Exposé Unveils Health-care Cost Delusions

October 1, 1996
Forget the high-priced consultants, the so-called pundits and the nasty back-and-forth finger pointing by physicians, HMOs and insurance companies. To really find out the state of corporate health-care benefits, ask an employee like Bill Keeley, a 43-year-old manager at a Fortune 200 company who suffered a stroke on March 13.

Like a teacher monitoring various stages of a term paper, Keeley graded each step of his four-week treatment and recovery process. The letters on his medical report card range from an "A-" for hospital admission and precertification to a "D-" for disability case management. A former 16-year HR veteran, Keeley sums up his ordeal this way: "Although we've come a long way in the management of medical benefits, we clearly have more room for improvement."

Although Keeley is just one person in one company evaluating one medical incident, his comments accurately reflect the overall state of corporate health-care benefits. We're ahead in cost controls. But, despite what you hear-medical costs are still rising at nearly four times the inflation rate. We need to do more. Fortunately, HR managers at America's larger employers are leading a market-based reform effort that's attacking the health-care system in four ways-by:

  1. Challenging providers to continue lowering costs.
  2. Rating providers with quality measures.
  3. Comparing quality with cost to gauge plan value-and demanding more quality and value for its money.
  4. Reducing unnecessary demand on health-care services through a process called demand management.

These efforts will likely result in better, cheaper care for all employees.

Competitive pressure and coalitions fight spiraling costs.
You're probably thinking that companies already have a handle on rising costs, especially considering a three-year trend of moderate medical cost increases. For the year ending in June, health-care costs for businesses rose only 0.01%, the lowest medical inflation rate in 13 years of tracking, according to the U.S. Department of Labor. This sounds like cause for celebration, but note the wording: cost of health care for businesses.

Here's what's happening: Costs to employers have leveled out largely because they've been shifting vast numbers of employees into less-expensive managed-care plans. In 1995, almost 73% of all covered employees were in some form of managed care, up from 63% a year earlier. This increase corresponds with a sharp decline in the availability of more-expensive indemnity plans, from 90% of employers offering them in 1990 to only 59% in 1995. Corporate costs have also steadied, because companies are asking employees to pay more in deductibles and monthly premiums. By sharing the costs with the medical users, companies save money.

But just because a company saves money through managed-care plans and cost shifting doesn't mean the excess expenses have been wrung out of the system. In Southern California, which caught onto the managed-care trend early, employees are feeling the crunch-even if their employers aren't-and experts predict workers will face increasing costs over the next five years, according to a Los Angeles Times report. In the nation overall, the report continues, employees' health-care costs increased at least $5.5 billion in the past seven years, as employers passed many costs on to them.

And a study by Sedgwick Noble Lowndes, an international employee-benefits consulting firm based in Memphis, Tennessee, shows that the average projected cost increase of medical plans in 1996 is close to 11% for everything from HMOs to traditional indemnity plans. So, while employer costs have evened out, plan costs are still rising.

"The epiphany - that it's OK to rate providers as they would any other vendor - has come just in time for many companies."

Although this increase was lower than expected, it's still the kind of double-digit shock many employers thought they'd ended. Costs continue to rise because the drivers of medical inflation are the same as they've always been: increasing use of sophisticated technology, an aging population, excessive or unnecessary usage and cost shifting from the government to the private sector.

"Employers should not be lulled into a false sense of security by the news that the projected rate of increase for most health plans has dropped for the third year in a row," explains Jack Doerr, national group benefits practice leader for Sedgwick Noble Lowndes. "These rates are still as much as four times the general rate of inflation." The crucial point: While managed-care plans and cost shifting do reduce employer costs, the decrease is likely to be short-lived unless the plans themselves become more efficient.

Large employers have become savvy to this and are using competitive pressure to force medical plans to keep costs down. Xerox Corp., for example, which offers several health plans to workers, encourages them to choose the most cost-effective plan by subsidizing these plans at a higher rate. The less the company pays, the less employees pay in co-insurance.

By letting employees choose among competing health plans, Xerox and other large companies are keeping the pressure on plans to lower costs. When a plan gets too expensive, employees avoid it and the company eventually drops it. "Because we don't have any more money to give them, they have to find ways to do more with less," explains Helen Darling, manager of health-care strategy and programs at the Stamford, Connecticut-based company.

Another way companies are forcing plans and providers to become more cost-efficient is by joining together in purchasing coalitions that use their size to leverage volume discounts. One such coalition is the Minnesota Business Health Care Action Group, an alliance of 24 self-funded employers that represents about 250,000 employees and their dependents. By working together and negotiating fees directly with HMOs, hospitals and physicians, the alliance has held local health-care providers accountable for costs as well as practices.

