From the trenches: strategies that work; Southwestern Bell, Chevron, Detroit Edison, and six other companies disclose why their cost containment programs are successful – includes related information on health care coalitions
Nancy N. Bell
American companies have had it with the high cost of insuring the health of their workers. Steadily increasing costs over the last decade have given way in the last few years to dramatic yearly price leaps that take an ever bigger bite out of corporate profits. In fact, according to a national survey of nearly 2,000 employers released earlier this year by A. Foster Higgins & Co., a consultancy headquartered in New York City, health benefits now consume more than one out of every four dollars (26 percent) of the average employer’s net earnings.
“Controlling medical expenses through traditional health plans has become a losing proposition,” says John Erb, a Foster Higgins managing consultant and the study’s author. “In fact, if costs continue to increase at the current rate, the annual cost of providing medical benefits will exceed $22,000 per employee by the year 2000. Employers who have put off addressing the health care crisis are now being forced to consider a managed care approach.”
But what kind of managed care approach works? The term is an umbrella for a variety of cost containment strategies. Some of the most common include scrapping traditional fee-for-service indemnity policies and negotiating services directly with hospitals and doctors; exchanging large patient pools for price breaks; case management and utilization review to monitor service delivery and cost effectiveness; restricted coverage; wellness programs; shifting a portion of health insurance expense to employees in the form of higher deductibles, copayments, and premiums; and penalties for unhealthy lifestyles.
All the above are good ideas. But what specific cost containment plans are actually working for individual companies and realizing documented, hard dollar savings? What follows is a sampling of strategies from nine companies across the country: what they’re doing to hold down the rate of increase, if not actually reverse the flow.
Southwestern Bell Corporation (SBC), based in St. Louis, is an international communications corporation with 66,000 employees and 26,000 retirees. The company was one of the first nationally to develop a managed care plan following analysis showing that health benefits spending had jumped 217 percent between 1979 and 1985.
According to Southwestern Bell, its CustomCare plan, introduced in April 1987, has become a model for corporate health insurance plans nationwide because it blends the best features of health maintenance organizations, preferred provider organizations, and indemnity plans. From HMOs come CustomCare’s pre-certification, utilization review, and a wellness focus; from PPOs, negotiated provider discounts; and from traditional indemnity plans, flexibility and freedom of choice.
The Prudential Insurance Company, which administers the plan, created local networks of doctors, hospitals, and other providers in the 13 major metropolitan areas where 65 percent of SBC’s employees and retirees live. A primary care physican acts as gatekeeper, and office visits are covered at 100 percent after a $10 copayment is met by the patient.
Claims, pre-certification, second surgical opinions, and utilization review are all handled by the primary care doctor. Employees may use non-network providers if they pay a fron-end deductible and a 20 percent copayment. Employees and retirees who live outside the 13 CustomCare network areas are covered under a first-dollar indemnity plan with an overlay of cost containment features.
SBC’s integrated managed care approach is working. The company reports that from 1987 to 1988, the per person claim cost increase was 12 percent, compared with the national average of 18 to 20 percent, and the increase from 1988 to 1989 was less than 10 percent, whereas the national average that year was between 20 and 24 percent. Employee response has been favorable, with 82 percent “thinking highly” of the care received.
In the first 2 1/2 years of the plan, per employee costs were 13 percent lower than would have been expected under the old fee-for-service arrangement. In the network cities, costs for employees staying within the network rose 6 percent in 1989, compared with 16 percent for employees who chose outside doctors.
Baker Hughes is a Houston-based company that manufactures oil processing equipment and provides oil field services. The company has 23,000 employees worldwide, with 12,500 in the United States.
“In 1989 we put together a task force to analyze our rising health care costs and redesign our benefit program,” says Joe Vinson, director of compensation and benefits. “We were doubling our costs every three years and expected to hit $100 million by 1993. To see exactly who was spending money on what, we actually broke down our $50 million in total costs by diagnostic category. We found we were spending half our money in just four of 16 categories: respiratory, digestive, circulatory, and musculoskeletal. The key is that these were all lifestyle-based health problems, or ‘ailments of choice’.”
The result of Baker Hughes’s research was the January, 1990, implementation of a wellness-driven flex plan that rewards healthy workers and penalizes tobacco users. The company instituted a surcharge for tobacco use, reported on the honor system. Employees who admit to tobacco use pay an extra $10 per month for health care coverage. “Our consultants said this wouldn’t work,” notes Vinson, “but it has. In 1990 we generated $418,000 from tobacco users, and since we spent only $220,000, we made money. The idea is simple: the people who cost us the most money now have to pay more for their health coverage. In 1991, by the way, our smoking rate fell from 34.7 percent to 29.1 percent.”
