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The Battle Over Benefits

November 6, 2003
Related Topics: Benefit Design and Communication, Health and Wellness, Labor Relations, Featured Article, Compensation

F rom janitors in New England and autoworkers in the nation’s heartland to grocery workers, bus mechanics and sheriff’s deputies on the West Coast, union picketers are focusing renewed attention on the health-care crisis in America. At a time when health-care costs are rising faster than the rate of inflation and employers are aggressively revamping benefit options, the sight of cashiers and butchers fighting for health benefits is the latest, most arresting example of the mounting discontent and anger surrounding the subject of who pays what for health insurance.

    In Southern California, the story isn’t only about the 70,000 grocery-store workers battling attempts by supermarket employers to curtail medical benefits, says Kate Bronfenbrenner, director of labor education research at Cornell University. It’s also about the customers who honored picket lines last month. "The unions are fighting for health benefits for everyone," Bronfenbrenner says. "They set the standard, and the public is sympathetic."

    The recent strikes are symptomatic of the pressure that skyrocketing health-care costs place on all employers--public and private, union and non-union--and on labor and employee relations, says Joe Martingale, national leader for health-care strategy at Watson Wyatt Worldwide's New York office. "Unless we do something to resolve the health-care crisis, there won’t be any winner in a strike like this," he says. "We have two choices. We can ask government to take over health care, which is not realistic. Or we can solve the problem from the bottom up: We all will have to be more involved in health care as powerful consumers."

    Throughout the country, employers are persistently trying to reduce double-digit cost increases by making changes to their health-care plans, modifications that are shifting more of the expense to employees--from raising premiums for family members to offering greater choices of medical care. Employers, employees, health professionals and government officials are all questioning the old ways of providing health coverage, and racking their brains for new solutions. While there is little agreement on how to lower health-care costs, developing shrewder consumers is fast becoming the mantra of the times.

    Some companies, like Sears, Roebuck & Co., are moving away from fixed-dollar co-payments to programs that require workers to pay a percentage of each medical bill. Sears also has reduced the number of HMOs it offers to employees, from 53 to 35 in 2003. Five years ago the company offered more than 200 HMOs, says company spokesman Stanley Aldis. Procter & Gamble Co. has increased co-payments from $12 to $15 for primary-care physicians, and from $15 to $25 for specialists, says company spokeswoman Vicky Mayer. Some prescription drugs that had been covered at 70 percent are now covered at 50 percent. Many other companies also are making it far more expensive to buy brand-name and designer drugs than generics. And a few are providing company-operated clinics that treat employees and their families.

"We have two choices. We can ask government to take over health care, which is not realistic. Or we can solve the problem from the bottom up: We all will have to be more involved in health care as powerful consumers."

    In September, the Kaiser Family Foundation and Health Research and Educational Trust announced that health-care premiums rose 13.9 percent this year--the steepest increase in 13 years and the third consecutive year of hefty increases. Workers are paying 48 percent more than they did three years ago. There are indications, however, that rate hikes may begin moderating. Hewitt Associates is projecting a 12.6 percent increase for employers in 2004.

    While some say the solution lies in nothing less than a national health plan and universal coverage, others, such as Larry Akey, director of communications for the Health Insurance Association of America, counter that such a major overhaul "risks disrupting the system and making it worse than it is."

What companies are doing
    Most employers are responding to cost increases in one of two ways, says Gary Kushner, president and CEO of Kushner & Co., a Portage, Michigan, benefits consulting firm. "One is a continuation of the status quo: year by year making plan-design tweaks and passing costs on to employees." Another trend is the now familiar option of "consumer-driven" health-care plans that give employees an annual cash allowance to spend on medical care. A survey by the American Management Association this year showed that 8 percent of respondents offered such a plan to their workers, among them Aon Corp., Medtronic Inc. and Raytheon. Another 40 percent were considering implementing similar models within the next six years.

    Companies also are demonstrating far more interest in health-care appraisals and promoting group exercise and lifestyle improvements to curb disease, notes Lee Exton, vice president of The Segal Company in Glendale, California. No one disputes that comprehensive disease management improves outcomes and quality of life for patients, but "there is a lot of conflicting research as to whether it saves money," says Alwyn Cassil, spokeswoman for the Center for Studying Health System Change.

