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1992 Financial Impact Optimas Award Profile Deere & Co.

October 1, 1992
Related Topics: Financial Impact, The HR Profession, Health and Wellness, Featured Article
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If you want a job done right, you often have to do it yourself. Although this isn't the golden rule of business management, when managing rising health care costs, it has proven to be a successful strategy for at least one company—Moline, Illinois-based Deere & Co.

The organization, which was founded in 1837, grew from a one-man blacksmith shop into a worldwide corporation that today does business in more than 100 countries and employs more than 37,000 people. Realizing more than 20 years ago that its own health care costs were growing increasingly higher, with virtually no end in sight, Deere took charge of the situation by creating its own health care business unit. For the past 12 years, Deere & Co. has managed its health care costs through an HMO program it established on its own.

This accomplishment in itself would have been enough to make the effort admirable—especially for an organization whose main business is manufacturing agricultural equipment. But the company has taken the action a step further.

Seeing other employers struggling with the same problems involved in providing quality care at a reasonable price, Deere realized that, if this service was valuable to its own parent company, it would be valuable to other organizations, as well. So it opened the service up to other self-insured and non-self-insured firms.

Now, through John Deere Health Care Inc. and its HMO operating company, Heritage National Healthplan Inc., Deere also provides managed care to more than 300 other clients, including Eastman Kodak Co., Monsanto Chemical Co., Sundstrand Corp. and Chrysler Corp. Because of the creative way in which Deere & Co. has overcome the financial challenge of rising health care costs for itself and others, Deere has been recognized by Personnel Journal with its 1992 Optimas Award in the Financial Impact category.

How it all started.
At Deere, health care costs had reached the $20 million mark by 1971, an amount that warranted the serious attention of the company's human resources department and senior management. While evaluating its contract with a third-party insurance carrier, Deere realized that something was wrong.

Typical of insurance carriers at the time, Deere's carrier was doing little to manage Deere's rising health care costs. Instead, the insurance carrier's biggest incentive was to pay more claims and, in so doing, collect more premium dollars. Therefore, the insurance company had gained from the reserves being held on Deere's behalf. Furthermore, the carrier also provided little data that could be used as a tool to manage Deere's overall health care costs. Deere terminated the contract in 1971.

After taking health claims processing out of the hands of the third-party administrator, Deere's HR department brought health care claims processing in-house. It was a good first step, but it wasn't nearly enough to stem the tidal wave of growing health care costs. Deere began to take the beginning steps to look at changes in methods of providing alternative health care delivery systems and to understand how health care delivery systems really work. It also entered into contractual agreements with outside HMOs in its sales branch locations.

In 1978, the human resources department formed a separate health care department within Deere, to focus attention specifically on managing Deere's health care costs. That department was headed up by Michael S. Plunkett, who's now Deere's vice president of engineering, technology and HR.

But the health care cost picture continued to look bleak. In the late '70s, a study projected that Deere's accumulated health costs would exceed the $2 billion mark over the next 10 years if the company didn't take more drastic action. So it did.

First, Deere self-insured the company's benefits. "But we felt we also needed to look at managed care, which was in its infancy at the time," says Richard Van Bell, president of John Deere Health Care Inc. So Deere began looking at the possibility of putting together its own HMO in conjunction with other area employers. Deere management called together four other large self-insured employers—Caterpillar Inc., International Harvester (now Navistar International Corp.), Alcoa and J.I. Case Co.—each having operations in the Quad Cities area of Illinois.

The employer group discussed the need for a change in health care delivery and their interest in taking an active step to change things. They were interested, but they decided to let Deere lead the way. Although each of them had operations in the area, it was Deere's headquarters location.

"The other employers indicated that, because this was our corporate home, they felt very comfortable with our taking the lead role, and their role should be supportive," says Van Bell, "and that's exactly what we did."

In 1980 and 1982, Deere established and fully funded two HMOs—the Quad City Health Plan and the Cedar Valley Health Plan. The Quad City Health Plan was a community-based, not-for-profit HMO that Deere initiated with start-up funding and staffing, but was a joint entity run by the five organizations.

The Cedar Valley Plan, located in Iowa, was Deere-sponsored only. The goal of both HMOs was to reduce, or at least slow down, the rate of health cost increases. They also worked with area physicians to bring more control to the health care delivery system.

In designing the HMOs, Deere considered both the individual practice association (IPA) model and the staff model, and concluded that either one would work well. "We began talking with the local medical community, and they urged us to work with them to create the IPA model," says Van Bell. Through these two HMOs, relationships with IPAs were established.

At the end of the year, doctors share in either the added cost or the savings, depending on whether they're over or under budget.

