Magazine Article

Why Should You Be Interested in CalPERS Healthcare Benefits?

By George Diehr
Chair, CFA Retired Faculty Committee
Business, San Marcos

Each year, CalPERS, which manages the CSU faculty’s healthcare benefits, runs an “open enrollment” period. During that time, you can change your healthcare benefits plan without constraint. It has ended for 2017, but another open enrollment will happen in Fall 2018 so it is well worth learning about our benefits.

Besides, even if you have no interest in or reason for changing plans, you may still benefit by understanding more about how these plans “work.” That entails only what they are—coverage, eligibility, cost, plan choices—but also how decisions about the plans are made and by whom

Note that our focus here is not on the on the features of specific plans; there is plenty of information about that on the CalPERS website. Changes in 2018 are summarized at this link, which prvides further links for more detailed information. The page about 2017 open enrollment provides information, too.

You can also access information through your my|CalPERS account (If you don’t have such an account, you should!)

How CSU faculty health benefits work

Managing provision of healthcare benefits for employees and retirees of the state of California, which includes the CSU, is the responsibility of CalPERS, the California Public Employees’ Retirement System. Its management of the health benefit program is governed by PEMHCA, the Public Employees Medical & Health Care Act.

CalPERS is the largest purchaser of public employee health benefits in California, with over 1.4 million covered lives the second largest only to the federal government’s programs for its employees. In addition to employees of the state, PERS plans are also available by contract (not mandated), to some 3,000 other California public agencies and K-14 school districts. Its annual spend for 2017 is estimated at $9.1 billion.

While CalPERS has administrative and managerial responsibilities, the day-to-day administration of each health benefit plan is done by healthcare insurance companies Anthem Blue Cross, Blue Shield, United HealthCare, and Health Net or by combined insurer/provider companies Kaiser Permanente and Sharp. Because CalPERS self-insures for most of its plans, we use the term “Plan Manager” (PM) for all these organizations.

With a few exceptions—Anthem Blue Cross “PERSCare” and the “association plans”—the benefits provided by the health plans (except as noted below) are essentially identical across HMO plans and across PPO plans except for the “Cadillac” (“Tesla”?) PERSCare plan. Public schools and public agencies that contract with CalPERS for health benefits also have the same plan alternatives. Thus, Employees of the Department of Motor Vehicles have the same choices of health plans as employees of the CSU and the city of Long Beach. The exceptions are so-called “association plans” specifically designed by and limited to several safety officer bargaining units. Note also that none of the CalPERS plans are of the “high-deductible” or “major medical” variety.

PEMHCA requires that the state and every contracting agency provide retiree healthcare benefits. This is a very important, valuable, and relatively rare benefit. Due to its added costs, this requirement discourages many public agencies, especially school districts, from contracting with CalPERS.

CalPERS offers most active employees and retirees both Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO) styles of health plans. All covered members living in California have the choice of three PPO plans: PERSCare, PERS Choice, and PERS Select. While most members will also have one or more HMO plans to choose from, many rural counties with very low population density do not have HMO plans.

In total, for 2018 CalPERS offers nine different HMO plans and three PPO plans (plus association plans):

HMO (Health Maintenance Organizations)

  • Anthem Blue Cross (2 plans): Select and Traditional
  • Blue Shield of California: Access+
  • Health Net (2 plans): Salud y Mas and SmartCare
  • Kaiser Permanente

  • Sharp
Western Health Advantage

PPO (Preferred Provider Organizations

  • Anthem Blue Cross: PERSCare
  • Anthem Blue Cross: PERS Choice
  • Anthem Blue Cross: PERS Select

Roles and Responsibilities of CalPERS, Employers, and State of California

Every year the CalPERS Board of Administration determines health plan availability, covered benefits, health premiums, co-payments, and, for PPO plans, co-insurance and deductibles. Aside from the association plans, plan features are not determined in bargaining or by the employer. This is important. More than a few of our colleagues believe that our health plan benefits are something that CFA negotiates with the CSU administration. The reason we—CSU employees—enjoy some benefits that other state employees do not enjoy is because of legislation that includes some advantages secured recently by CFA working with state legislators.

Thus, an employee working for the State Comprehensive Insurance Fund in San Francisco, an employee at CSU Long Beach, and an employee of the City of Long Beach who enroll in the Blue Shield Access+ HMO plan, will have identical covered benefits, co-pays and premiums. What differs, as noted above and discussed below, include the level of premium support provided by the employer and the benefit eligibility requirements.

