The news has been full of stories in recent weeks of how Anthem Blue Cross has been trying to increase health insurance premiums by as much as 39 percent for some people who buy insurance on their own, outside of the kind of group coverage a person gets from an employer. Almost entirely unnoticed, meanwhile, has been a more newsworthy development: in a time when medical costs have been rising rapidly, premiums for many public sector workers enrolled in a Blue Shield of California HMO have actually gone down.

How is this possible?

The explanation lies in the fact that large groups have dramatically more market power than individuals. CalPERS, which buys health insurance on behalf of its 1.3 million members, is the largest purchaser in California and the second largest in the nation after the federal government.

More important than mere scale, though, is how CalPERS uses its market power to drive down costs and improve quality. For years, both on its own and in concert with the other members of the Pacific Business Group on Health, a coalition of large purchasers, it has worked with insurers and providers to pioneer innovations in value-based benefit design, quality ratings for doctors and hospitals, and delivery system reforms such as the establishment of medical homes.

Over the course of the past year, CalPERS has partnered with Blue Shield of California, Catholic Healthcare West and Hill Physicians Medical Group to pilot a new “virtual integrated delivery system.” CalPERS members who are covered through the Blue Shield of California HMO and who already had a doctor in the Hill Physicians Medical Group as their primary care physician were automatically enrolled in the program.

What are the terms of the deal? The insurer, hospital system and physicians association are given mostly free rein to redesign their care delivery systems to promote better coordination and improve efficiency. For example, these partners are eliminating redundancies such as having the same patient participate in multiple chronic disease management programs. In return for this autonomy, Blue Shield will not be raising premiums this year for over 40,000 CalPERS members who are participating in the pilot. What this means is that the insurer and providers have a strong financial motivation to produce the efficiencies they seek as they are on the hook to pay for any increase in costs.

Ellen Badley, the interim Assistant Executive Officer for Health Benefits at CalPERS, points out that her organization has been an active partner rather than merely a passive purchaser. The relatively small scale of the project meant that CalPERS had to create a new rating region for the pilot that includes just three counties: Sacramento, El Dorado, and Placer.

The agency uses different regions to determine premiums because medical costs vary substantially among the different areas of California. In general, medical costs for CalPERS are somewhat lower in southern California where there is more competition among providers. Regional variations in cost and quality were brought to the attention of a larger audience by Dr. Atul Gawande in his New Yorker article, “The Cost Conundrum.” Understanding the drivers of these variations, and how to make higher-cost areas such as parts of northern California more efficient, is a major priority for CalPERS, according to Badley.

What does “efficiency” look like from the standpoint of the patient? Dr. Alvin Sockolov, a family physician who works in a small group practice in Sacramento says that we’ve only seen “the tip of the iceberg,” of the potential for the collaboration. However, he is already getting better information on discharges from Mercy General, a local Catholic Healthcare West hospital. This lets him know which of his patients he needs to follow up with to smooth their transition home and to avoid demoralizing – and costly – re-admissions.

According to Michael O’Neil of Blue Shield of California, the partners “are hopeful that we will be able to see more benefits over time and be able to replicate the pilot in other markets.” What these remarks emphasize, though, is that this project is still more promising than proven. In the estimation of Ellen Badley, “the jury is still out.” She is looking forward to meeting with the leadership of the groups that are running the pilot to learn more about the practical details of what they have been able to achieve.

In theory, the coordination that occurs through integrated delivery systems should allow them to be dramatically more cost-effective than those that operate under the fee-for-service model in which providers have an incentive to focus on the volume rather than the value of the care they deliver. This is the concept behind the Accountable Care Organizations envisioned in federal reform, which builds on California’s experiences both with fully integrated delivery systems such as Kaiser Permanente and the delegation of responsibility for patient care from plans to physician groups.

There is support for the idea that method of payment does affect delivery of care. The research of Dr. Laurence Baker of Stanford has shown that Medicare HMO patients in California spent fewer days in the hospital during the last two years of their life. However, there is a great deal of evidence, including in the Baker study, to suggest that variation in cost and quality is driven more by differences among doctors and hospitals than by who is paying for the care. These variations in physician culture and patterns of practice have also been brought to light by Dr. Gawande and by Dr. John Wennberg in the work that he has done with his colleagues at Dartmouth University.

It’s surprisingly difficult, though, to get a handle on which healthcare markets are the most efficient. Dr. Wennberg’s conclusions are drawn from examining Medicare reimbursements. According to these data, Sacramento is a very efficient, low-cost community and was celebrated for this in several conferences held last year that focused on variation. However, it is less clear that Sacramento is a low-cost community when examined through the lens of private reimbursement. A report funded several years ago by CalPERS and the Pacific Business Group on health called out Sacramento as one of the highest-cost markets in the state.

If the pilot fails, the partnership is on the hook for the increased costs this year and premiums for CalPERS are likely to return to a more standard rate of growth for this market in coming years. If the pilot succeeds, though, it could help push the whole region, and eventually the entire state, toward better value.

Micah Weinberg is a Senior Research Fellow in the California Program of the New America Foundation. This year he ran the California Task Force on Affordable Care, a group of stakeholders that developed a strategy to move the state toward better value for its medical spending. Blue Shield of California, Catholic Healthcare West, and the Hill Physicians Medical Group all participated in this effort.