Until recently, purchasing alliances like the one in Minnesota have been regional in nature. But employers now are banding together in national coalitions that can exert even more pressure on providers. An example is the two-year-old National HMO Purchasing Cooperative that comprises 10 large employers, including American Express Co., Merrill Lynch and Company, IBM, ITT Corp., Marriott International and Sears. Currently, the coalition is evaluating and soliciting bids from approximately 200 HMOs, which together will provide an estimated $1 billion worth of health services to 600,000 employees at approximately 27 U.S. worksites.

The focus of these coalitions isn't just cost, however. It's also quality. After years of cost cutting, cost shifting and cost sharing, employers have finally realized the only way to achieve long-term cost reductions is by improving the efficiency and quality of care. As the new mantra of health-benefits planners goes: Better medicine is cheaper medicine.

Quality measures help gauge a plan's success.
The epiphany-that it's OK to rate providers as they would any other vendor-has come just in time for many companies. Employees have become skeptical-if not downright fearful-of managed care, believing that some managed-care companies withhold necessary treatment to save money. "Because of vastly different levels of plan performance, the employees' fear is not unjustified," explains Tom Beauregard, a principal with Hewitt Associates in Rowayton, Connecticut. The best way to allay that fear and improve the quality of medical care overall is by pressuring providers to improve their own effectiveness. After all, you can't impact what you can't measure.

Dr. David Friend, global director of Watson Wyatt's health-care consulting practice, agrees. "Too many employers still look only at the three Cs: costs, controls and clerks," he says. "They need to move from comparing costs to assessing value; from controlling patient access to measuring patient outcomes; and from focusing on the amount of clerical services to evaluating the quality of clinical services."

But what does quality care look like? How do companies assess the quality of the plans they purchase? Although the quality movement is still in its infancy, companies are starting to get answers. One way to ensure health plans meet basic quality standards is by checking to see if plans are accredited by the National Committee for Quality Assurance (NCQA), a Washington, D.C.-based nonprofit organization. The NCQA evaluates health plans on 60 measures, including things such as whether an HMO's physicians are board-certified, whether women in the plan are allowed routine Pap smears and how efficient the medical-records process is. Although it's a rough assessment focused more on procedures than results, more companies are requiring NCQA accreditation from HMOs seeking their business.

Some companies take it a step further by looking at the actual criteria used by the NCQA to evaluate health plans. Instead of simply relying on the organization's stamp of approval, HR professionals look at individual performance measures reported by the plans to see if they meet the needs of their employee population. Currently, approximately 59% of employers with 10,000 or more employees use these criteria when choosing plans.

Recognizing the vast employer demand for quality data, the NCQA is updating and expanding its performance measures. When complete, the new measures-known as HEDIS, for Health-plan Employer Data and Information Set-will give companies specific information in eight areas:

  • Effectiveness of care
  • Access/availability of care
  • Patient satisfaction
  • Patient education
  • Plan descriptive information
  • Cost
  • Stability of health plan
  • Use of services.

"We expect more employers to use these tools as they become better understood," says Dr. Mary Jane England, president of the Washington Business Group on Health (WBGH).

According to a study conducted by WBGH and Watson Wyatt Worldwide, an international management consulting firm in Washington, D.C., more companies plan to adopt value-based measures. For instance, 82% of the largest employers expect to use disease-specific outcomes measures in the next two years, in addition to the 19% of employers already doing so.

Comparing quality with cost determines total plan value.
As valuable as the NCQA measures are, they currently don't encompass the relationship between health-plan performance and cost. When added together, quality and cost are what really determine a plan's value. To aid comparison, consulting companies like Hewitt Associates and New York City-based Towers Perrin are working with employers to compile quality and cost information that can be shared with employees to allow smarter, value-based purchasing decisions (see "Looking for Quality Information?"; left).

Take Rohm and Haas Co., for example. The Philadelphia-based chemical manufacturer battled 20% annual increases in medical costs for several years. Recognizing that HMOs were the "best buy around," 95% of its 8,000 employees (representing 20,000 covered lives) have been shifted into some form of managed-care plan-up from 5% just six years ago. Although the strategy was successful in cutting costs, benefits managers at the company started to question whether cheaper care was really better care.

"It began to bother us that [most] employees were in plans that restricted access," explains Pat Coyle, director of benefits and workforce strategies. "This, combined with the fact that we were seeing a lot in the press about how HMOs don't provide the same level of quality [as indemnity plans] got us wondering about how we could assess the overall delivery of care."