Determining Which Plans to Offer. A major CalPERS responsibility and decision is which plans to offer and in which regions each is offered. The substantial increase in plan offerings beginning January 2014 was the result of an innovative contracting process that elicited proposals from eight health insurers, five of which did not previously offer plans, and the implementation of “risk adjustment” (described below). This process resulted in the set of plan offerings for 2018 shown above.

CalPERS decisions regarding plans, features, etc. must comply with state and federal laws and regulations regarding HMOs. For example, the State’s Department of Managed Health Care enforces laws and regulations that set out access requirements for HMOs. For CalPERS to offer an HMO plan in a certain region requires that the HMO have medical services facilities not greater than a certain distance or time from a member’s home or place of work. Thus, if you wonder why CalPERS does not provide the Kaiser HMO plan in Butte or Humboldt counties, it is because Kaiser’s nearest facilities that provide the mandated services exceed the maximum allowed travel distance or time.

Determining Benefits. While adding or dropping plans occurs infrequently, almost every year the CalPERS Board considers proposed changes in plan design. For various changes—e.g., additional mental health services—the plan managers provide estimates of the impact on premium cost. For example, several years ago CalPERS considered increasing the co-pay for an office visit from $5 to $10. Each of the plan managers estimated the reduction in premium that would result from this co-pay increase.

In evaluating a copay increase, CalPERS considered evidence of the impact a co-pay increase would have on member behavior. Very low or zero co-pays can result in overuse of a medical service. Instead of taking an aspirin for a headache (a few cents), a member might see their family doctor (at a cost to the plan of about $90). On the other hand, co-pays that are too high can result in patients avoiding services that may be important to diagnosing and treating health problems before they require more serious and expensive care.

CalPERS is always looking for way to improve the quality of services and outcomes, limit cost increases, and enhance access. Some health care experts have asserted: “improve quality, constrain cost, increase access—pick any two”, meaning you can’t have gains in all three. But others disagree. For example, there is little empirical evidence to support the thesis that the quality of a treatment or drug is related to its cost. Nonetheless, many of us persist in believing that higher costs of care lead to better outcomes. As we discuss below, CalPERS has instituted benefit designs that discourage members from using expensive services where equal (and often superior) quality services are available at (often) substantially lower cost.

As an example of such benefit “engineering” to encourage sensible selection of healthcare services, in 2012 CalPERS’ PPO plans placed a limit of $30,000 (called the “reference price”) on how much it would pay for hip or knee replacements. A member who used a more expensive provider is responsible for all costs above this. Before you raise obvious objections to such a constraint—e.g., “what if I live 200 miles from the closest facility that will do the job for $30K?” or “the only provider near me that will do it for $30K has limited experience and lots of poor outcomes”—know that: 1) only providers that meet both the cost limit and quality standards are included in the plan’s network and 2) if you live over 50 miles from a qualified provider transportation and lodging is provided for the patient and a support person. In fact, about 95% of plan members have qualified providers available within the distance limit.

In practice, members have found that their preferred hospital for a knee replacement that normally charges over $40,000 may agree to do the job for the reference price. Google “James Robinson CalPERS knee” for an extensive list of articles related to CalPERS “reference pricing” for hip and knee replacements. The benefits of this CalPERS initiative extended well beyond its own members as reported by the LA Times:

Extract from “Hospitals cut some surgery prices after CalPERS caps reimbursements”, LA Times, June 23, 2013

When the California Public Employees’ Retirement System told its Anthem Blue Cross members it would pay only up to $30,000 for a knee or hip replacement surgery, some patients shopped around for a cheaper hospital.

What may be more surprising is that about 40 higher-priced hospitals in the state cut their surgery prices significantly to avoid losing patients. That response accounted for about 85% of the $5.5 million CalPERS saved over two years, researchers at UC Berkeley found, with the rest of the savings coming from patients opting for lower-cost hospitals.

The average charge among the more-expensive hospitals fell 37% from $43,308 in 2010 to $27,149 last year for these common joint replacements. The average price for CalPERS members at the less-expensive hospitals was $24,528, down just 3% since 2010. …

CalPERS, the nation’s third-largest purchaser of health benefits, said it pursued this idea because its hospital bills for hip and knee surgeries ranged from $15,000 to $110,000. Now the giant pension fund said it will look at expanding this approach to other procedures.

Establishing a network of providers that limit charges while meeting quality standards is an example of what is termed “value based purchasing” (VBP). VBP refers to a broad set of performance-based payment strategies that link financial incentives to health care providers’ performance on a set of defined measures in an effort to achieve better value. (Click here for more information about VBP)

Use of VBP resulted in annual savings of about $5 million and encouraged the addition of 12 more procedures beginning 2018. Table A provides details. (If you think the U.S. healthcare is “well”, note the huge range of costs for each of these routine procedures. For example, the cost of a “sigmoidoscopy” can be as high as $9,907 at a HOF to as low as $403 at an ASC—a ratio of almost 25:1. Only in healthcare do we find such pricing. Can you imagine a car dealer in San Bernardino charging even 20% more for a Prius V than a dealer in Los Angeles? Just wait until Amazon goes in the healthcare business!

