No bailout required; Great Western Financial is one savings and loan with its eye on the bottom line. Its health care cost increases have been nickels and dimes compared to the corporate average

Lynne Christensen

In January of this year, the Princeton, N.J.-based health care consulting firm A. Foster Higgins announced that corporate health care costs in the United States rose an average of 17.1 percent between 1989 and 1990 and were costing employers $3,217 per employee. In response to similar increases occurring over the last few years, creative, combative strategies to curtial out-of-control costs have been implemented and experimented with in just about every company that offers a health benefit plan. The question is: Has anyone out there had any success?

At least one company, Great Western Financial Corporation, can boast an annual increase in health care costs of only 5.5 percent for the past four years. How did this Southern California-based savings and loan institution manage to keep health care costs under control? There is no one easy answer, and the company’s experience doesn’t necessarily apply to every business. However, there are some key factors in Great Western’s strategy that may prove instructional.

Western style

Great Western made the decision to change its health benefit plan drastically five years ago when a number of strategic acquisitions caused the company to grow substantially. The corporation and its subsidiaries currently have 14,000 employees in 1,222 offices across the country, primarily in California and Florida.

Up until that expansionary onset, the company’s management maintained a “hands off” attitude toward health benefits, leaving all decisions to the California League of Savings and Loan Associations, an organization formed by a coalition of institutions to administer member health plans.

With its work force growing, however, Great Western wanted to offer a flexible benefits plan. Since CalLeague was unable to supply this option, Great Western struck out on its own. That was in 1987. Today, Great Western offers a comprehensive health benefits menu that includes three indemnity choices along with at least two HMO options (depending on the location of the work site). Employees can choose a plan with a $250, $400, or $1,000 deductible. In addition, employees are encouraged, via a higher corporate reimbursement rate, to utilize a PPO network.

Trish Benninger, vice president, human resource services, attributes the company’s success in running a cost effective health benefits program to five key factors: management involvement, plan design, pricing structure, a close alliance with consultants and third-party administrators, and tinkering. One additional element–and one which Benninger admits needs to be better promoted to employees–is the growing necessity to encourage beneficiaries to become more discriminating health care consumers.

Benninger stresses the importance of early and continuous involvement on the part of Great Western’s senior management in making decisions regarding the structure of the benefit plan, as well as the equally critical task of communicating with employees. Early in the plan adoption process, the 10 senior bank managers made a commitment to review the status of the benefit plan every month with regard to financial decisions and coverage changes that might affect employee relations.

Code of the Western

Great Western developed a philosophy for administering its self-funded plan based on a principle of balance. The officers determined that no single benefit option should bear the entire brunt of excessive cost increases. To maintain balance among the plans and keep annual cost increases to a minimum, management carefully reviews the cost increases imposed on all of the plans and distributes them in the most prudent fashion.

For example, when indemnity costs rose to a point where the benefit was in danger of being priced out of the reach of employees, management had to make a decision either to keep the pricing pure or redistribute costs among the various plans to keep them in balance. They decided that in order to offer employees a true choice it was best to allow the HMO plan to subsidize some of the cost of the indemnity plan in that particular year. In other years, when HMO increases outstrip indemnity increases, the reverse happens.

Benninger admits that the pricing structure is very complex. “We don’t just evenly split the costs between us and the employee,” she says. “We evaluate what a cost increase does to the employee. If it’s going to result in an employee picking up, for example, a 30 percent increase in his premium, we don’t let him bear the full brunt of it.” Every year management evaluates all of the cost increases and determines how much the employee can absorb and how much the company can afford. At that point the increases are apportioned between the company and the employee and distributed across all of the plans.

No claims jumping

Over the course of time this pricing strategy has tended to even out. The most important thing is that the cost to the employee stays relatively stable. This prevents beneficiaries from jumping around from plan to plan in response to widely varying prices.

Benninger also believes Great Western’s pricing structure will benefit the company even more over the next few years. As it experiences greater price increases from HMOs, the mechanism is in place for the indemnity plan to subsidize, in part, any excessive HMO costs.

The last two ingredients of Great Western’s health benefit strategy are a close relationship with consultants and its third-party administrator, and what Benninger refers to as tinkering. According to MaryAnn Kiely, a consultant with Hewitt Associates, “Great Western makes incremental changes to the plan design as needed.” In consultation with both its consultants and third-party administrator, Great Western is continually evaluating the plan design and making subtle changes. By making changes subtly and continually, the company avoids the potentially fractious situation of making major alterations all at once–a scenario almost guaranteed to produce employee disaffection.

For example, in one year the company changed its policy toward outpatient surgery. Like most companies in the 1980s, Great Western encouraged the use of outpatient surgery centers by offering 100 percent reimbursement rates. As outpatient surgery has become the status quo and no longer offers the cost savings it once did, Great Western noticed that a higher utilization of these centers was putting a financial burden on the plan, and it made the decision to introduce a local adjustment to the reimbursement policy. Thus, the current plan offers no additional financial incentive for having a procedure performed as an outpatient. In another year Great Western took a look at psychiatric costs and slightly reduced the level of benefits in that area.

In regular meetings with consultants, ideas are generated for new alterations to the plan design. Like many other self-funded companies, Great Western also employs utilization review, preadmission certification and case management to keep a further check on cost outlays.

The company has also had a PPO network in place in Southern California since 1988. According to Kiely, “If we define managed care as HMOs and PPOs, Great Western has 80 percent of total expenses incurred under some type of managed care.”

The company’s philosophy is to avoid being reactionary, but at the same time to steer clear of the cutting edge. Rather, it considers itself to be at the leading edge: up-to-date on the latest innovations in health benefit design, but also cautious enough to take a wait-and-see attitude. When point-of-service plans began to be implemented a few years ago, Great Western was very interested in their potential as a way to manage future health care costs. It spent time interviewing companies that had experience with this type of plan, and decided to wait one year before making a final decision. Ultimately, Great Western concluded that point-of-service networks weren’t developed enough yet to make sound fiscal sense.

Into the sunset

One area where the company has had to make some changes is retiree benefits. Like most businesses, Great Western must contend with providing health benefits to a growing retiree population. (The company currently provides health benefits to some 600 retirees.) In an effort to curtail some of these costs, the company is implementing a flexible benefits plan for its retirees beginning July 1, 1991. It has also changed its policy of trying retiree benefits to age and length of service. Benninger explains, “We’ve been giving it away. Now we’re going to recognize service as a critical factor in determining how much the company is going to subsidize retiree medical costs.”

Along with managed care and incremental plan adjustments, some intangible elements have also contributed to Great Western’s success. It can’t be overlooked that the company has been fortunate not to have been overwhelmed by catastrophic cases. It has had some high dollar claims, but nothing that has thrown the plan out of kilter. Management isn’t betting on continued good luck, however. Over the last five years it has accrued a reserve of about $10 million as protection against high-cost cases.

Can this success be duplicated in other companies? For that to happen, top management must play a major role. Benninger sums up Great Western’s experience: “We made the best judgment calls we could, and we got lucky.”

Lynne Christensen is a Brooklyn-based freelance writer specializing in health care issues.

COPYRIGHT 1991 A Thomson Healthcare Company

COPYRIGHT 2004 Gale Group

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