Unique Industry Pact With Doctors, Hospitals Expected to Save 30% on Fees : Silicon Valley Firms Link in Bid to Cut Health-Care Costs
In one of the first industrywide programs of its kind, a group of Silicon Valley employers are joining under the leadership of the American Electronics Assn. to share health-care data in an effort to dramatically cut employee health-care costs.
Armed with hospital utilization data from about 30,000 workers, Apple Computer Co., Lockheed Corp., Xidex Corp. and four other Silicon Valley companies are currently negotiating final agreements with nine hospitals and half a dozen physicians’ groups.
The companies hope to secure cost savings of between 25% and 30% on health care, say association officials and Chicago-based A. S. Hansen Inc., a health-care management consulting firm that is coordinating the program.
“There’s a lot of money at stake here,” said Donald Brothers, a vice president at Hansen. “Apple alone spends $7 million annually in (Silicon) Valley on health-care costs.” (Apple officials said their actual costs were slightly higher than $7 million, but they did not disclose any figures.)
The so-called shared health options purchasing (SHOP) program is modeled after a health insurance alternative called preferred provider programs. Under those programs, companies examine the fees and care provided by local hospitals and doctors and then negotiate discounted fee schedules for their employees.
Companies thus get reduced medical care costs from the “preferred providers,” and the hospitals and doctors get quick payment and a lion’s share of the companies’ business.
With 93 of the nation’s 413 PPOs, California leads the country in such plans. However, more than 80% of the existing PPO plans have been sponsored by insurance companies or hospital and physicians groups. Experts say the SHOP program is apparently the first time such a large group of companies in the same industry have approached health-care providers in an effort to secure lower medical prices.
“It’s the first time I’ve heard of it,” said James E. Sherman, president and chief executive of the Cypress-based PPO Alliance, which with 300,000 members is the largest PPO in the state. But it’s a logical move, he said. “The more volume you can put together in business, the better the opportunity to contract for lower prices with hospitals and physicians.”
Leslie Andrews, benefits manager for Apple, said her company and the others spent about 18 months collecting and reviewing data on their employees’ health-care utilization of local hospitals and physicians in order to better equip themselves to negotiate fees.
“We said, ‘Here’s what you are charging, and here’s what we expect the charges to be based on our data,’ ” Andrews explained.
Corporations have been driven to such ends because of skyrocketing health-care costs.
Hospital insurance premiums jumped to 9.1% of pretax corporate profits in 1983 from 3% in 1970, according to the latest figures from the Department of Labor Statistics. The annual tab for employee health insurance premiums has risen to more than $100 billion from $82 billion in 1983, the U.S. Chamber of Commerce says.
In recent years, hospitals and other health-care providers have been more willing to watch their costs in exchange for a sizable source of patients. That’s because hospital occupancy rates have been dropping steadily as the federal government and private insurance impose cost containment measures such as treating patients in less expensive emergency clinics or doctors’ offices rather than in the costly hospital setting.
In pushing for the discounts, however, the companies and the association are having to carefully observe some tricky antitrust regulations.
The companies are prevented by law from jointly negotiating contracts, and the association is also prevented from negotiating a contract on the companies’ behalf, officials say. Thus, savings at the participating companies vary. However, Donald A. Peen, a Hansen executive who directed the SHOP project, said the health-care providers “guaranteed a base” cost for all association members with at least 150 employees.
The association’s Debi Nason said about 250 members in Northern California have enough employees to qualify for the SHOP program. She said the association will soon try to introduce the program to members in Southern California and other parts of the country.
