments for certain preferred and non-preferred drugs, and instituted a 'member pays the difference' programme. Under this programme, when a doctor prescribes a brand name drug—and a U.S. Food and Drug Administration (FDA) approved generic equivalent is available—the member will pay the difference between the costs of the brand name and the generic drug. The member will also have to make the generic drug co-payment.
The aforementioned strategies have been effective for CalPERS. However, we have found the greatest promise in creating integrated healthcare systems that align financial incentives, focus on improving outcomes and reduce redundancies inherent in the delivery system. A recent study released by Catalyst for Payment Reform indicated that only 11 per cent of payments to doctors and hospitals were tied to their performance. All of the providers covered by that number were either given financial incentives (43 per cent) or put at financial risk for their performance if they didn’t meet certain quality and cost goals.
CalPERS used that type incentive when we initiated a pilot partnership project in 2010 between Blue Shield, Dignity Health and Hill Physicians Group. The partners committed to improved communications and data sharing. They agreed to achieve cost-reduction through service initiatives. Additionally, they integrated care delivery, implemented evidence-based practices, increased generic drug use and streamlined administrative processes.
Crucial to the success of this exciting partnership was an agreement to share the financial risk. CalPERS goals for the partners were to create a sustainable model, grow membership and deliver cost savings. We wanted them to keep our 2010 costs the same or lower than they were in 2009. The partners would share in the savings or loss.
The strategies employed were integrating the delivery of care; implementing evidence-based practices; streamlining the administrative processes between the partners; increasing population management; reducing physician variation in clinical care and resource use; increase use of generics and establishing drug purchase strategies; and have all the physicians adopt and effectively use the technologies and tools available.
Our members benefited from improvement in key areas of care:
The number of discharges with no medical group follow-ups fell from 93 per cent in 2009 to 60 per cent in 2010.
The Blue Shield plan also added more than a thousand new CalPERS enrollees, and we expanded the integrated healthcare model six other counties in northern, central and southern California. To top it off, our programme model received national attention and was lauded by the U.S. Department of Health and Human Services as an example of an innovative share savings model.
CalPERS will continue on its path of innovation, even as we engage in procuring future health plan services. We are in the midst of a health plan procurement process, seeking companies to fulfill a five-year contract to provide healthcare for our members beginning January 2014. Because we know that it will enable us to better control costs of services as well as quality, we are pursuing a strategy of self-funding our HMO programmes in the same way that we currently self-fund our PPO health plans.
In addition, as part of our contract requirements we are requiring the winning bidders to share risks and align their incentives with CalPERS health initiatives and offer options to address our purchasing needs. The bidders had to show that they were willing to incorporate transparency, pricing and performance guarantees, and health and disease management into strategies aimed at reducing costs and improving our members’ health outcomes.
We have found our plans and providers to be enthusiastic partners with us in these endeavors. We believe that the active involvement of the healthcare purchaser is key to bringing about systemic change. We have also understood that a crucial element of our success in implementing healthcare innovations is including early input from our members and their representative constituent groups, discussing and considering their input on the possible impact of any changes made in the design and operation of our health benefit plans. Looking ahead, we will seek to expand the ways we can influence coordination of care, alignment of incentives and long-term reduction of cost without reducing coverage or restricting access. Delivery model reform is not only possible, it is imperative.
Ann Boynton Boynton provides executive leadership for health policy and planning, health policy research, health plan contracting and administration, retirement research and planning, and the CalPERS Center for Innovation. She also oversees CalPERS Information Technology Services Branch. Her work experience includes almost twenty years as a management consultant in the private sector.