Rather than tinker with traditional remedies, such as increasing deductibles and shifting larger copayments to employees, the high-tech aerospace and automotive products company decided to write its own prescription for managing health care costs.
Today, after the conclusion of a three-year agreement with CIGNA Corp's Employee Benefits Co., Allied-Signal executives are calling its new nationwide managed health care plan a success. The savings, achieved from March 1988 to February 1991, included the following:
- Annual premium increases were held to less than 10%
- The average cost per employee was reduced from $3,200 under the old indemnity plan to $2,700 under the managed care plan, saving the company a total of $200 million in reduced premiums.
- In 1990, the total health care premium paid by the company and its employees was $360 million, up from $355 million in 1987.
It was in 1987 that a task force of human resources executives from the corporate office in Morristown, New Jersey, was given the challenge of developing a custom-designed program that would hold down rapidly escalating health care premium costs. Under the direction of Ron McGurn, vice president of group insurance and labor relations, it was decided that the new program would be built on the following foundation:
- The insurance carrier would be a partner in the program with a financial risk, not merely an administrator that paid the bills as they came in
- The carrier would use its buying power to establish a strong network of primary care physicians and specialists coinciding with the company's locations throughout the U.S. and guarantee a high level of quality care
- Unlike what is found in true health maintenance organizations (HMOs), the employees would be able to switch from managed care to an indemnity plan at will, but would pay extra for exercising that option.
"We sought to change the way health care was delivered to our employees," says Al Gesler, corporate director of human resources for Allied-Signal. "The net result was a hybrid program, taking into account the best features of HMOs and indemnity plans and combining that with a partnership arrangement between the insurance carrier, Allied-Signal and its employees."
Once designed, the task force contacted several insurance carriers and asked for bids on the new program. While many declined the opportunity to bid, saying the new program was too much of a gamble, four companies submitted presentations. The company that came closest to Allied-Signal's requirements for service and quality health care and also had the best price was CIGNA.
"CIGNA had a health care network in place across the U.S., almost in a pattern that paralleled our major locations, so it was easier for them to adapt to our needs," says Gesler.
In March 1988, Allied-Signal signed a three-year agreement with CIGNA for a managed care program called the Health Care Connection. The plan covered medical, dental, vision and hearing care and prescription drugs. It also included well-care programs, such as prenatal care and annual physical exams.
A major feature under the managed care portion of that agreement was that CIGNA guaranteed annual premium increases would be held to less than 10% during the next three years. For the traditional indemnity side, the guarantee was set at 15%. The actual figure for the managed care side would depend on how many employees would stay in the network.
"We wanted a very strong gatekeeper system," says McGurn. "For our employees to take advantage of the extremely comprehensive benefits found on the in-network side of the Health Care Connection program, as well as the modest $10 copay-only feature, they had to agree to choose a primary care physician from within the closed panel and visit specialists and hospitals, or receive ancillary services only when referred by their primary care physician. That was the trade-off."
The managed care portion operates much like an HMO, where employees first visit their primary care physicians and then are referred to specialists. The cost to employees, above their monthly premium, is only $10 per office visit and $5 per prescription. As a self-funded program, single employees pick up 10% of the annual premium costs, while employees with dependents pay 15%.
Unlike an HMO, however, employees retain the option to switch to the traditional indemnity side of the plan at any time, for any particular illness or injury. Those who choose their own physician instead of managed care pay an annual deductible equal to 1% of their salaries and then are subject to an 80/20 copayment split.
The basic concept behind managed care is just that, managing it," says McGurn. "We were willing to pay 100% of the freight, but employees had to follow the rules of the program. For example, in the network, for a quadruple bypass, it may cost the employee $30, depending on the number of office visits. Out of the network, they have to come up with the 1% deductible and the 20% copayment, up to 4% of base pay, before 100% of the remaining cost would be covered. By staying in the network, everyone saves money. We felt this was a major effort aimed at limiting unnecessary care." For its part, CIGNA is responsible for guaranteeing the quality of the managed care side of the network. That means it is responsible for using its buying power to ensure that the hospitals in the plan attract an adequate supply of high-quality physicians and specialists. It also means continued monitoring of employee usage through utilization studies.
