Teaming Up To Cut Health-care Costs

September 1, 1993
Instead of waiting for federal health-care reform to address the critical issue of soaring costs, employers in many communities are joining forces to reform the system on their own. The health-care coalitions that they're creating have the potential to fundamentally change the way health care is purchased and delivered in this country. More often than not, in the companies involved, it's the human resources department that's leading the way.

In Minneapolis, for example, the HR executives of several large, self-insured companies have pressured local providers to put greater emphasis on the quality and cost-effectiveness of care. A major aim of the coalition is to cut back on the care delivered by expensive cardiologists, orthopedists and other specialists, and instead to rely more heavily on primary-care doctors. According to Paula Roe, vice president and director of compensation and benefits for Norwest Corp. in Minneapolis, it was natural for the HR professionals in that community to join forces because they shared the same "compelling interests."

"Our main interest was in how we could collaborate in the whole area of health-care reform," says Roe. "The kind of reform work we're doing has tremendous potential to reduce costs because we're focusing on the delivery of necessary, effective and efficient care."

The Minneapolis coalition, known as the Business Health Care Action Group, has been instrumental in changing the way that providers deliver health care in the Twin Cities area because the group will do business only with providers that show a commitment to high-quality treatment. Like other coalitions, it's working to make the system more accountable to those who are picking up the tab.

"For a long time, employers have sat back passively and accepted their role as a major financier of health care, but they have been unable or unwilling to proactively manage those costs other than through traditional benefits means," explains Bryan Bushick, a consultant in the Minneapolis office of Towers Perrin.

But cost-shifting and managed care—the two primary avenues of cost containment—aren't working because there has been no accountability in the U.S. health-care system. Providers are paid based on the number of services that they provide, not on how well they provide them. Patients aren't the primary purchasers, so they have no incentive to shop around. And, lacking information on treatment effectiveness, purchasers have sought price discounts based on quantity, not quality.

Community-based health-care coalitions like the one in Minneapolis represent a grass-roots effort by employers to change this expensive paradigm. How? By using their combined purchasing power to make demands on the system. At last count, there were close to 100 of these employer-driven coalitions, according to the National Business Coalition Forum on Health in Washington, D.C.

Health-care coalitions aren't a new idea. Many of them have been around for more than a decade, explains George Morrow, principal and health-practice leader for William M. Mercer Inc. in Minneapolis. However, the focus of coalitions has changed during the years. "They originally were designed for the purpose of exerting raw economic leverage and achieving some significant discounts in the cost of care," says Morrow.

But in the late 1980s, employers began to realize that cost by itself wasn't the problem. They caught on to the idea that cost and quality don't necessarily go hand-in-hand; that a higher price for health services doesn't always mean that care is more effective. Today, as the coalition movement spreads, employers—both large and small—are demanding quality and cost-effectiveness from the health-care system.

The way this is done varies greatly from community to community (see "Community Coalitions Influence Their Local Health Care"). Some coalitions put their energy into lobbying for local health-care reform. Others offer managed-care services to their members. Still others say that the only way to get the attention of providers is by putting financial pressure on them. For all their differences, however, employer-led coalitions share a common belief that because health care is a local industry, reform must be community-based.

As Catherine Kunkle, vice president of operations and information services for the National Business Coalition Forum on Health, explains, "State and federal reform efforts are an attempt to look at the global picture and legislate from the top down how health care will be delivered and paid for. In reality, it's done at the local level. Every health-care market is somewhat different in terms of the number and capacity of providers available, the demands on the system and the complexion of employers who pay for benefits for people in the community."

The Memphis Business Group on Health provides just one example of how this works.

Purchasing power helps Memphis employers reduce health-care costs.
In 1985, a coalition of 11 self-insured employers in Tennessee, including Federal Express, Holiday Inn and First Tennessee Bank, started the Memphis Business Group on Health. Like many coalitions, its original focus was on health-cost control.