The HMOs also introduced fee- and utilization-review into the plans and, for the first time, physicians were sharing in the health care cost risk. Here's how it works:

The premium dollars each year go into four different funds: 1) administrative costs, 2) hospital charges, 3) physician's fees and 4) general and ancillary costs. Each year, Deere negotiates with the IPAs to get a capitation (or fee-per-person) rate, which is then placed into the physicians' fund. "The physicians are under agreement to provide services for a fixed budget for the year," says Van Bell. "At the end of the year, they share in either the added cost or the savings, depending on whether they're over or under budget." If there's surplus money in the fund at year's end, however, it's theirs to keep. So far, there's never been a year in which the physicians' fund was in the red.

Other, even smaller companies began to hear about Deere's managed care plan and wanted to have the same plan for their employees. Van Bell remembers their saying: "We'd really like to offer the HMO option to our employees, but we really can't take the risk."

Deere already had accepted contracts with some self-insured employers in the area, but had had no outlet from which to offer the same services to non-self-insured companies. So in 1985, Deere established a new, wholly owned subsidiary, John Deere Health Care Inc., to accommodate the growing interest of other non-self-insured companies. Heritage National Healthplan Inc., the operating company, replaced the Quad City and Cedar Valley Health Plans and today provides HMO services to all of Deere's U.S. core company factories, in addition to more than 300 other clients.

Currently, Heritage operates in four states—Iowa, Illinois, Wisconsin and Tennessee—and is planning to expand into at least four more states in the future. It's accredited in each state in which it operates. The HMO offers six different plan options within the system. Heritage now works with 17 IPAs that include 3,500 physicians in the four-state region. IPAs traditionally shave about 15% off the cost of traditional pay-for-service plans. "Through our medical director at Heritage, we provide the doctors with a lot of data and a lot of support," says Van Bell. The doctors are responsible for engaging in peer review practices, discussing among themselves, for example, what constitutes typical fee schedules and diagnoses patterns.

The HMO covers a total of about 200,000 employees, dependents and retirees. Of those, approximately 65,000, or 30%, are Deere employees, dependents and retirees. The remainder of the Deere insureds are covered under a traditional indemnity plan. The Heritage plan only covers individuals who live in the areas in which the plan operates, namely the four-state region. Therefore it isn't available to expatriate employees, dependents and retirees, nor to the other clients' employees in overseas locations. In the locations in which the Heritage plan is offered, about 60% to 70% of eligible individuals are enrolled. About the same percentage of enrollees who are union members have joined.

Both plans are paid 100% by the company, although the Heritage plan offers a few more features than the indemnity plan, such as an immunization program, scheduled physical exams and preventive care options.

HR involvement.
Since the late 1970s, when the health care department at Deere was established, it has been under the direction of human resources. In May 1992, however, Heritage was placed under the direction of the financial services division, headed up by Eugene Schotanus. The financial services division consists of an insurance group, casualty and life companies and credit company.

The John Deere Health Care Inc. division, having a total of approximately 500 employees, was moved to the financial services area because:

  • Heritage had turned into a significant business in its own right
  • Under this department, it has extra resources, which are helping it grow and expand
  • Deere's other financial services businesses are already under this department and share staffing services.

Although the reporting relationship for Heritage has changed, its main purpose hasn't. The relationship between HR and Heritage still is clearly the primary interest of the HMO.

"A principle interest, obviously, is managing our own health and accident benefits—so there have to be very close ties between HR and the Heritage group. That really hasn't changed," says Plunkett, whose office is next door to the financial services division. "I'm still as close to that as I was before, so it isn't that it was moved to another city or another world," he adds. "I still serve the health care group through a separate board. A major focus of that organization continues to be managing our own health and extra benefits." HR just has less reason to deal with health care and can focus on other issues.

Van Bell explains, "There still is a link with the human resources function, and it will continue for a long time. It's important that we work together to continue to focus on plan design and managing the company's health care costs."

"Heritage turned out to be a very good business, and it's growing externally," says Plunkett. "We have other financial services businesses that follow many of the same staffing and financial decision-making processes."

Has the creation of the HMO helped the credibility of HR within the Deere organization? "Human resources developed the methodology for what we hoped would manage our health and accident benefits better. We developed Heritage over a period of time as a commercial business, and the move to financial services is really confirmation of the success that Heritage has had in bringing that business to Deere. Because human resources did it, I think that the position the function holds in the company has been enhanced. It's a success," Plunkett says.

What has Deere's human resources department learned from the process? "From the standpoint of HR, we know more today about health and accident benefits and about the design of benefits than we ever dreamed of knowing before we got into this business—so we have many more knowledgeable human resources people in the company," explains Plunkett.