Baker Hughes also put in a voluntary wellness check-up. If an employee doesn’t smoke and falls into national norm ranges in certain categories, the company puts $100 into an individual spending account. The money can be used to offset the cost of any health expense. “We expect within the next three to five years to save between $2 million and $4 million,” Vinson says, “but we see our real savings as soft dollars in healthier lifestyles and an overall healthier workforce.”
Signet Bank, based in Richmond, Va., with branches in Washington, D.C., Virginia, and Maryland, reports that two cost containment strategies are working well for its 4,500 covered employees. “We have self-insured contracts with HMOs,” says Richard Browne, assistant vice president and benefits manager. “Each year, when we negotiate prices, we strip out hospitalization. In other words, we don’t pay for that in advance. Instead, when the hospital bills come in, we run them through the network and pay them. With a negotiated aggregate limit, at the end of the year, we see how our hospitalization costs compared to our projections, and we share, 50/50, both cost savings and expenses with the HMO.”
With 14 HMO plans, the bank has a 55 percent HMO penetration rate. “We encourage folks to go into one of our HMOs, and it’s working well for us,” says Browne. “So far, we’ve had no cost increase over 1990.”
Signet Bank’s other winning cost containment strategy is a prenatal care program to hold down the often astronomical costs of premature births. “Like most banks, 75 percent of our employees are female, and 35 percent of our health care costs were going to maternity,” notes Browne. Through Blue Cross’s Baby Benefits Program, pregnant employees or dependents are assessed by an expert to identify high risk situations; then steps are taken to ameliorate conditions that might contribute to a premature birth. A dependent might be treated for high blood pressure, for example, or a teller with varicose veins switched to a sit-down job for half the day.
Browne notes that the cost of a premature birth can range from $125,000 to $250,000 so preventing one such incident represents significant savings. “This is a hard area to measure because if your’re successful, costs never occur,” he concedes. “But before we put in this program, we had six claims over $100,000, and four of them were for premature babies.”
The Moore Company:
The Moore Company in Portland, Ore., is a wholesaler of consumer electronic equipment and computer and office supplies. With just 50 employees, the company has taken a wellness incentive approach to holding the line on costs. Moore pays a basic 50 percent of employees’ health insurance premium costs, and then pays an additional 25 percent for employees who maintain an acceptable body weight as determined by the American Health Association, another 25 percent for those who exercise aerobically for 30 minutes at least two days a week, and an additional 25 percent for employees who don’t smoke or use drugs. Those who meet all three criteria may take the overrun 25 percent either as a credit toward dependent insurance (an employee responsibility) or as additional salary.
Employees complete a monthly form reporting compliance with the above criteria on the honor system. According to Moore controller Susan McFarlan, from 35 to 40 of their 50 employees participate. “Unfortunately, those who are most likely to get sick or aren’t interested in meeting the qualifications are the ones who don’t participate,” she adds. Nevertheless, the wellness plan seems to be working. There have been no big health care claims from those employees who don’t participate, while those who do, are undoubtedly fitter.
The Dade County School System:
Central to the Dade County, Fla., School System’s cost containment success is an unusual level of union involvement at the benefits decision-making table, says Susan Weiner, assistant superintendent in the office of risk and benefits management. “We don’t have an adversarial relationship at all with our unions,” she says. Dade County Schools, based in Miami, has 30,000 covered lives under its health plans. The county formed a Fringe Benefits Council made up of one representative from each of five unions, plus retirees and administrators. “In our meetings with them,” says Weiner, “the unions realized that benefits are part of the whole compensation package.”
“One change we made that’s helped contain costs is that, starting two years ago, all new employees must be enrolled in an HMO,” she says. “With 79 percent of school board employees in HMOs, we haven’t offered an indemnity plan for years.” In addition to the HMO option, Dade County also offers two PPOs and an HMO with an opt-out feature–which means that enrollees can go out of network and still be reimbursed for 50 percent of their health care costs.
The county encourages HMO enrollment by awarding flex credits that can be used to pay for dependent coverage. “That’s been a big motivator in moving people into the lower cost plans,” Weiner adds.
Other cost containment strategies include strict utilization review on mental health and substance abuse benefits, and case management and utilization review to monitor service delivery and costs at every step.