    Dan Conroy, human resources manager for Nexen Group Inc., a manufacturer of brakes and clutches, last year began offering a consumer driven plan to the 150 employees of his Vadnais Heights, Minnesota, firm. "We didn’t save a dime the first year," Conroy says. But this year when Nexen re-enrolled, the company paid 7 percent less. He says that most of the savings "came from [lower] reinsurance fees, but our utilization fees were also lower."

    Overnight, Nexen’s employees began calling free health-advice lines instead of running to the doctor, and they pushed their providers for generic drugs. "This is the only ray of light I’ve seen in terms of continuing to provide health insurance to employees. I’m surprised that people don’t just go running and sprinting to this kind of plan," Conroy says.

The immensity and seeming hopelessness of the health-care
crisis have driven some executives
to conclude that nothing less than
a wholesale overhaul of the
system is in order.

    "All the major carriers spent two years explaining why this model wouldn’t work, and now they’re offering it," adds Chris Delaney, a marketing vice president for Definity Health, a Minneapolis firm that was among the first to offer consumer-directed health-care plans in 2000. Delaney says that about a million people are enrolled in similar plans nationwide. Definity covers 320,000 of them.

    Critics say that the plans are unproven, that they often present stopgap coverage problems and unfairly penalize workers who have several dependents with costly chronic conditions and health problems. They also say that, just as for-profit HMOs can be successful in tamping down costs for the first few years, there is a clear limit as to how much can be pared without compromising care.

A universal system: SAS
    SAS, a billion-dollar-a-year private software company headquartered in Cary, North Carolina, has a lavish campus fitness facility plus a medical center with a staff of 55, including three family-practice physicians, 11 nurse practitioners and a part-time psychologist. "This is family practice in practice," says Gale Adcock, corporate health services manager. "Everyone would be in favor of universal health insurance if they had an SAS plan." While employees can use the SAS self-funded indemnity insurance to see outside doctors, 50 percent use the SAS health-care center for primary care and 90 percent make use of it each year. Last year, 7,500 employees and dependents used the center for things like pregnancy tests and flu shots, and for treatment of diseases ranging from bronchitis to diabetes.

    Virtually every visit, procedure, shot and test at the medical center is free. Adcock, who points out that SAS hasn’t had a losing year or a layoff or a turnover rate above 5 percent, says that the clinic actually contributes to the bottom line by saving the firm money in recruitment, replacement and time. SAS calculates that administering health care on-site saves about $500,000 in "hard" costs and another $500,000 in "soft" costs, such as employee time spent driving to outside doctors. By having health care that is exceedingly accessible (the center is open 12 hours a day and the average wait is five minutes), employees are more motivated to address incipient health conditions before they have a chance to become acute and costly.

    Supplementing insurance with on-site primary care makes the most sense for self-funded companies with a workforce of at least 300 people, Adcock says. "If you want to do primary care for 200 people, this is not an effective way to deliver it. But we didn’t start out as a Lexus; we began as a Volkswagen. We began in 1984 with just one nurse practitioner."

A total overhaul: RSD transportation
    The immensity and seeming hopelessness of the health-care crisis have driven some executives to conclude that nothing less than a wholesale overhaul of the system is in order. Scott Perrault, controller for RSD Transportation Inc., in White River Junction, Vermont, is thinking that national health care may be the only answer. When Dr. Deborah Richter, a family-practice physician who is past president of Physicians for a National Health Program, asked for a meeting, he  listened to her. She said that a 5.8 percent employer payroll tax and 2.9 percent employee payroll tax could whittle his overall costs from $500,000 to $700,000 a year down to a guaranteed $472,000. (Richter’s numbers were to implement a single-payer system in Vermont. Other funding schemes for a national single-payer system typically require a 7 percent employer payroll tax, or involve taxing personal income.)

    "I was very surprised by her numbers," Perrault says. "We’d have a lot more profit" under such a system if the percentages stayed stable, he notes.