Setting Premiums. A key CalPERS’ decision, made every year, is setting plan premiums. Of course, CalPERS cannot set premiums unilaterally—CalPERS is the buyer and the insurers/plan managers are the sellers. The process is quite complex and, with the implementation of “risk- adjusted premiums,” became considerably more complex beginning 2014.

Remember that the premiums for a given plan are the same for all employees of all state agencies. No state agency gets lower or higher rates even if its members incur substantially lower or higher health care costs than the average. In addition, the premiums for state employees for a given plan are the same across all counties. This is the case even though the actual costs of health care in some areas—Northern California—are considerably higher than in other areas Los Angeles. What does differ, for the CSU in particular, is the level of premium support provided by the state. See Determining the Employer’s Share of Premiums below.

The premium-setting process involves an extensive cadre of experts—CalPERS’ managers, actuaries, and staff analysts; external consulting actuaries under contract to CalPERS; insurance company managers and their actuaries and other experts—and huge amounts of data including CalPERS own “data warehouse” of over a decade of claims (billions of records), each PMs historical data for its entire “book of business” (which includes CalPERS members), supplemented by national healthcare data such as predictions of healthcare cost increases by health/economic research organizations.

In the main, premiums are determined by two major factors and one (to some people’s surprise) relatively minor factor.


1) The estimated utilization (“U”) of each of the tens of thousands of possible healthcare services—office visit, ER visit, coronary artery bi-pass graft, etc. and the utilization of prescription drugs.

2) The estimated cost to the plan/insurer for each specific service (the rate, “R”) such as $90 for an office visit with a primary care physician, cost of a prescription drug for high blood pressure, etc.

For Health Maintenance Organization plans there are two parts to the “rate” and “utilization” components: services that are “capitated” and those that are not. Capitation is a single annual per-member cost to cover a specified set of services (e.g., office visit, vaccination, colonoscopy). Capitation is most widely used for primary care physicians where costs of each specific service have relatively low variation and, with a large number of patients, the average number of times the service will be required can be estimated fairly accurately. With specialists, and even more so with hospitals, there is much wider variation in both cost and utilization so capitation is less widely used.

For Blue Shield’s HMO, about one-third of its costs are capitated. Kaiser and Sharp are examples of a fully capitated health systems. These plans bear the risk, for example, if its members have an unexpectedly high need for very expensive procedures or drugs.

Estimating Per Member Per Month (PMPM) Medical Cost. By example, if estimated Primary Care monthly office visits for a member of specific characteristics (e.g., male, age 37, obese, smoker, PhD) is 0.6 (=U) and the charge for each visit is $90 (=R), the contribution to the PMPM cost of medical care for a member with these characteristics is U*R, or $54.  Total PMPM cost for each member (of these characteristics) is estimated by summing over the estimates for each possible health care service and drug.

Given the estimated PMPM cost for members of each characteristic type, an overall average PMPM is estimated as the weighted average. 

Estimating both utilization rate and cost of each medical service/treatment and drug uses historical data and projected changes—e.g., for prescription drugs the estimated cost of an individual drug for the coming year, which considers the potential for a price increase as well as or the potential reduction in cost for a patent drug that will become available as a generic. Reams of data, sophisticated data analytics and (I suspect) “gut feelings” are used to develop these estimates.

To supplement the historical data, analysts also use external healthcare statistics and projections to refine their estimates. This does not necessarily yield estimates that are agreed to by both the buyer and seller. Negotiating, haggling, gaming, and less than objective methods are also employed.

These estimated PMPM costs for medical care and drugs are the major drivers of the final healthcare plan premium. Of course, the PMs also know that they are in a competitive environment. If the PM for plan “K” successfully negotiates a premium that is substantially higher than a different PM’s plan “U”, it risks not only discouraging new employees from selecting its plan but also losing some current members to “U”.

But we are getting ahead of ourselves. In addition to the PMPM cost for medical care, there is also the final component of the premium.


3) A negotiated allowance for the plan manager to administer the plan and for profit/retained earnings. For CalPERS health plans, this allowance amounts to only 5-6% of the total cost. (There is, of course, also some cost to CalPERS for (high level) administration of the health care program that is supported by the premium. But it is a very small—well under 1% of total cost.)

