Employers Treat Health Plan Costs With Managed Care : Medical insurance: Companies find that they have more ways to cut the costs of coverage than by dropping benefits or making employees pay more for them.

Linda Daniels is earning $40 more a month this year without getting a payraise. She is taking advantage of a new twist in medical insurance benefits offered by her employer, Nichols Institute in San Juan Capistrano.

The firm, which conducts complex medical laboratory tests, this month began offering a “working spouse option” to married employees willing to forfeit full medical insurance coverage. In exchange, those employees receive more pay or pension benefits.

Daniels, an investor relations assistant, has chosen an option under which Nichols insures only 20% of any of her future medical bills. Her husband’s employer, Pacific Bell, provides coverage for other medical costs.

“I think it’s great,” Daniels said. “There is no sense for me to have extra coverage that I can’t use or don’t need. Between the two policies, I have 100% coverage.”

The arrangement also is beneficial to Nichols, which now has to spend only $140 a month--instead of $400--to provide health insurance coverage to Daniels.

The Nichols program, a type of flexible benefits plan, is just one example of steps that companies nationwide are taking in an effort to place a check on medical premium costs, which consultants say have been rising about 20% a year in Orange County.

Other firms are cutting costs by shifting to preferred provider and health maintenance organizations (PPOs and HMOs), hiring specialists in handling mental health and drug abuse cases, and offering exercise and other programs to improve their workers’ health.

Paul J. Feldstein, a professor at the UC Irvine Graduate School of Management, said that companies have more alternatives to cut employee medical costs than just dropping benefits or making employees pay more for them.

“A lot of companies get so frustrated by the issue that they will drop dependent coverage or increase co-insurance and deductibles rather than find how to more efficiently provide the same level of benefits,” said Feldstein, who will speak today at a health benefits conference sponsored by the Orange County branch of the Merchants and Manufacturers Assn.

He encourages companies to offer employees HMO and PPO plans. In contrast to the traditional insurance plans that let employees choose their doctors and hospitals, these managed health care programs seek to direct patients to the most cost-effective treatment.

Employees are enticed to join managed care programs for the chance to reduce or eliminate their out-of-pocket costs in the form of deductibles and co-payments.

Some companies have switched exclusively to managed health care. Advanced Controls Inc., an Irvine manufacturer of machines used in making printed-circuit boards, contracted with a PPO last May.

The company was seeking to avoid a 96% increase in the cost of its previous insurance plan, which paid a percentage of all medical bills regardless of which doctor or hospital an employee chose. Now everyone at the company is restricted to a pre-approved list of doctors who have agreed to provide discounted services.

“Even my family had to change doctors as a result of our new program,” said Robert W. Quest, the company’s president and chief executive officer.

Swiftly gaining popularity are the kind of PPO plans that allow employees to go to a doctor or hospital outside the plan--if they pay an out-of-pocket premium for the privilege.

Parker Hannifin Corp.’s aerospace unit in Irvine offers such a “swing” plan to all of its 4,000 employees in Los Angeles and Orange counties. Moreover, the company has created its own case-management network, hiring physicians and nurses to review treatment plans.

Currently 60% of Parker Hannifin’s employees have joined the swing plan and choose to use pre-selected doctors and hospitals 80% of the time, said Joyce Munsell, the company’s medical resources manager.

Other companies are offering “flexible benefits” programs that allow employees to tailor their medical benefits to individual needs.

These companies in some cases are giving employees a certain amount of money to buy the medical benefit plans they want or feel they can afford. Under federal tax rules, money earmarked for medical expenses can be deducted from the employee’s income, thus reducing both the employee’s income taxes and the employer’s payroll taxes.

“It is an outstanding opportunity for the employer to do something for the employee,” said John Word, president of Word and Brown Inc., an Orange wholesale broker of health insurance to small companies. Such tax breaks, he said, can make the employee’s growing role in funding medical insurance “much more palatable.”

So far, those using flexible medical insurance plans with tax benefits have primarily been large companies. But Word said this year he expects “a tremendous number” of companies with 50 and fewer employees to jump on the bandwagon.

Under Nichols’ flexible plan, an employee may be required to pay a portion of his medical insurance premium of up to $167 a month, or he may receive a refund from the company of up to $60 a month. The amount depends on the benefit package chosen.

Raman Raj, the company’s director of compensation and benefits, said he has revamped Nichols’ medical benefits since he took his job a year ago. Since then, he said, the company has cut administrative costs and added many options, including a PPO.

As a result, Raj said, this year his company does not expect its medical benefit costs to rise. “If we hadn’t done these things, rates would have gone up 15% to 20%, at least,” he said.

But flexible benefits plans have drawn criticism. Gary Golden, president of Insurance Alternatives, an employee benefits brokerage in Irvine, predicts that letting employees choose to drop some medical insurance benefits will gradually cause the cost of those benefits to rise.

“It sounds wonderful,” he said. “But as soon as you allow employees to pick and choose what they want, it drives the healthy employees out of the plan. I think it is a stopgap measure that ultimately will cost employers more money because of increasing adverse selection.”

Golden contends that to lower the cost of medical insurance, more employees need to be insured, not fewer, in order to spread the financial risk. As of 1987, the last year for which data is available, 23% of American workers aged 18 to 64 had no employer-subsidized group medical benefits and 16% had no medical benefits at all.

“Nothing is going to contain costs until there is some mechanism of getting all employers to pay a decent share,” Golden said. “If everyone did, the cost per person would be lower.”

Companies nationwide are especially dismayed by a leap in the cost of insurance to treat mental illness and chemical dependency--which increased 27% in 1988, the most recent year for which there is data available.

In response, companies are beginning to hire specialists in efficiently managing psychiatric and alcohol- and drug-abuse cases.

Since its founding in 1988, Lifelink, a Laguna Hills company that specializes in managing psychiatric and chemical dependency cases, has enrolled 200,000 employees in its plan. Almost half were added in the last year.

Some companies also are instituting “wellness programs” including exercise rooms and smoking cessation counseling, in an effort to cut future medical costs by making workers healthier. Odetics Inc., an Anaheim electronics firm, has one of the most extensive health programs in the nation. It offers its 488 employees a 6,000-square-foot exercise facility with a lap pool, as well as a broad range of classes ranging from yoga to the use of acupressure to reduce back and neck strain.

But even if a company adopts all of the alternatives available, most consultants do not believe that it can hold down rising medical costs forever.

“Every little bit helps. But the basic underlying fact is that the cost of health care is increasing by 20% a year and Orange County is one of the highest--if not the highest--cost medical areas in the country,” said Michael Fox, who manages the Costa Mesa office of Foster Higgins, a medical benefits consulting firm.

“It is a frustrating area. The fact of the matter is nobody has a solution,” said Richard Burrell, vice president of human resources for National Education, an Irvine-based vocational education company that has seen its medical costs rise 15% to 21% a year, even after taking cost-curbing measures.

EMPLOYEE MEDICAL CARE COSTS

The average cost of providing medical care, including claims and administration fees, for an employee it the United States has increased steadily since 1984. 1984: $1,645. 1989 (estimate): $2,742.

Source: Foster Higgins Health Care Benefits Survey