Review Firms Bring HMO Cost Focus to Private Medicine
Richard Holzer was “scared to death” early this year when doctors told him that his wife would require round-the-clock custodial care for the rest of her life.
Betty Holzer had been hospitalized for two months with a severe brain infection that left her mentally debilitated and unable to take care of herself.
Holzer, the merchandising director for a paper-products company in Connecticut, recalled that his wife’s doctors said more rehabilitation efforts would be fruitless. But the doctors’ prognosis was disputed by Cost Care, a Huntington Beach company that advises insurance companies and self-insured employers on how to pull the reins on runaway medical costs.
Cost Care gambled that it would be more cost-effective to send the 52-year-old housewife to a rehabilitation center for traumatically brain-damaged patients for two months for $32,000 than to send her home in a helpless condition that had been expected to lead to injuries and future hospitalization at a cost of at least $75,000 in just the next three years.
After two months of intense rehabilitation, Holzer regained control of her faculties and resumed an independent life.
Increasingly Influential
In recent years companies such as Cost Care have become increasingly influential in recommending and approving treatment for members of group medical plans. They are being hired by self-insured employers and insurance companies concerned by soaring medical costs.
These “utilization review” companies provide many services designed to save their clients money--by reviewing the need and length of hospital treatment and surgery to auditing hospital bills, arranging for second opinions and managing “catastrophic” cases such as Holzer’s.
While in the Holzer case everyone was satisfied by the outcome, some physicians have complained that such companies emphasize saving money at the expense of quality. In retort, advocates of such review contend that the most cost-efficient medicine is also the best medicine because it eliminates risks from unnecessary drugs and surgery and puts a premium on getting patients well as quickly as possible.
Review firms have also added to the bureaucracy of medicine by creating a kind of peer review to look over the shoulders of once independently practicing physicians. Patients have sometimes complained about delay in getting approval from review firms for hospital stays, and some physicians have lamented that they have to hire more staff people for the additional paper work.
But a hospital, patient or physician decision to go ahead with elective surgery without first consulting such companies is at peril because the patient’s insurance carrier may then refuse to pay some or all of the bill.
In 1981, Cost Care was one of the first companies to jump into the business of pre-authorizing elective surgeries as a service to medical insurance carriers and self-insured employers. Since then, stickers on insurance cards that require their holders to call review firms to authorize non-emergency treatment have become commonplace.
Cost Care was founded to apply cost-containment principles practiced by health-maintenance organizations to the larger fee-for-service sector, where patients pick their physicians.
It is no coincidence that the management team at Cost Care, which also owns the company, is headed by former officers of FHP Corp., a Fountain Valley-based HMO that offers an insurance plan with its own network of hospitals and physicians.
Cost Care President Lawrence Goelman, 47, who has a master’s degree in business from Harvard and past experience in the computer industry, cut his teeth in the medical field at FHP in the late 1970s. As FHP’s vice president of marketing he sought to create an indemnity insurance product that could be competitive with FHP’s HMO costs.
Ultimately, Goelman said, FHP decided not to pursue the indemnity side of the medical insurance business. “(FHP) didn’t see it as a business. I did. So we parted company.”
Dr. Gerard N. Mazo, a former medical director of FHP, joined Goelman in establishing Cost Care. Mazo now is Cost Care’s director of medical affairs.
Goelman acknowledged that HMOs have an advantage in containing costs because they employ the providers that their policyholders must use. But he said early on he recognized that an alternative form of cost monitoring was vital because about 70% of the people prefer to choose their own doctors.
Goelman realized that the biggest bite of the medical insurance dollar--55%--is spent on hospitalization, so Cost Care pioneered the concept of reviews on behalf of private-indemnity insurers.
Before hospital admissions for elective surgery, Cost Care verifies the need for surgery and determines the number of hospital days needed for recovery.
“We have been able to reduce hospital admission rates (of Cost Care customers) by up to 50% and hospital days by up to 45%,” Goelman said.
Review advocates said it has reduced unnecessary surgery and overlengthy hospital stays and has virtually eliminated the once-customary practice of admitting patients to hospitals several days before surgery.
Dr. Thomas Mayer, director of managed health care for the national medical audit division of Mercer Meidinger Hansen, an insurance consulting firm in Los Angeles, said he believes that because of the peer review that private physicians are receiving from companies like Cost Care, “doctors are doing a better job and costs are being cut. . . . It is kind of like getting a second opinion on everything being done.”
But Russell Ewing, a family practitioner in Yorba Linda and president of the Orange County Medical Assn., said he doesn’t “know anyone (in the medical community) who isn’t bothered and concerned” by companies such as Cost Care.
Frequently, he said, such companies reject as “medically unnecessary” procedures that patients’ physicians believe are important to diagnosis and treatment.
Ewing said that he has no specific knowledge of Cost Care but that in some instances he has seen that such companies show more interest in saving money than in getting patients well and back on the job as swiftly as possible.
“It is sometimes cheaper to let the patient get well slower,” he observed.