We know more today about health and accident benefits, and about the design of benefits, than we ever dreamed of knowing before we developed an HMO.

"In addition, because we look at this as a business, the whole senior management group of the company has become more knowledgeable about the health insurance crisis in the country, and I think they're probably better-equipped to make decisions than they would have been, had we not been effective in the businesses that we have now."

What effect has the creation of the Heritage HMO had on the company operations? Plunkett says that Heritage has had a TQM mission for several years, and it has served as a model of quality for the Deere's other operations. "I notice now that other units in the company are using Heritage as an example of how they might do the same kind of thing in their own organizations," says Plunkett.

First things first.
About a year ago, Deere conducted a complete survey of Heritage employers and subscribers, which indicated a 93% to 96% satisfaction rating with the HMO services. "We like to think that the retention of these employers and subscribers in our plan is the best evidence of satisfaction," says Van Bell. For the most part, a high number of employers and subscribers—98%—stay with the plan once they join.

These numbers are good, but because Heritage was first created to take care of Deere's own internal health care needs, it must measure its success by that thermometer first. An employee survey taken last year also confirmed that the people who actually use the HMO also give Heritage high marks for excellence.

In addition, a highly respected, independent consumer magazine recently rated Heritage National Health Plan as the number one HMO in the country, based on a survey of 20,000 readers. Two hundred thirteen Heritage members responded to the consumer magazine's poll, which was taken last year. Of those readers enrolled in the heritage plan who responded, 38% were completely satisfied and 59% were very or moderately satisfied. Only 3% were dissatisfied with the Heritage HMO. The same magazine also reported that, of the people who responded to the poll, those people who were enrolled in the Heritage plan had one of the shortest waits for appointments of any HMO plan.

The numbers generated from Deere's experience in providing health care services also bear out its success: Annual premium increases have averaged only 11% a year for the past decade. "Although we aren't happy with that increase, the trajectory of the increase has been slowed, and if you look at national norms, you'll see many years during which employers have experienced 20% to 30% increases in their health care costs," says Van Bell.

The number of annual admissions also has dropped dramatically. In 1980, annual admissions were 225 per 1,000 covered persons, and annual days confined per 1,000 persons were approximately 1,200. These numbers for all clients, including the Deere enrollees, have dropped from 225 to 80 admissions per 1,000, and from 1,200 annual days confined to 400. In addition, hospital lengths of stay have been reduced by 2 1/2 days—from six days to 3 1/2.

Other areas of health care delivery also have been the object of much attention. They include: case management, hospital contracting, preprocedure authorization, data analysis (to establish a focused quality-of-outcomes index), treatment pattern profiles and severity-of-illness factors. Physicians participating in the Heritage network also will have access to drug formularies, an educational tool that helps doctors prescribe cost-saving, quality drugs for patients.

Because the personnel department no longer processes claims for Deere-covered individuals (the HMO now does that), Heritage takes care of the complaint process as well. "From the standpoint of HR administration, we've split that off now because Heritage is a separate subsidiary," says Plunkett. Heritage currently is developing a new claims processing system to enhance data analysis further.

Employees also have a more direct complaint process through which to address any concerns or problems they may encounter. Before the claims process was brought in-house in 1971, employees (and other Deere-covered individuals) had to go through the third-party insurance company to get answers—a process that usually took a lot of time and effort.

Heritage, on the other hand, now has a formal complaint procedure. "That's something that doesn't exist in traditional pay-per-service medicine," says Plunkett. "The administrative advantage is that, not only do we have fewer employee complaints, but the fact that they have a place to go gives us an opportunity to hear what's wrong and correct it."

Other advantages add up to a higher quality of care for Heritage-covered patients. "One of the advantages that the HMO gives our employees is enhanced quality through a more consistent practice taken by the physicians who are a part of Heritage. Another is peer review; they have opportunities to talk with one another, specialty by specialty, about how they're practicing," says Plunkett.

In addition, a single network system helps employees with continuity of care, especially in the area of prescription drug coordination. "If we were in the traditional medical community, we could go from one doctor to another, and get—if we weren't careful—a couple of drugs that interacted horribly. In this process, we screen for that," explains Plunkett. Another advantage of the Heritage plan for employees and plan members is that, to get medical services, they need to fill out paperwork only once, then members just show their member card after that.

Building a separate business unit.
Although it started out simply as a way to control Deere's own health care costs, the HMO grew into a thriving business on its own. "It never was our intention to provide services to other companies," says Van Bell.

Could other companies do this? Deere managers say yes. "I don't think we're unique," says Plunkett. "I think that others could replicate what we've done." But it takes a long time. Deere now has a 21-year file of data on how people use the company's health and accident benefits. "We probably have as complete a set of data for as long a period of time as any company in the country," he says.