Chevron, based in San Francisco, is the third largest oil company in the world, with 55,000 employees and 45,000 retirees with benefits. According to Alex Ross, manager of corporate benefits, it has recently taken two steps that have helped contain costs for its 55 HMO and indemnity plans. “In early 1989,” he says, “we pulled mental health and substance abuse benefits out of our plan and created a managed care network with an internal employee assistance program (EAP) and an outside administrator. We did this because we found that our people in HMOs weren’t getting adequate substance abuse care or access to benefits. When they needed substance abuse treatment they’d leave the HMO and go back to indemnity. Then, after treatment, they’d jump back to an HMO. That was very expensive for us.”
Under the carve out mental health/substance abuse plan, the EAP counselor acts as gatekeeper for employees with substance abuse problems, and the outside administrator plays the same role for dependents with substance abuse treatment needs and for those in need of mental health services. The plan has worked.
Thanks to discount arrangements, says Ross, “in 1989 we provided mental health and substance abuse services for double the population at the same cost as in 1988. The 1990 figures look as good.”
Seessel’s is a seven-store grocery chain in the Memphis area with 425 employees. Effective case management, according to vice president of finance Fred Bowman, has been the key to containing Seessel’s health care costs. The company’s contracts with the local health care coalition, the Memphis Business Group on Health, to provide case management services (see box). “The gatekeeping aspect of case management is what has made this successful for us,” Bowman says. “Having someone handling pre-certification prevents claims for disallowed procedures, like cosmetic surgery and other procedures, from slipping through. We also have a preferred provider organization with discounted services, and 81 percent of our employees participated last year, up from 60 percent.” To make the PPO option more attractive, Seessel’s has increased items covered, and reduced employee copays and deductibles.
Bowman estimates that Seessel’s is spending 15 to 18 percent less than it was previously, thanks to case management and the PPO. “I’m very satisfied that we’re saving a lot of money–between $300,000 and $350,000 a year on our group plan,” he says.
No more instant coverage
Burdine’s, Maas Brothers/Jordan Marsh, a division of Federated Stores, Inc., is based in Miami and employs 20,000 people. Besides moving 85 percent of its employees into fully insured HMOs, Burdines, has taken several other steps to hold down health care costs. “It used to be that executives were eligible immediately for health benefits when they were hired, and non-executives in 90 days,” says Kathleen McManus, vice president of human resources. “We’ve changed that so that no one is eligible until having been employed six months.”
She notes that under COBRA law, many incoming employees are covered under their old plans, plus the company has found insurance brokers willing to write bridge plans until coverage officially kicks in. New employees pay for the bridge plans without Burdine assistance. “This has saved us money because fewer people are covered under our plan as quickly,” says McManus. “A number of our retail competitors are also starting to delay eligibility to cut costs.”
Careful case management also represents another savings avenue for Burdine’s. “We look at all the alternatives to find less costly care,” says McManus. “For instance, home health care for a new mother who has had a cesarean saves money over hospitalization without sacrificing the quality of care.”
Burdine’s also restricts yearly dental coverage. “We changed from no limit to $1,000 a year per insured,” says McManus. “We also switched to a scheduled dental plan, where we pay a certain amount per procedure instead of the old ‘percentage of reasonable and customary cost’ arrangement. This lets our employees know exactly what’s covered before they schedule a dental procedure; they are more informed consumers, and we can estimate and control costs better.”
Detroit Edison, with 9,600 employees and 6,000 retirees, provides electric utility services to southeastern Michigan. In 1989, it switched from its traditional health coverage to a comprehensive major medical plan with a PPO option, managed care components, and localized features to target local problems.
“What’s worked best to hold down costs,” says Dennis McCafferty, director of group insurance plans, “are the pre-certification and concurrent review features, which approve hospitalization before admission, then follow each case to make sure the patient still needs to be hospitalized and is getting the most appropriate, cost effective level of care. The other things that have saved us money are the PPO and hospital discounts.”
By 1990, McCafferty reports that Detroit Edison had a cost increase of just 1.7 percent, well below both the national average and the expected 15 percent increase if it had stayed with its old benefits plan. Between 1989 and 1993, the company expects a net reduction of $90 million in health care costs. “I’d like to see the managed care emphasis shift from discounts to quality,” McCafferty adds. “The word ‘preferred’ should connote quality, because quality does reduce costs in the end.”
Nancy N. Bell is a Tampa, Fla.-based freelance writer specializing in health care and mental health.
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