Soon after forming, the group commissioned a study that revealed that some local hospitals charged up to 80% more than others for the same health services. The members publicly released the results of the study and sought a competitive bid for the hospital care of their combined 25,000 employees. "We didn't want to start an open war," explains Fred Bowman, chief financial officer of Seessel's Supermarkets, "but most companies felt that they had been on the outside looking in at the health-cost issue. We wanted the medical community to acknowledge that we were important and that we needed to have input."

Baptist Memorial, the only hospital that responded to the bid, got the contract. By making employees pay more out-of-pocket if they went elsewhere, coalition members were able to steer their workers and dependents to Baptist and its affiliated network of doctors. Two years later, during a new bidding cycle, all four Memphis-area hospitals bid on the contract. The coalition stayed with Baptist, and in recent years, members have received about a 20% discount in hospital prices.

"Most companies felt they had been on the outside looking in at [health costs]. We wanted the medical community to acknowledge that we needed input."

According to Robert Ellis, vice president and manager of employee benefits at First Tennessee Bank, the coalition was the result of HR executives joining forces in search of a solution to rising health-care costs. "Our objective was to have a moderating influence on cost by establishing greater efficiency and a price-competitive hospital market," he says. In doing so, the employers recruited other members, used membership dues to create an annual budget and hired a staff to give guidance to the new coalition.

Today, in addition to influencing competitive prices through open bidding, the business group runs a utilization review program for members that has reduced the use of inappropriate services by their employees. The coalition also established a resource library, and full-time specialists manage employee cases involving home care, substance abuse, psychiatric services and workers' compensation claims. Members purchase these managed-care services from the coalition for an additional fee.

"For every dollar spent in medical costs, First Tennessee Bank has saved between $7 and $9 by using the managed-care services of the coalition," explains Ellis. "And when we save money, our employees save money because they're required to pay a portion of their own health costs."

The Memphis group's success in demanding cost concessions from providers is typical of how coalitions have operated. But the group's focus is changing. As the coalition has grown—there now are 46 companies representing more than 100,000 employees and dependents—members say that their improved purchasing power will lead to a restructuring of the local health-care market. More than gaining price reductions, members hope to encourage providers to deliver efficient, high-quality health care to the local community.

There are early indications that this is happening. For example, during the hospital bidding process, Methodist Hospital—Baptist's chief rival—discovered that its costs were 15% to 20% higher than Baptist's. This prompted a productivity drive that included use of a computer program to show doctors how their use of resources varied, even on similar cases. At another local hospital, everything from heart surgery to admissions procedures is undergoing quality review.

Coalitions can influence a variety of health-care issues.
The results achieved by the Memphis Business Group on Health illustrate the influence that employers can have when they become involved in activities related to health care at the local level. In fact, many of today's coalitions were formed for the express purpose of influencing local health planning and policy issues.

The Health Care Purchasers Association (HCPA) in Seattle, for example, was established to support health-care legislation that's beneficial to employers, and to resist public policy that's detrimental to business interests. More than 100 companies belong to HCPA, and members purchase health benefits for more than 1 million covered lives. This includes companies that are self-insured as well as those that purchase insurance.

"Our objectives are to influence the political process associated with health care and to speak with a more unified voice in the marketplace," says Steve Hill, senior vice president of HR for Weyerhaeuser Co. in Tacoma, Washington. "We believe that the people paying for health care ought to have a larger say in the process."

As a result of the coalition's efforts, state legislation was passed in April that will require all providers of health-care services to make data on those services available. These data eventually will become part of a state-wide health-information network that will, among other things, allow employers to gain access to cost and quality information that, in turn, will help them make better-informed benefits and purchasing decisions.

"Imagine what business would be like if it didn't have the latest computer systems to track customers, inventory or quality," says Dorothy Graham, director of HR for Puget Sound Power and Light Co. in Bellevue, Washington. "The health care and insurance industries still operate that way. This information system finally will give employers a basis to judge the value of health care received. That's the only way to get a handle on what we're paying and to work with providers on cost-containment."

