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Last Updated: 3/2/2012
Budget Issue: Health Care Premium Savings
Program: Control Section 4.21
Finding or Recommendation: Hold item open until after May Revision when the CalPERS 2013 health premium negotiations and collective bargaining for four bargaining units may be closer to completion.
Further Detail


California Public Employees’ Retirement System (CalPERS) Negotiates Health Premiums. The Legislature determines policies concerning state employee health benefit programs. The Public Employees’ Medical and Hospital Care Act (PEMHCA) provides state workers and retirees access to group health insurance. Under PEMHCA, the Legislature vests CalPERS with the responsibility for managing health benefits for state workers and retirees. Any health premium increases in a calendar year are negotiated by CalPERS with health plan providers. The CalPERS board typically adopts the next year’s health premiums in June.

State Pays Portion of Premiums for Employees. Both the state and employees pay a share of employees’ monthly health premiums. The amount the state contributes is based on a weighted average of the cost of the four health plans with the most enrolled state employees. Under current law, the four most enrolled plans are determined using prior calendar year enrollment numbers. For rank-and-file employees, the state’s share of premium costs is negotiated through the collective bargaining process. The Department of Personnel Administration establishes the state’s share for employees who are excluded from collective bargaining (managers and supervisors). For most employees, the state contributes 80 percent of the average employee premium plus 80 percent of the average for any additional premiums necessary for dependent coverage. Employees are responsible for covering any costs associated with their health plan that exceeds the state’s contribution.

State Pays Larger Portion of Premiums for Retirees. Retiree health care payments are structured similarly to employee health care in that the state’s contribution is determined using a formula based on a weighted average of the cost of the four most enrolled health plans. The state, however, generally contributes a larger share of the cost for current retirees. Specifically, the state contributes up to 100 percent of the average health premium for eligible retirees and 90 percent of the average for additional premiums necessary to cover eligible family members of retirees. State employees hired prior to 1985 are fully vested to receive this health benefit upon retirement. Most state employees hired since 1985 receive the full benefit only after a period of vesting. (Retirees with less than ten years of service and their eligible family members generally receive no state contributions towards their health insurance. Retirees with ten years of service generally receive 50 percent of the contribution, with this percentage increasing by 5 percentage points annually until the 100 percent level is earned after 20 or more years of employment.) Like employees, retirees are responsible for covering any premium costs associated with their health plan that exceeds the state’s contribution.

Increases in Health Care Costs Budgeted in Two Budget Act Items. The state uses two budget items to account for increases in state health care costs. Any increases in state employee compensation costs, including costs associated with employee health care, are budgeted in Item 9800 of the budget act and then distributed to departmental budgets. State costs for retiree health care are budgeted in Item 9650. Because the Governor introduces the budget before the next calendar year’s premiums are negotiated by CalPERS, the Department of Finance (DOF) estimates the next year’s premium cost for these items. In determining the state’s costs in Items 9800 and 9650 in 2012-13, the Governor assumes that premiums will increase by 8.5 percent in 2013. This assumption is based on the state’s most recent retiree health valuation report.

Governor Assumes Savings in the 2012-13 Health Benefits Program. Relative to what is budgeted in Items 9800 and 9650, the budget assumes (under Control Section 4.21) that CalPERS will reduce state costs for employee health premiums in 2012-13 by $68 million ($45 million General Fund). The budget assumes CalPERS will achieve these savings through the development of a “core health plan,” other cost-saving measures, or a combination of the two.

Proposed Core Health Plan Would Provide Coverage With Fewer Benefits. The Governor proposes that CalPERS negotiate with health plan providers to add a core health plan option to the existing portfolio of health plans offered to state employees and retirees. The core health plan would be designed to offer fewer benefits with lower premium costs than existing health plan options. In order for the state to achieve any savings from such a plan in 2012-13, CalPERS, health plan providers, the Legislature, and employees would need to act very, very quickly. First, the CalPERS and health plan providers would need to establish a new health plan that offers fewer benefits with lower premiums before the 2013 open enrollment period (to occur in the autumn of 2012). Second, the Legislature would need to enact trailer bill legislation to specify that the determination of the four most enrolled health plans should be based on the current calendar year’s plan enrollment. Finally, enough employees would need to enroll in the new health plan to reduce the weighted average premium cost used to calculate the state’s contribution to employee health care.

2011-12 Budget Made Similar Assumption. The 2011-12 Budget Act assumed CalPERS would reduce state health care costs budgeted in Items 9800 and 9650 by $116 million ($80 million General Fund) by establishing a core health plan and/or through other cost-saving measures. No core health plan was added to the portfolio of health plans available to state employees. Through negotiations with health plan providers, CalPERS approved 2012 health rates that increased overall premiums by 4.1 percent—a rate increase that was somewhat lower than premium increases paid by other employers. (For comparison, the Kaiser Family Foundation reports that the average employer-sponsored family health coverage premium increased by 9 percent in 2011.) The CalPERS indicates it was able to negotiate a lower overall premium increase largely through the use of one-time solutions, such as the use of excess reserves in its health plan accounts. The DOF estimates that the state was able to reduce General Fund state health care costs, as budgeted in Items 9800 and 9650, by $47 million through CalPERS 2012 premium negotiations.

LAO Comments

Core Health Plan Would Not Likely Achieve Savings in 2012-13. It is virtually impossible that (1) CalPERS and its health plan partners could establish a core health plan before open enrollment and (2) enough employees would enroll in the plan to generate 2012-13 savings. Absent savings from a core health plan, the only practical way for CalPERS to achieve the budget savings would be to negotiate 2013 premium rate increases that are much lower than the 8.5 percent assumed in Items 9800 and 9650. The CalPERS should complete its 2013 negotiations by early June.

Other Options to Reduce State Health Care Costs. The goal of the proposed Control Section 4.21 is to reduce the amount of money the state spends on employee and retiree health care. The state may not be able to achieve the assumed savings through either the establishment of a core health plan or 2013 premium negotiations. If the Legislature wanted to reduce state health care costs, it could encourage the administration to (1) negotiate higher employee contributions through the collective bargaining process for rank-and-file employees and (2) adopt higher employee contributions for managers and supervisors.

Opportunities for Savings at the Bargaining Table in 2012-13. Before a memorandum of understanding (MOU) can be enacted, it must be ratified by the Legislature. Four bargaining units (Bargaining Units 12 [Craft and Maintenance], 16 [Physicians, Dentists, and Podiatrists], 18 [Psychiatric Technicians], and 19 [Health and Social Services—Professional]) will have expired MOUs in July 2012. The other 17 bargaining units’ MOUs expire in July 2013. The Legislature could, if it wishes to do so, reject any proposed MOU that would not reduce state employer contributions to employee health care. Any increase in employee health premium contributions, however, could result in the state agreeing to provide to employees some offsetting benefit (such as pay increases). As a result, when considering agreements for approval, the Legislature will want to weigh the value of any savings achieved with the cost of any concessions granted to achieve them.

LAO Recommendation

Hold Item Open. Any savings resulting from this control section likely would have to be achieved through CalPERS premium negotiations. In April, CalPERS will begin the formal negotiation process for calendar year 2013 premiums. The CalPERS board is expected to approve the premium rates in June 2012. We think it is premature to assume any savings resulting from the 2013 premiums. We recommend that the Legislature hold this item open until after the May Revision when the CalPERS 2013 health premium negotiations and collective bargaining for the four bargaining units described above may be closer to completion.