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Controlling Costs with Competition

November 1, 1993
As health-care costs continue to rise, many companies are turning toward managed-care to help them control their medical-benefits costs. The majority of companies that engage these methods for their active work forces extend them to their retiree population as well—a group that represents a higher percentage of the health-care costs.

The state of Ohio has gone one step further. Ohio Retirement Systems, the name given to the five organizations that administer benefits to the state's retirees, has implemented a managed-care plan that uses two competing health-care networks to deliver high-quality, cost-effective care to retirees and their dependents. The arrangement, which became effective April 1, is a variation on the managed-competition model, in which various groups band together to form a large purchasing block, forcing health-care networks to compete for the purchaser's business. For this particular plan, not only must the health-care networks—Aetna and Blue Cross/Blue Shield—compete in the initial selection process, they must continue doing so in the day-to-day care of plan participants.

The plan, which covers non-Medicare, nonprescription-drug claims in Ohio, uses the point-of-service model. Health-plan participants have the choice of staying within their chosen network or going outside the network each time they seek care. The aim is to encourage participants to use the networks, while still providing freedom of choice.

The two networks provide identical benefits. They compete for plan participants, therefore, on the basis of quality, access, service and cost. As a result, participants receive both cost savings and improved quality.

Approximately 85,000 retirees and their dependents participate in the managed-care plan. Ohio Retirement Systems comprises approximately 190,000 retirees from five systems: highway-patrol retirement system, police and firemen's disability and pension fund, public-employees retirement system, school-employees retirement system and state-teachers retirement system. (The school-employees system has chosen not to participate in the managed-competition plan.) Health-care expenditures for this group have been more than $500 million annually.

Washington, D.C.-based The Wyatt Co., which assisted in the implementation of the managed-care competition plan, estimates that savings in the first two years of operation will total more than $100 million. Jim Braun, manager of the health-care team for The Wyatt Co., says that although it's too early to determine what the actual cost savings will be, preliminary evidence "is very encouraging." Payment data for the months May, June and July reveal that payments for each of these months were less than those for the same months one year ago. In addition, Braun says that he has seen "the notion of competition take hold and spread like wildfire. Each of the two vendors have aggressively pursued expanding their networks throughout the state to serve the retirement systems. I think we're going to see really good results."

Personnel Journal, November 1993, Vol. 72, No.11, p. 84.