CalPERS contracts with the PMs to, in effect, rent their network of providers—the individuals and organizations that each PM has contracted with to deliver health care. Each PM negotiates rates for services with its providers (more later), pay claims, provide call centers, guard against provider fraud, and a host of other services to help ensure that members get the benefits and services they deserve. Note that the Affordable Care Act limits the profit and administrative costs of insurers to 15% of premium cost (for large group plans); as noted above, the cost to CalPERS for the non-medical costs is only 5 to 6% of the premium.

Determining Provider Rates/Charges. There is an important aspect underlying premium-setting that is often misunderstood. Some believe that CalPERS negotiates rates with providers (e.g., what they charge for an MRI) and, due to its size, should be able to get lower rates than available to most employers, hence, lower premiums.

The rates for provider service are, in almost all cases, the same rates that each PM has negotiated for its entire “book of business” (all of the members covered by its plans).  While CalPERS has a substantial number of people in its health plans (by far the largest of any employer in California), CalPERS membership with any given PM is, at best, moderate versus that PM’s total book of business.

For example, Anthem Blue Cross’s (ABC) book of business in California is about 5 million people. CalPERS’ membership in ABC’s three PPO plans is about 362,000, or only 7% of ABC’s total covered lives.

Thus, when ABC knocks on the door of a provider (hospital, physician group, …) to negotiate rates for services, it has much more clout than if CalPERS knocked. ABC’s share of the total California health care market is so large (about 20%) that most providers find it necessary to be in the ABC network. In contrast, most providers would not be substantially impacted if they lost all their CalPERS patients.

Finally, the data show that the rate each PM is able to negotiate with a specific provider for a specific service is quite similar across all PMs who have that provider in their network.

Determining the Employer’s Share of Premiums. While coverage choices, benefits, co-pays, etc., are the same for employees of the CSU as for employees of other state agencies/bargaining units, the levels of premium support across units differ.

Across state employers/units, the employees of the CSU enjoy the best premium support through the so-called “100/90” formula.

For all state employees, the key statistic determining the support level for the coming year is the average premium of the four plans with largest enrollments in the current year. These “big 4” plans in 2017 were Kaiser Permanente, Blue Shield Access+, PERS Choice, and UnitedHealthcare.

Their average single-person premium for 2018 will be $725. The CSU contributes 100% of this average premium for members and 90% for dependents for the plans they select. For example, suppose you and a partner select the Kaiser plan which has a premium of $1,434.76 for two. The CSU/state premium subsidy for 2018 will be $725 for you and 90%*725 for your partner for a total of $1,377.50. Thus, the net cost to you (and partner) is $57.26 per month. If, instead, you selected the Sharp HMO plan, the cost for two would be $1,249.40 which is less than the state subsidy, hence a zero net cost. (This scheme has its flaws in that if you select a plan whose cost is less than the subsidy—as with the Sharp plan—you do not benefit from this difference of $128.10 ($1,377.50 – $1,249.40). Thus, there is no financial incentive to select a plan whose premium is below the subsidy. A smarter scheme might be to provide you with at least some of that difference—e.g., use it to offset other costs charged to employees such as parking.)

Most other state employees receive lower premium support, typically 80% of this “big-4”average for both the employee and dependents.

While the CSU employer premium support is set in statute (state law), statutes can be changed.  The process for change usually begins at the bargaining table. For example, at CFA’s recently concluded contract bargaining, the CSU administration proposed reducing the CSU support level to 95/85. Had that been the final agreement between the parties—it was not—the change would have gone to the legislature for ratification.

Member and Dependent Eligibility. Full-time employees are eligible for health benefits coverage as soon as they receive their first paycheck. For part-time employees, eligibility for the member is more complex. Part-time faculty at semester campuses must be hired at a minimum time base of 40% (six WTUs). For quarter campuses, the employment contract must be for two consecutive quarters, again at a minimum of 40% time base each quarter.

The 40% time base level used to be 50%— requiring a clumsy teaching load of 7.5 WTUs or more. Several years ago CFA succeeded in getting a bill passed by the State legislature that reduced the minimum time base requirement to 40%.

Spouses, domestic partners, and children are eligible for health benefit coverage when the member gains eligibility. Under the Affordable Care Act, children up to age 26 are now eligible for benefits.

Vesting Requirements. “Vesting” refers to the amount of time you must be employed by the CSU to be eligible to receive employer contributions toward the cost of the monthly health premium during retirement.