Another time-consuming task is to go into each community in which you want to set up a health care system and work with physicians, hospitals and other medical services providers. "It isn't that other companies can't do it, but what we've found is that these organizations have turned to us because it takes such a long time," explains Plunkett.

"We're both a consumer and a provider of care. We're very concerned as a consumer about how we structure our benefits and how we maintain cost controls or improve them, so we certainly are in a position to speak the same language as the employers we talk to. We have the same concerns, and we try to maintain an employer's perspective," says Plunkett.

Van Bell agrees. "Those employers look to us and say, 'You can relate to our problems, you have the same problem of managing those costs.' We believe we can relate to them and their problems, and we have a vehicle to help do that," he says.

Future care.
As far as Deere's management has come in managing rising health care costs, there's still more to do. "Managing Deere's health care costs have been, and will continue to be, a major issue," says Van Bell. (Deere spent $200 million on health care in 1991.)

"We aren't doing everything we need to do," says Plunkett. He describes health care as a moving target that requires business leaders "to think about it in a million different ways and to do a variety of different things."

A big focus in this decade and the next will be on quality and service. According to Plunkett, the better health care service becomes, the higher the quality of care will be.

Van Bell cites another area of concern in the future. "As we look to the '90s, managed health care services will direct more people toward more specialized, higher-quality care. Employees and plan members will be required to use specific providers, who will be selected based on their quality and cost of service." He also says he anticipates that exclusive and preferred-provider arrangements will become more common. This, in turn, will allow more cost-effective contractual relationships.

A third challenge that they cite is educating employees about the benefit of receiving care through an HMO. Most people don't view managed care as positively as the traditional system, explains Plunkett. "I think many people equate their ability to choose whatever provider they want - whether that's a doctor, a hospital or a dentist—with the highest quality," he explains, adding that most people, even if given a wider range of choices, aren't provided enough information to make the most informed decisions. "We know whether we like them or don't like them, but whether they are really good or not is the question," he explains.

We believe it has been financially successful, in that we have slowed the rate of health care cost increases. We never expected that costs would decline.

In the managed care environment, however, HMO plan members probably receive better care because the providers all have agreed to a set of guidelines and principles before being admitted into the system. They are evaluated as well on their performance every step of the way. "I think educating people that managed care really is a better way for them to go is a major challenge that we face," says Plunkett.

Deere, through the Heritage plan, encourages plan members to evaluate their own individual lifestyles to help in the health-education process. Employees at Deere, for example, can attend various lifestyle classes, such as smoking cessation, nutrition improvement and stress management. They also receive a regular newsletter that outlines lifestyle improvements, such as how to deal more effectively with stress and to develop other healthful habits. Heritage has had videotapes produced on health issues. These videos are shown in the waiting areas of member physicians' offices. "So there's an ongoing attempt and a major commitment on the part of Heritage to educate," says Plunkett.

Heritage also expects to move into other areas of the states in which it's already operational, as well as into new states. "We are open to that only if we are able to do a high-quality job," says Van Bell. "If it requires us to stretch resources in inappropriate ways, so that we can't deliver on service and quality, then we aren't interested. But if we can grow and add real value to other employers, then we'll look at opportunities beyond the four states."

As in any good business move, careful planning is key. Deere is committed to expanding without compromising quality of service, especially for the individuals who are enrolled in the plan.

"I really believe that high-quality care is cost-effective care," says Van Bell. "Often, people look at managed care and they see it as a less-than-adequate method of controlling costs, and they also look at it in a negative light when it comes to quality." To Deere, the words quality and managed care are synonymous. In fact, he says that high-quality care is more cost-effective. "We believe that it has been financially successful, in that we have slowed the rate of increase in the cost to Deere," Van Bell says. "We never expected that those costs were going to decline." Deere has an older work force and a growing body of retirees, which typically requires greater health care intervention than a younger work force would.

Deere is now in the midst of a feasibility study on a potential demonstration project with the federal government. The project would establish a managed Medicare Insured Group, for most, if not all, of Deere's retirees (who are eligible for Medicare) and their dependents. This project would allow Deere to take over the management of health care for its Medicare population on a risk basis, and adds yet another strategic step to Deere's do-it-yourself health care plan.

While Deere's HMO is continuing to make a significant financial impact on the organization, it continues to come up with new ways to control health care costs for clients, employees, dependents and retirees. In the process, Deere also is proving yet another important point: If something's worth doing, it's worth doing well.

Personnel Journal, October 1992, Vol. 71, No. 10, pp. 82-89.

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