    RSD subjects prospective employees to pre-employment physicals, covers physicals and many preventive services at 100 percent and offers wellness programs. It also ratcheted up deductibles and co-pays, pitted insurers against each other to achieve the most economical package and still found costs bubbling up 5 to 10 percent a year. "There’s only so much an organization can bear," Perrault says. "Where does it end?" He says that he can’t even calculate the drain of all the executive hours spent on looking for ways to contain health-care costs. "I would love to be out of the health-care business."

    Uwe Reinhardt, an internationally known health economist and the James Madison Professor of Political Economy at Princeton University, says that a Canadian-style health-care system would be cheaper for corporations for several reasons. Overhead costs would be dramatically diminished, he says, care would be distributed more rationally and effectively, and risks would be borne more equitably. But Reinhardt, who supports such a system financed by personal income taxes, says that most CEOs and chief executives eschew the idea because they preside over large personal fortunes that they prize more than increasing their companies’ profits. He adds that employers like the fact that U.S. workers are tied to their jobs by the threat of losing health care for themselves and their families.

    Not all corporations would benefit equally from a nationalized system. Under Richter’s scheme, which would be financed by payroll taxes, "IBM would save a fortune," she says. Smaller firms that provide coverage would also save, but not as much. Companies that do not now provide benefits would face increased costs because they would be forced to ante up their fair share.

Informed but demanding: Stanford
    Stanford University has an unusually literate, intelligent workforce of 11,000 employees and 3,000 retirees who comprehend how individual health habits and consumer practices influence rising costs and enthusiastically participate in wellness programs. "The downside is that they do a lot of reading, hear all about the latest things, and they ask for it," says Sue Cunningham, Stanford’s benefits program manager. The average Stanford employee is 48, which means that many are at an age when they are more likely to encounter costly illnesses and operations.

    For 2003, the average health-care cost per employee was $5,873, and $3,919 per retiree on a Stanford plan involving Medicare supplementation. The total tab for medical, mental and drug benefits is projected to be $53 million for 2003. This year, the university began mining data from its claims to find out where cost increases were originating. "We’re carving out our prescription drug plan so we can have all the claims in one place. We chose Express Scripts because they have very good data possibilities. All the drugs are priced at a negotiated rate. We had a pharmacist do the negotiating." If a generic drug is available, the employee has no option but to take it. "That’s built into the plan."

    Cunningham would like to see the U.S. government follow the lead of other industrialized nations by imposing price controls on the pharmaceutical industry. Yet most of the increases she confronts come from fee increases for provider visits and hospitalizations. Stanford creates incentives to corral costs by paying the premiums for employees who choose the cheapest HMO option among its five plan offerings. California HMOs tend to be better than many offered elsewhere in the country and are not reviled there. "Here, the physician groups do utilization management and decide if an MRI is needed or not--not the carriers," Cunningham says. As a result, only 19 percent of Stanford employees enroll in the pricey PPO product.

    Before lasting solutions to the health-care crisis can be found, experts say, it’s essential for companies to understand where the costs are coming from. In a 2001 to 2002 study, PricewaterhouseCoopers found that fraud and abuse made up only 5 percent of the 13.7 percent rise in health-care costs for the previous year. Litigation and risk management represented another 7 percent of that increase. Heightened consumer demand and the cost of implementing government mandates and regulations were each responsible for 15 percent of the increases. The biggest drivers of increased costs were rising provider expenses, which made up 18 percent of the surge, and ever pricier drugs, medical devices and medical advances, which were blamed for 22 percent of higher costs. An analysis in the August 21 New England Journal of Medicine reports that administration costs accounted for 31 percent of all health-care expenditures in the United States, an average of $1,059 per capita.

    In the coming months and years, it’s unlikely that employers will be able to swing their way off the ropes alone. Still, Akey is hardly a lone voice when he says: "Employer-sponsored health insurance is a fact of life in America." Maybe so, but consumers will have to be move involved in cost cutting, Martingale notes. "That’s what shows promise," the national health-care strategist says. "There is hope. But tensions between employers and employees will continue. Nobody’s happy. If companies can’t pay for benefits, and employees can’t afford them, where’s the money going to come from?"

Workforce Management, November 2003, pp. 28-34 -- Subscribe Now!

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