In addition to the superior level of premium support afforded to CSU employees in comparison to employees of other state agencies, CSU employees hired prior to January 1, 2013 also have a shorter vesting period—only five years of FTE (full-time equivalent) service meets the vesting requirement. Those hired after that date require five years of FTE service to vest 50% of the support, increasing 10%/year each yeat to full support after 10 years of FTE service.

Once vested, the premium support in retirement continues at the same 100/90 formula. For other state agencies, the requirement is (generally) 10 FTE years of service at retirement to vest, at which level they receive 50% of the 100/90 premium support. For each FTE service year above 10, the support increases by five percentage points to 100% at 20 years of service.

We hope this discussion has helped you better understand some of the underlying features, responsibilities, and processes involved with your CalPERS healthcare benefit. This description has not been exhaustive (even if it may have been exhausting!). There are many special cases and special situations that we have not explored. Therefore, it is essential that when you face a major decision regarding healthcare benefits—e.g., separation in service and retiring, going on leave, moving out of California, change in marital/partner status—that you seek information and advice from experts: look before you leap.

Future Outlook and Challenges

A critical challenge facing CalPERS—indeed, the nation—is the escalating costs of healthcare. Even though the CSU covers the lion’s share of premium increases, you are not immune from escalating health care costs.

Even if the CFA can protect our 100/90 formula, co-pays can increase, the dollar amount of coinsurance will increase with increasing cost of services, and deductibles could increase. There are also potential indirect impacts of increasing costs of any benefits paid for by the state: stagnant salaries, increased teaching loads, denial of SSIs, etc.


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Summary of Key Characteristics of HMO and PPO plans

A Health Maintenance Organization (HMO) plan provides health care from specific doctors and hospitals under contract with the plan. You pay co-payments for some services, but you have no deductible, no claim forms, and a geographically restricted service area. Except for emergency and urgent care, if you obtain care outside the HMO’s provider network without a referral from the health plan, you will be responsible for the total cost of services.

HMO’s are not available in all California counties.

A Preferred Provider Organization (PPO) is similar to a traditional “fee-for-service” plan, but you must use doctors in the PPO provider network or pay higher co-insurance (percentage of charges). You must usually meet an annual deductible before some benefits apply. You’re responsible for a certain co-insurance amount and the plan pays the balance up to the allowable amount.

When you use a non-participating provider—a provider outside your PPO network—you are responsible for any charges above the amount your plan allows.

Find available health plans by ZIP Code.


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By law, CalPERS sets premiums based only on the plan and the unit. In other words, whether your coverage is for a single person, a couple or a family, premiums for CalPERS members who are working state employees do not vary with age, health status or region.

Without risk-adjusting, the premiums would reflect the medical needs for only those members using each plan, plus the small allowance for administering the plan and profit or “retained earnings”.

To understand this better, consider what happens if one plan attracts younger members, who are generally healthier on average than older members. That plan will have lower medical costs, hence a lower premium.

This is what happened when the PERS Select plan was introduced. Newly hired—generally younger, healthier— employees, many of whom had little or no prior healthcare coverage, elected this plan disproportionately to other plans. That resulted in substantially lower medical costs and lower premiums for the Select plan.

While some older employees switched from (typically) PERS Choice to Select, “inertia,” and the fact that the Select network of primary care physicians was more limited, discouraged most from switching. Those who did switch also tended to be healthier than the average member covered by PERS Choice.

With the loss of healthier individuals from Choice, the increased average medical needs of those who remained increased the cost of their care, hence the premiums of Choice increased. Over time, the increasing difference in Select and Choice premiums encouraged more members to switch, further increasing the difference.

This is “adverse selection.” The continued shift of healthier people to the lower-cost plan and increased difference in premiums eventually results in the total demise of the higher-cost plan—the so-called “death spiral.”

Basing premiums for a plan on an assumed average health risk for all members rather than on the health of its actual members ameliorates adverse selection.

If a plan attracts healthier-than-average members, the premium revenue it receives is reduced and shifted to plans with above-average health-risk members. Thus, there is little if any incentive or advantage for a plan to pursue or have a lower risk membership.

Applying risk-adjustment to determine premiums resulted in a dramatic increase 
in the nominal premium for PERS Select because if it had “average member health risk” its costs would be much higher. If it continues to have lower-risk members, some of its premium revenue will be shifted to subsidize plans such as PERSCare that has higher risk members. The reallocation of premium revenues is such that there is no net benefit or cost to the state—it is a zero-sum process.

Note that CalPERS did not “invent” the risk- adjustment process. Medicare uses a similar method; the UC system and the Affordable Care Act use risk adjustment. Using risk adjustment allows CalPERS to offer more plans and encourage plan managers to offer plans in areas where costs are higher or members are not as healthy without the risk of adverse selection and death spirals.