Allied Achieves Major Cost Cut in Health Care : Insurance: The giant firm, with 76,000 U.S. employees, has saved about $750 on each of its workers participating in a new specially designed Cigna plan.

As did many American businesses, Allied-Signal Inc. began a war on rising health-care cost in the early 1980s only to discover by 1987 that it was losing. A shocking 39% increase in health-care cost that year forced the company to take radical action.

Allied adopted a new nationwide network of hospitals and doctors that offer health care at a prepaid fixed rate or a discount. After 18 months, the company reports that it has saved about $750 in health-care costs on each of the workers participating in the program.

Assessing the results of the program for a group of employee benefits specialists, doctors and hospital representatives meeting in Los Angeles this week, Joseph Duva, Allied corporate director of employee benefits, said the company would have had a per capita health-care cost of $3,200 “if we had done nothing.” The per capita cost under the new plan is $2,450, he said.

Allied’s plan is a point-of-service program that allows workers to go outside of the network for service if they believe that it is necessary for a particular problem. When workers use a doctor in the network, they simply pay $10 for the office visit and $5 for prescription drugs. When outside the network, employees are subject to a deductible equal to 1% of their salary and pay 20% of the cost after the deductible.

Stunned by its escalating costs in the 1980s, the Morristown N.J.-based company, with $12 billion in sales, sought bids from several insurance companies, eventually contracting with Cigna Corp. to develop and manage the first nationwide network of its kind.

In return for the business, Cigna guaranteed that Allied’s premium increases for network participants would be less than 10% for the first three years of the program, Duva said. He detailed the program at a seminar sponsored by Los Angeles-based Managed Care Providers Inc.--an affiliation of 14 Los Angeles and Orange County medical groups known as IPAs--and the Rosenberg and Kaplan health-care law firm.

In the past two years, several companies, including Los Angeles-based First Interstate Bank, San Francisco-based Wells Fargo & Co. and Pacific Telesis Group, and St. Louis-based Southwestern Bell, have come up with point-of-service plans in an attempt to stem health-care cost increases. American Telephone & Telegraph also has solicited bids from insurance companies to administer a health-care network with a point-of-service feature that would be the nation’s largest experiment in managed health care.

In considering how to cut its health-care bill, Duva said Allied realized in discussions with insurance companies that there were opportunities to control cost through managed care.

“What we had to offer was volume. We had the ability to negotiate,” he said, noting that Allied, with interest in aerospace and automotive parts, has 76,000 workers in the U.S. In contracting with Cigna to manage the network, Duva said Allied opted for “a change that would be dramatic and would give us a competitive edge,” he said.

Allied now has 114,000 workers and their dependants participating in the network, Duva said. About 25,000 Allied workers in Los Angeles are enrolled he said. He said the company’s experience has been that more than 75% of workers in the plan use the network 95% to 100% of the time. Contrary to expectations, workers in the network see doctors twice as often as those enrolled in the traditional fee-for-service indemnity insurance plan “even though with significantly less cost,” Duva said.

Overall, he said, 83% of the money spent on employee health is spent within the network. “Only 17% went out of the network where we don’t have controls,” he added.

Allied’s plan is not necessarily the model for health-care cost containment, he said. “We’re still learning. My feeling is that if managed care is the solution, it is like a nine-inning ballgame and this is like being in the first inning of the ballgame. We have got a long way to go,” he said.