As health reform starts in earnest in 2014, health plans in California will not only be jockeying for insurance exchange members but also for the business of state employees and retirees.

In a decision that could significantly alter commercial insurance market share over the next five years, the California Public Employees Retirement System?with a total of 1.3 million members?has opened up the statewide HMO business to four other carriers, dependent upon their ability to successfully negotiate contracts with the agency, a process now underway. Assuming negotiations are successful, Anthem Blue Cross, UnitedHealthcare, Health Net and Sharp Health Plan will compete with Blue Shield of California and Kaiser Foundation Health Plan for nearly 1 million HMO members the next five years, starting in 2014. Not all HMOs will compete in all counties, but they will overlap in Southern California, where the competition will be intense.

All of this is a big blow to Blue Shield; the CalPERS business represents about 15 percent of Blue Shield's total membership. Conversely, it's a another feather in the cap of UnitedHealthcare, which has been successful knocking other Blue Cross Blue Shield plans off their perch in state employee benefit systems, including those in Texas and Nebraska. Anthem Blue Cross not only wins the opportunity for HMO membership, but also recently held onto the administrative contract for CalPERS? self-insured PPO business in the face of a failed competitive bid from Blue Shield. The PPO portion of CalPERS business represents about 358,000 members.

Whether Blue Shield can hang onto most of the HMO business depends on factors yet to be shaped by contract negotiations.. Details, such as how open enrollment would unfold, are still to be ironed out. Kaiser Foundation Health Plan's contract, which expires at the end of 2013, is separately being negotiated.

CalPERS? monumental decision harkens back to many years ago when about 20 plans shared the state employee business. But over the years, Blue Shield gradually gained the exclusive non-Kaiser statewide contract for HMO business. Blue Shield built in many of the cost controls that kept premiums low for CalPERS for several years. It built the original narrow-network product by excluding the high-priced Sutter Health System from some of its provider networks. (Ironically, Blue Shield may lose members to competing HMOs that now have Sutter in their networks.) Blue Shield also help set up CalPERS? first accountable care organization in the Sacramento area, which has saved the state millions of dollars.

Now the pension fund believes that by bringing in more plans to compete, rates will come down further. In a change from years ago, CalPERS will be risk-adjusting HMO rates so that one plan isn?t saddled with more than its share of unhealthy members and is not prompted to jack up premiums to compensate. In another change from years ago, all the major carriers have narrow provider networks that can drive bigger discounts. Just as important to CalPERS is the ability to tap the carriers? development of integrated healthcare model (which others call accountable care organizations) that will not only lower the unit costs of care but also better coordinate care to improve health outcomes and thus lower downstream medical costs.

This theme should sound familiar to anyone tracking healthcare trends, not only in California but the nation. One need look no further than the state-run insurance exchanges being set up in California and elsewhere to see that, in an era where benefits are standardized and dictated, the only real lever for cost control will lie in the ability of health plans and providers to partner on innovative network and integrated care arrangements.

Follow Chris Lewis on Twitter @ChrisLewisHLI

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