Another coalition that has been actively involved in health planning and policy issues is the Greater Detroit Area Health Council. Now 37 years old, it's one of the oldest employer-led health coalitions in the country. Its members include HR representatives from such corporate heavyweights as Ford, Chrysler and General Motors. The organization was established in the 1950s to guide the growth of health-care services during that decade's hospital boom. But 10 years ago, faced with a quite different health-care market, the council changed its mission to address cost-and-access issues.

"Our objective is to influence the political process associated with health care. We believe that people paying for health care ought to have a say."

Last year, for example, the coalition was extremely vocal in its opposition to a proposed new open-heart-surgery program. Although there were already 28 such programs in Michigan, the chief executive of a Detroit hospital said that his facility needed one to compete. The coalition disagreed. Why? Because heart treatment is expensive, especially in Michigan, which ranks number one in deaths from heart disease. At Detroit Edison, for instance, as much as 25% of benefits costs goes to heart care.

Believing that runaway replication of medical services drives up costs, the coalition lobbied hard to defeat the hospital's proposal. John Smith Jr., chief executive of General Motors, went so far as to tell Michigan's governor that one of GM's top priorities was to block new heart-surgery units. Thanks to the coalition's lobbying efforts, the state's certificate-of-need commission denied the hospital's request.

"If coalitions didn't exist," says James Kenney, president and CEO of the Detroit Coalition, "the business community would be fragmented and inarticulate on the most-important human resources issues of the day."

Introducing competition into the marketplace can improve the quality of health care.
In addition to influencing local health policy, many coalitions are using their members' collective purchasing power to introduce competition in the marketplace—that is, competition based on the quality of health-care services delivered, rather than on the quantity. For example, HR professionals who were frustrated with managed care and other ineffective cost-containment techniques founded the Business Health Care Action Group in Minneapolis.

"All of us had used a confrontational approach to managing costs—beat the hell out of the doctors, that kind of thing—which never works in the long term," explains Fred Hamacher, vice president of compensation and benefits for Dayton Hudson Corp. in Minneapolis. "We decided as a group of employers that we needed a system that focused more on quality, because if you buy quality, then cost takes care of itself. We brainstormed ways to get competition into the marketplace and to put some efficiency into the delivery system."

In doing so, Hamacher and his HR colleagues from 13 other local companies spent four hours each week for several months hashing out a common benefit-plan design. The group—which includes large, self-insured employers, such as Norwest, Honeywell Inc., Ceridian Corp. and General Mills—then put its employee health care out to bid, choosing providers not on the basis of cost, but on whether they could demonstrate a commitment to continuous quality improvement. Members were determined not to impose rules on doctors, but instead to purchase care only from an organization that developed and followed its own practice standards and worked to improve overall performance.

Providers were happy about the opportunity to bid on the contract—which currently represents about 6% of the local health-care market—because the coalition was asking providers to improve the quality of care on their own. "We didn't want to shoot the bad guy," Hamacher says. "We wanted the physicians to come up with their own best-practice guidelines (see "Why Providers Favor Health-care Coalitions").

The coalition's combined benefit plan is an option offered to employees in addition to the members' existing benefit plans. Financial incentives make the new plan more attractive, however. Currently, more than 50,000 employees and dependents are participating, but total sign-up could reach 200,000.

At some companies, the new plan is more generous than existing plans, whereas at others, it's more restrictive. At Dayton Hudson, for example, provider choices are more limited under the combined plan, but the amount of covered services has increased. At Norwest, however, employees who choose the new plan now face exclusions based on pre-existing conditions, a restriction that isn't part of the company's standard health plan.

"Imagine what business would be like if it didn't have the latest computer systems to track quality. Health care still operates that way."
Dorothy Graham,
Puget Power

But Norwest's Roe emphasizes that plan design is less important than the overall goals of the coalition. "Plan design is an old paradigm," she explains. "In an indemnity world, we focused on deductibles and whether a person was eligible or ineligible for certain treatment services. We're trying to shift a new paradigm in which we can deliver all that's necessary and effective. To do this, we need practice guidelines and outcomes data.

