Allied-Signal’s bold move: is it working? – health benefits plan
Maria R. Traska
Allied-Signal’s bold move: Is it working?
Are employees accepting the plan? Is the employer saving money? Here’s what the people behind the program have to say.
The health benefits plan implemented two years ago by Allied-Signal Inc., was new and radically different from almost everything else on the market at the time. It’s probably gotten more media attention than any health benefits plan in history.
Allied-Signal, a Morristown, N.J.- based technology firm with some 200 locations around the country, dropped all of its health care options. Included were a variety of indemnity plans and HMOs. The firm signed on with CIGNA Corp. to develop a national HMO network that would allow members to opt out and go elsewhere for medical care at any time, though at a hefty price. CIGNA agreed to hold down rate increases to a certain percentage over the three years of the contract.
Despite rumors to the contrary, Allied-Signal’s main program–known as the Health Care Connection–seems to be doing well both financially and in delivering care.
HCC started providing care March 1, 1988, the start of Allied’s fiscal year. Actual figures for the year ended Feb. 28, 1990 weren’t available at press time, but numbers for the first 18 months of the program were provided by Allied-Signal.
Some 44,000 workers are currently enrolled in the program. Including dependents, some 113,500 people are covered by HCC.
For the first 18 months, the company says it saved more than $33 million over what it would have spent had employees remained under the former benefits system. Per person cost for HCC members was $2,542 a year compared to $3,293 a year if they’d been covered under the old system. That translates to a $751 savings per HCC member.
Employers that hope to duplicate what CIGNA created for Allied-Signal should bear in mind some caveats, however: The Allied-Signal model is significantly different from other point-of-purchase plans currently on the market and some experts predict it will remain one-of-a-kind.
HCC is not, as many observers first thought, strictly an open-ended HMO product. Nor is it strictly a point-of-service plan. CIGNA’s Senior Vice President Chip Sharkey describes HCC as an experience-rated, non-federally qualified, open-ended HMO offered on an administrative services only (ASO) basis to a self-insured employer.
CIGNA uses established, licensed HMOs almost exclusively as the basis of its network, both for HCC and for other clients. It formed IPA-model HMOs from scratch where it didn’t already have a plan, and these HMOs are available to all CIGNA clients, not just to the HCC program, Sharkey says.
Joe Duva, Allied-Signal’s director of employee benefits, concedes that forming the network has been a problem for CIGNA, which, he adds, didn’t have a true centralized national accounts program or national network in place when it bid on and won the Allied-Signal contract. CIGNA had to form the network as it went along, having already agreed to a three-year contract with Allied-Signal and to limited price increases. The task was easier in areas where CIGNA already had established HMOs.
In-network utilization is clearly higher in areas where CIGNA already had well-established HMOs –mostly in Arizona and Southern California plus Kansas City. The Western concentration works out well for Allied-Signal, because the bulk of its employees are located there, according to Duva.
For example, the opt-out rate is a mere 6.5 percent of HCC members in Kansas City, 11 percent in the Phoenix/Tucson area, 14.6 percent in San Diego, and 21 percent in Los Angeles, but 32.5 percent in northern New Jersey and 32.6 percent in Houston. The program’s overall opt-out rate is an acceptable 16.8 percent.
The plan has built in incentives for people to stay in the network. If an employee goes outside, there are deductibles and copayments. The deductible for the worker is 1 percent of annual salary. The deductible for family members is 3 percent of the employee’s annual salary. Thus, if a worker earns $30,000 a year, his annual deductible is $300; the deductible for the family is $900.
On top of that, if an employee goes outside the plan, there’s a co-payment of 20 percent.
But for people who stay in the network, there’s only a $10 copayment for each office visit, and a $5 copay on prescription drugs. Everything else is covered.
Hospitalization rates looked good for the program’s first year. HCC had 271 inpatient days per 1,000 members for acute medical care, compared to 562 days per 1,000 for Allied-Signal workers and dependents still covered by the old indemnity plan and to an average 315 days for HMOs nationally, as surveyed by InterStudy. HCC members had fewer admissions per 1,000 (57) than did HMOs in general (74), but HCC members had a longer average length of stay (4.8 days compared to 3.8 days for HMOs in general).