For example, he said, review companies may save money by discharging patients from hospitals to their own homes--where they receive “adequate but not as intensive” care and take longer to recover.
Cost Care’s monthly charges to its corporate clients range from $1.15 per employee for the basic pre-hospitalization review to about $2 per employee for the full gamut of services other than catastrophic case management, which is billed on a per-case basis.
“For every dollar they spend on us, we typically save them $7 to $10,” Goelman said about his corporate clients.
Mark Smith, benefits supervisor for Torrance-based Toyota Motor Sales USA, a self-insured company that has hired Cost Care to pre-authorize hospital admissions for its 2,500 employees, said that from April 1, 1987, to March 31, 1988, physicians requested 1,387 hospital days on the company’s insurance plan, of which Cost Care authorized 1,233.
To Toyota, that means a savings of 154 hospital days, and in California each day costs an average of $855.
“It is definitely worth it,” Smith said of Cost Care’s service. “Not only is money saved in Toyota’s pocket, but money is saved by the (Toyota) employees,” who are obliged to pay 20% of their hospital bills.
The promise of savings has helped Cost Care--and other review companies--to expand rapidly. The company claims to represent about 4,000 U.S. employers whose medical insurance policies cover 2.5 million employees and dependents. Counted among its clients are such Fortune 500 companies as Borden Inc., Colgate-Palmolive Co. and Champion International Corp.
Cost Care’s staff of 230 workers includes 18 physicians and 80 registered nurses as well as system analysts and programmers to handle the company’s huge computerized data base.
More than 2,000 calls a day are answered over 165 incoming WATS lines at Cost Care’s Huntington Beach offices. Most of the calls come from hospitals and patients seeking treatment authorizations.
Also, 2,500 outgoing calls are made daily mostly to private physicians’ offices to gather clinical diagnostic information that Cost Care’s own physicians use to evaluate the cost-effectiveness of treatment plans. Cost Care officials brag that while other review companies allow nurses to determine the appropriateness of treatment, at Cost Care that is exclusively done by doctors.
While Cost Care claims to have been the first company to apply pre-hospitalization review in the private insurance sector, it wasn’t alone for long.
Andrew G. Campbell, Cost Care’s executive vice president and also a former FHP official, said: “In 1981, there was no competition anywhere we know of. By 1985, there were 50 to 75 competitors, and today there are over 200, of which maybe 10 are national in scope like us.”
A 1987 benefits survey by A. Foster Higgins & Co., a health insurance consultant, found that 61% of U.S. employers--and 66% on the West Coast--have pre-hospital admission review programs. And 49% of U.S. companies--and 54% on the West Coast--also have a program for continuously reviewing the length of hospital stays.
Goelman estimated that such reviews are a $300-million U.S. business that is expanding by 20% to 30% a year. As a privately held firm, Cost Care declines to disclose information about its revenues or profits.
Catastrophic Cost Managing
Perhaps the fastest-growing trend today in cost containment is the managing of catastrophic cases, patients who need intense, long-term medical care. Acquired immune deficiency syndrome has focused attention on the importance of identifying the most cost-effective, life-extending treatments from diagnosis to death.
“If we look at all cases that go into a hospital, only 3% meet the catastrophic criteria, but they use 80% of the health-care dollars,” said Sue Sedaka, manager of Cost Care’s case-management department.
The primary goal of case management, she said, is to get a patient well as quickly as possible by seeking out the most effective medical delivery systems available.
Sometimes, Sedaka said, Cost Care’s case workers advise transferring a patient out of a community hospital and into a center specially equipped to treat traumatic injuries. And they push to have dying or chronically ill patients discharged from acute-care hospitals to less expensive hospices or home settings.
In one instance last year, Sedaka said, a doctor was persuaded to allow quadruplets to go home with 24-hour nurses and support equipment in three to eight weeks, rather than stick to his original intention of keeping them in the hospital for six to nine months. The total tab for the at-home care for eight months came to $176,000; eight months in the hospital could have cost $2 million.
Cost Care’s officials said their doctors question primary-physician recommendations for hospitalization in 15% to 20% of all medical/surgical cases. That increases to 80% to 90% of cases involving the treatment of psychiatric problems or drug and alcohol abuse--an exploding area of health care that Cost Care officials said is plagued with overuse of in-patient hospital treatment programs.
Leon Starr, vice president for financial affairs for the Hospital Council of Southern California, said review companies are unnecessary because hospitals have become more conscious of containing costs.
“From a hospital’s point of view, I think hospitals believe the most effective utilization review is done by the hospital’s own medical staff because they know their peers and the standards that prevail in their own community,” he said.
But Cost Care shows no signs of retreating. Instead, the company is marketing a new review program tailored for worker compensation insurance and establishing an affiliated network of physicians, clinics and hospitals specializing in handling worker compensation cases with high cost efficiency. He said it will be the first of its kind in Southern California.
Talking like a man with a mission, Goelman warned: “If our type of programs don’t work, nobody will be able to afford to buy insurance for their employees, and the only alternative will be some form of nationalized health care.”