"The most interesting element to me," Roe adds, "is that 14 corporations with different cultures have been able to agree on the importance of collaboration between payers and providers to deliver effective and efficient care."

The coalition's combined benefit plan has been in place only since the first of the year, so it's too early to tell what kind of quality improvements providers will make, and how those improvements will impact benefit costs. "There was a one-time initial savings of 10% to 14% because of the increased administrative efficiency created by a common plan design," says Bushick. "The real savings remain to be seen. Proof will be borne out over multiple years." (Providers passed on the cost savings of having one plan to employers.)

Another effort to influence the quality and cost of local health care is underway in Cleveland. There, through the Greater Cleveland Health Quality Choice Program, all local hospitals are collecting data on intensive care, acute care and patient satisfaction. Results are soon to be released to local corporate benefits officers. Based on this data, employers will provide incentives to steer employees to the highest-quality hospitals.

The effort was initiated by the Health Action Council of Northeast Ohio. A study in the late 1980s found that employers could fly patients to Minnesota for care at the Mayo Clinic for far less money than it would cost to buy care locally.

According to Tom Roos, director of employee benefits and HRIS for Parker Hannifin Corp. in Cleveland, members of the Health Action Council eventually will use the provider data to make health-care purchasing decisions. "In the meantime, a lot of us HR folks are meeting with our peers at local hospitals to learn about the provider side of the business, and to teach our hospital friends about the purchasing side. Working together, we're coming up with long-term solutions based on quality," says Roos.

Data collection helps coalitions select the most cost-efficient health plans.
It makes sense that for employers to make purchasing decisions based on quality, they need better information about treatment outcomes. That's why many coalitions place such strong emphasis on data and data collection. Information is one of the keys to reforming the health-care system. Without it, health-care purchasing will remain a costly guessing game. With it, employers can give their business to physicians, hospitals and health plans that truly offer the best quality at the best price.

HCPA in Seattle is leading the effort to develop an electronic data network that will provide this kind of important information. The coalition received a grant from the Hartford Foundation to prepare the design specifications for a statewide community health management information system (CHMIS). Based on the technology behind ATM bankcards and credit-card validations, the system would track the costs and services of health-care providers in the state. A similar system is under development in Memphis.

The cards would give physicians, hospitals and other providers access to an on-line communications network that could verify benefits eligibility, speed claims and payments and reduce paperwork. With the patient's permission, a physician would have on-line access to the patient's history of illness and to the care given by other providers. Because information on diagnoses, treatment and results would be transmitted through the system, purchasers would be able, over time, to analyze provider performance, as well as other data covering cost, utilization and public health.

"The goal of CHMIS is to have an electronic medical record of sorts," Kunkle explains. "It's an exciting concept in that it will create a paperless trail, which is more efficient and less expensive to administer. The system will promote quality because there will be less confusion, less duplication of services and more information to compare on actual treatment results."

For community health-care reform to take root, consumers have to make changes right along with purchasers and providers. That's why, in addition to gathering data to aid in purchasing decisions, coalition members throughout the country are using available market data to help employees understand important health-care issues.

Members of the Business Health Care Action Group in Minneapolis held focus groups to determine their employees' expectations of the health-care system. "At Norwest, the employees' perception was that the more services they utilized, the better their care would be," explains Roe. "This revealed a significant opportunity and challenge to educate consumers on how to use the health-care system appropriately."

Similar information was uncovered at Honeywell Inc. in Minneapolis, and it prompted the company to create an employee health-education program that includes courses on health-care consumerism. According to John Burns, vice president of health management, Honeywell wanted its employees to understand the complexity of the health-care system and their ability to play an active role in receiving necessary, appropriate and affordable care.

"The main points we try to cover are 1) that the health-care system is extremely complex, and 2) that there's wide variation in practice styles among providers," Burns explains. "We want employees to understand the need to request services on the basis of quality and effectiveness." Honeywell's consumer-education courses are voluntary, but the company offers cash incentives for employees to participate. At last count, about 65% of its work force had participated in the program.