Not surprinsingly for a managed care plan, the trade-off for fewer hospitalizations is a greater number of physician visits annually. HCC members had 4.4 physician visits per member per year compared to an average 3.8 visits for InterStudy-surveyed HMOs and to 2 visits for Allied-Signal’s indemnity plan members.
Getting the program running
At first, some of the company’s local managers weren’t supporting the new program; that had to be remedied. Employees had to be educated about how the HMO and the opt-out system work. All the necessary accommodations took time, Duva says.
Further, because the point-of-service concept was new for CIGNA, the program had to undergo some debugging, Duva says. “An opt-out program is difficult from an administrative viewpoint,” he notes. “We had more administrative difficulties than we had health cost problems.” Most of the start-up glitches, however, were ironed out within the first six months, he says.
HCC capitates providers (pays a fixed fee per month for each person who selects them). The plan itself is capitated in that CIGNA keeps all the profit if the cost of the entire program falls below cost guarantees; CIGNA eats all the losses if costs exceed guarantees.
Not all point-of-service plans use capitation and few use such a risk-sharing agreement. More common is an arrangement in which the employer and insurer split the profits or losses above or below a target cost range. This latter system is often used between indemnity carriers and large or self-funded employers.
Win or lose?
“The conventional wisdom was, for the first year to 18 months, that CIGNA had made a bad decision and was going to lose its shirt,” says Joseph Martingale, the consultant in charge of the program for TPF&C, New York. “I think the conventional wisdom was wrong.”
He is quick to admit, however, that he doesn’t actually know how much money, if any, the insurer is making on the deal. And CIGNA isn’t talking.
Allied-Signal’s Duva maintains that CIGNA made money on the first year and probably made money on the first 18 months of the program, but he declines to give figures. He does say that the program’s 1988-89 benefits year costs rose only about 4 percent over the previous one, compared to a 1989 medical CPI rate of 6.5 percent.
Without revealing figures, CIGNA’s Sharkey says that savings on workers and dependents who do use the network are “more than enough to cover the higher costs” of those who don’t.
He hastens to explain, however, that those who don’t use the networks fall into two separate groups: those eligible to be in the HCC program who choose to opt out of the network (considered out-of-network care) and those who aren’t yet eligible to join the HCC program and must be covered under separate indemnity coverage.
Whereas CIGNA is making money on HCC, even with patients who opt out, it is losing money on the indemnity portion, which is unmanaged care.
The indemnity portion of the total package was necessary for two reasons, Sharkey explains. The first, as noted above, is that CIGNA didn’t have plans in all of Allied-Signal’s plant locations and had to build them from scratch. That took time. Second, there are several unionized worker groups whose benefits are subject to collective bargaining and whose contracts (many of them multiyear agreements) were still in place when HCC went on line. That meant they couldn’t vote on whether to join HCC until their contracts expired and had to be covered under an indemnity option until then.
The contracts don’t all expire at the same time, either. These union groups–if they elect to join HCC–will have to be phased in. Worker groups that vote against joining HCC will continue to be covered by the indemnity plan for the balance of CIGNA’s three-year contract. Some 15,000 employees are in unionized groups.
Unfortunately for CIGNA, it was forced to bid on–and provide cost increase or `performance’ guarantees on–the entire package, as were other insurers. Allied-Signal wouldn’t allow companies to bid on the managed care portion alone. “In retrospect,” Sharkey says, “a performance guarantee on an unmanaged system doesn’t make a lot of sense.”
“Point-of-service plans–make no mistake about it–are priced more like indemnity plans and are usually provided to self-insured employers,” says Howard Veit, a consultant with Tillinghast, a Towers Perrin company, New York. He predicts that point-of-service plans will remain an insurance company product for those reasons, rather than being offered by pure HMOs such as Kaiser, and will be offered mostly–if not exclusively–to large employers.
“Allied-Signal was a one-shot deal,” Veit concludes. “I don’t think any other insurance carrier in the future will take on a risk-sharing arrangement that is either a)winner take all, or b) winner take all plus the risk for non-network [unmanaged indemnity] care.” That, he adds, won’t necessarily dampen employers’ enthusiasm for point-of-service plans–they’ll merely pay for them differently than Allied-Signal does.”
COPYRIGHT 1990 A Thomson Healthcare Company
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