The new plan was communicated to employees in January 1988. First, a series fo regional meetings was held between sector benefits personnel, the task force and CIGNA representatives. A turnkey communication package consisting of data, videos, scripts, slides and overhead materials was then presented to employees at individual locations.
During the next three years, the actual implementation of the managed care plan was accomplished through phases according to employee location. Phase one, which began in March 1988, focused primarily on the West Coast, where CIGNA had a large number of existing networks that closely matched Allied-Signal locations.
Phase two, which was completed in January 1990, focused on cities in the East and Midwest, such as Providence, Rhode Island, Detroit, Columbia, South Carolina, and Richmond, Virginia, where networks needed to be developed.
In cities where CIGNA didn't want to build a full network, the insurance carrier subcontracted with established HMOs that agreed to administer the basic plan design to Allied-Signal's standards. More remote areas required intensive scouting efforts to locate significant numbers of quality physicians and specialists willing to participate in the program.
Phase three is an ongoing effort, representing the greatest challenge to both CIGNA and Allied-Signal. It encompasses all remaining employees not covered by a managed care network, whether they are located in smaller cities such as Metropolis, Illinois and Moncure, North Carolina, or part of an Allied-Signal bargaining unit that recently voted to accept the new plan.
"Phase three is a kind of misnomer in the sense that it is a long-term process that won't ever be finished," says McGurn. "Many employees are in fairly remote places that have no managed care. So, it is a long, cumbersome process of going into every single location around the country to see what we can do to reduce premiums. It may mean going to locations with single hospitals and negotiating for discount rates."
Today, out of Allied-Signal's 70,000 U.S. employees, approximately 50,000 are located in cities where networks have been established and are eligible to join the new program. Of those, about 44,000 employees and 66,000 dependents are enrolled in the CIGNA program. According to utilization studies conducted during the first three years of the program, more than 75% of all eligible employees stayed in the managed care network between 95% to 100% of the time.
In March 1991, Allied-Signal signed its fourth one-year agreement with CIGNA, which provides a premium increase guarantee for the managed care side of the program. McGurn declines to say that the guarantee is, only that it "will be considerably less than the 13% to 15% increases you see in HMOs today."
On the indemnity side, however, McGurn says there will be no increase guarantee. Instead, each network unit will be rated on its own merits. Again, McGurn thinks those increases will be no more than the 18% to 20% average increase predicted this year for indemnity plans across the country.
"We have a hybrid of these networks in place now," cautions McGurn. "The subcontracted, second-wave HMOs or preferred provider agreements (PPOs) are not as effective as the CIGNA health plan. They are not as tightly controlled, so there are different numbers involved. But we think those numbers will be well below the national average."
Other elements of the new agreement include CIGNA's implementation of a nationwide health care accreditation process. While details for this are still being worked out, the plan is for an impartial national agency, such as the National Council on Quality Assurance, to reaccredit each health care network on an annual basis.
"This says to our employees that somebody cares each year about whether or not these health plans are still subscribing to the highest quality standard of health care," says McGurn. "We also plan to survey our own people in 1991 about their attitudes on how the different plans are doing."
While Allied-Signal is still believed to be one of few companies with a national managed care network in place, many others across the country are trying to get involved through regional programs. Today, membership in the Managed Health Care Association includes 150 of the Fortune 500 companies.
"Major corporations, such as IBM, AT&T, General Motors and Sears are moving rapidly away from traditional fee for service plans into managed care settings, both unilaterally and through the collective bargaining process," says McGurn. "Unions are very interested in helping management find alternative high quality medical delivery systems that will have the effect of holding back their members' increasing annual contributions to the skyrocketing premiums of traditional fee for service plans."
Personnel Journal, May 1991, Vol. 70, No. 5, pp. 41 - 45.