As quality data become available in Minneapolis, Honeywell will share the information with employees, so that they can choose providers who offer the most-effective treatment. "Employee communication is a critical part of our health-care strategy," Burns says.

HR has two roles in making health-care coalitions work.
In the final analysis, HR professionals are influencing community-based health-care reform in two ways. The first is by joining with HR representatives from other companies to form health-care coalitions. "Coalitions are broad and flexible," says Morrow of William M. Mercer. "All you need is a de facto coalition, meaning that you don't need to incorporate or even hire a staff. You just get a bunch of employers together in a room and get them to agree on common objectives. Announce those objectives to the world in some sort of manifesto, and then sit back and wait for the world to beat a path to your door."

Forming a coalition is relatively easy, agrees Roos. All it takes is HR people and others who are concerned about health-care issues to get together and talk about their common interests. Chances are, HR people in many communities have been doing this for years, he says.

In the early stages of coalition-building, members will be concerned primarily with recruiting other businesses, and with identifying goals for the group. Is the coalition going to focus on legislative issues, for example, or are members interested in forming a collective purchasing association? These questions need to be answered before an action plan can be developed. Once this occurs, most coalitions find it necessary to organize as nonprofit corporations, and hire a staff to perform administrative duties and to represent the coalition at public meetings.

For those coalitions in which a staff and incorporation become necessary, the budget usually is made up of dues charged to coalition members based on the number of employees they have. Dues typically range from $1.50 to $5.00 per employee, putting the total membership cost for a given company at anywhere between $500 and $18,000 per year.

In an incorporated coalition that has staff members, HR professionals continue to provide guidance by sitting on the organization's board of directors. In most coalitions, board members are nominated and elected by their peers. The top-ranking HR professional in a member company is most likely to be nominated, along with chief financial officers, and in some cases, the CEO. Board members, on average, spend five hours a month on routine coalition meetings.

In most coalitions, there are also on-going committees that perform specific duties, such as developing a common benefit plan, preparing a request for proposal for employee health-care services or monitoring state legislation related to health reform. Because the time needed for participation on these committees is much greater than that required for board meetings—up to a half day each week as found in Minneapolis—it's typically junior-level HR staffers from member companies who serve on the committees.

For HR professionals who are interested in pursuing coalition activities in their communities, Ellis has this advice: "Just do it! Visit other coalitions to see how they operate, and make the commitment to spend time on developing the coalition's objectives," he says. "Health-care issues are extremely complex, and we don't need to pretend to understand all of them."

The second way that HR is influencing the community delivery of health care is by taking the information it gains from coalition efforts, educating employees about their role in purchasing decisions, and giving them incentives through the benefits system to use only the most-effective providers. In the long run, it's the consumers using the health-care system who will determine whether reform efforts at the community level will succeed.

What impact will federal health-care reform have on the coalition movement? Not much, at least not at any time soon. But don't throw up your hands prematurely, Kunkle cautions. "HR professionals have been negotiating benefits on behalf of their employees for years, and are therefore in the best position to create models for reform that work. From a federal standpoint, no legislation will be passed quickly. The more coalitions that get started and the more they accomplish, the greater the likelihood that we may see a local, community-driven solution evolve over time."

Adds Morrow, "I would say that if the government acts prematurely or overregulates the delivery system of the insurance industry in an attempt to solve problems that are solvable through other means, they will kill the developing coalition movement. The private sector, with very little fanfare, is solving the health-care problem for government. The greatest fear we have is that government will intervene prematurely, in its usual clumsy, heavy-handed way, in an attempt to solve problems that already are in the process of being solved.

"For HR professionals, my advice would be to hang in there," he adds. "The private sector, working together with providers and managed-care organizations, is in the process of providing this country with a solution to all the things we've been frustrated about."

Personnel Journal, September 1993, Vol. 72, No.9, pp. 104-118.