Two years ago, Rohm and Haas, working with Hewitt Associates LLC, a Lincolnshire, Illinois-based consulting firm, embarked on a comprehensive research effort designed to uncover those plans with the highest value. The first step was to survey employees to determine how they felt about their HMOs. They were asked: How long did you have to wait for an appointment? How clean was the office? Were the providers responsive to your needs? "We took a look at the things employees notice," Coyle says. Believing that recommendations from co-workers can do a lot to allay fears about managed care and improve the perceived value, Rohm and Haas shares all results with employees during the open enrollment process. The first year it shared these numbers with employees, enrollment in high-quality plans jumped 30%. And, enrollment in HMOs overall has increased 13% since the survey ended.

The second step was to analyze the cost, demographics, geography and design of each of the company's 30 managed-care plans to see if they were paying rates commensurate with the needs of the workforce. If a plan charged the company a community rate, for example, but Rohm and Haas employees at a particular location were younger, with a less-rich plan and in a less-costly geographic area, the company negotiated discounts. "We essentially used the same data used by underwriters to challenge the cost structure," Coyle explains. Instead of relying on the plan to accurately quote a rate, Hewitt Associates compared the price charged with the services needed to determine actual value. During the first year, the company saved $500,000 in plan costs by renegotiating prices. "This was easily enough to justify the cost of Hewitt doing the work," she adds.

Rohm and Haas is now at work on the third phase of its research effort: compiling a Quality of Clinical Care Index. Using the NCQA's HEDIS measures, the company is analyzing carefully the performance of each health plan to determine where there might be room for quality improvements. If women don't get mammograms at the expected rate, for example, or if childhood immunizations are lower than average, the company shares that information with the HMOs and asks for improvements. "We'll give each plan an opportunity to improve its performance," Coyle says, "and then we'll share results with employees. If [the plan doesn't] come through, we'll drop it."

Like Rohm and Haas, White Plains, New York-based NYNEX Corp. compares cost with quality and reports findings to employees. NYNEX takes a health-plan "scorecard" that measures health-plan quality, overlays it with results from an employee-satisfaction survey, and then compares those data with evaluations of economic efficiency. The composite results reveal which plans have the highest financial value, quality and satisfaction. By sharing this information with employees, the company can steer employees into "best practice" plans that not only save the company money, but also satisfy employees.

Companies like NYNEX and Rohm and Haas can gauge quality thanks to better technology and tracking systems. But don't be misled: Measuring quality is still in the formative stages. Health care remains difficult to measure and analyze, and outcomes analysis remains relatively primitive. Furthermore, employer efforts to measure quality are hamstrung by the fact that the government, which pays for 30% to 40% of all health care in the United States, does little to promote value.

"Still, we're light years ahead of where we were two years ago," Doerr says. Given that health care operates in a competitive marketplace, what employers end up with in terms of quality will depend largely upon what they demand.

Demand management reins in overutilization.
Another weapon being used in employers' war against health costs is a strategy called demand management. According to Michael Scofield, chief epidemiologist with Actuarial Sciences Associates Inc., an employee-benefits consulting subsidiary of AT&T based in Somerset, New Jersey, demand management can cut costs by reducing unnecessary use of medical resources. How? By addressing the nonmedical drivers of benefit utilization.

"Demand is driven by more than the objective severity of an illness," he explains. How people respond to an illness and the resources they use are influenced by the care they receive, their perceptions of how sick they are, how well they cope with pain and stress, how well they adhere to treatment plans, what they gain from being well and what they gain from being sick. A person with lower back pain, for example, who hates his or her job but has good benefits and a good relationship with his or her physician, may be able to get the physician to prescribe an extended period of home recovery.

Demand management seeks to reduce the gap between the health care needed and the health benefits utilized. Contrary to popular belief, it's not primarily a prevention or wellness strategy. "Wellness programs are more concerned with reducing the incidence of disease by reducing modifiable risk factors," Scofield says. "However, the severity of a person's illness is only a modest predictor of the amount of medical and indemnity benefits that are used." Although demand-management programs may include early detection and patient-education strategies, the overall intent is to reduce utilization, not illness.

Demand management also takes into account the whole picture of health costs, including lost productivity. Companies using demand management must make sure treatment plans are appropriate, that they're adhered to and that employees are back on the job as soon as possible.

Typically, demand-management programs start out in a focused area like disability management. At Stamford, Connecticut-based Champion International, for example, a total disability management program is being developed. When complete, it will unite all facets of the company's health benefits, including wellness, workers' comp, short- and long-term disability, medical benefits, and health and family services into "one seamless delivery system," explains Victor Paganucci, total disability management project manager.

The intent is for all departments to work together to make sure injured workers receive appropriate care and support so that they're back on the job as soon as possible. By integrating the health resources, Champion removes communication barriers that allow employees to "fall through the cracks." For example, an injured employee may be able to work in a limited capacity-but the treating physician, unaware of the onsite physical therapist, might keep that person off the job longer than necessary.

To be successful, Champion must integrate data from each department to track employees through the system and to monitor the overall costs. This way, workers' comp professionals can't fool themselves into thinking costs have been reduced just by transferring cases to long-term disability-where an employee may still be under treatment and off work. "By looking at the overall costs, we can find ways to reduce the costs stemming from unnecessary utilization and get people back on the job sooner," Paganucci says.

Early indicators suggest that Champion can save on the $40 million a year it currently pays in direct disability costs and on the $60 million per year it pays in "soft costs," such as lost productivity and recruitment of temporary employees.

For companies interested in implementing demand-management programs, Scofield suggests these strategies:

  • Early detection:
    Screenings for cervical and breast cancer for women have the clearest cost benefit. Leave blood pressure, cholesterol and other cancer screenings to an employee's physician. Demand management seeks to avoid payment for services that aren't absolutely necessary.
  • Information and education:
    Give employees written information on how to determine when self-care is appropriate. A recent study of 15,800 employees at 22 California companies found that self-care education reduced utilization by 7% to 17%, depending on the insurer and the type of coverage.
  • Benefit design:
    Emphasize quality and accessibility of medical care, and avoid trying to control demand by creating financial barriers to certain services such as mental health.
  • Employee Assistance Programs (EAPs):
    Encourage employees to use the EAP. It can help avoid more expensive mental-health costs later.
  • Disability management:
    Use duration guidelines and clinical-practice protocols to promote good treatment with safe and timely return to work.
  • Provider incentives:
    Create incentives for providers, third-party administrators and case-management vendors to establish demand-management strategies.

Although demand management is still young, the pioneers' savings indicate it's a viable option for companies-indeed, a necessary one for true cost savings.

What to expect in the future.
With employers now focusing on lowering costs, increasing quality and reducing unnecessary demand, what can we expect in the near future? Bruce Taylor, director of health-care management at GTE Corp. in Stamford, Connecticut, believes that although cost control and demand management will remain important, the crucial piece of the cost-saving puzzle will be improving quality-rating providers and pushing for better value.

"We have to keep the pressure on the delivery system to improve the quality of health plans," he says. GTE does this by maintaining a staff of five health-care specialists who monitor the quality of each of the company's 135 HMOs. These individuals not only compile employee-satisfaction ratings on each plan, but also regularly review procedures, examine medical records and quiz physicians. By compiling quality data, the 300,000-plus employee company can more easily compare one plan to another. Plans that perform poorly are then pressured to improve. "Our statistics show that plans rated with the highest quality and employee satisfaction actually do have the lowest cost," Taylor says.

As GTE's experience suggests, if employers keep up the pressure, medical quality must improve. But if costs don't drop, they're at least more likely to remain steady. However, smaller companies have to get on the bandwagon as well. Although companies that aren't self-insured can't exert pressure directly on providers, they can ask plans for the same quality information that's available to larger employers. "This sends a message to insurance companies and managed-care organizations that they must change how they do business," says Rick Elliott, head of employee-benefit services with Johnson and Higgins, an insurance brokerage and insurance consulting firm based in New York City.

But you must look beyond quality. Because of intense competition, many health plans are merging, hoping their combined size can deliver care more efficiently while capturing more business. From a cost and efficiency standpoint, consolidations may make sense. But from an employee-relations perspective, any change in plans, providers and procedures can be disruptive. Because of this, Beauregard suggests that companies evaluate a plan's total membership relative to market share, its disenrollment and membership growth rates, and the plan's medical-loss ratio. This information, which more plans make available thanks to the NCQA, provides a good indication of whether a plan is financially stable or a likely target for takeover.

What all this means is that when it comes to the struggle over health-care benefits, there's really no end in sight. But, there's light on the horizon. Competition is finally forcing the health-care system to produce quality care at reasonable costs. Given that we're talking about medical care, the term "reasonable" is used loosely. But experts agree the days of 20% annual increases are behind us.

As long as employers continue to vigilantly demand proof of higher quality, providers will do their best to provide it. Perhaps someday soon, stroke patients like Bill Keeley will be able to give all phases of the medical delivery system a resounding "A+." It's certainly not too much to hope for.

Personnel Journal, October 1996, Vol. 75, No. 10, pp. 36-46.