WILLIAM L. FERRIS : Curing What Ails the System : Health Insurer Prescribes Cost Reforms, Relief for Poor

As chief executive of Pacific Mutual’s Group Life Insurance Co., William L. Ferris doesn’t mind taking the road less traveled to press for industry reform.

While competitors in recent years have indulged in price wars to gain new business, Ferris has sacrificed growth to achieve more stable earnings.

And now that the insurance industry is consolidating, the company is poised to increase its market share, partly through acquisitions. PM Group Life is a Fountain Valley division of Pacific Mutual Life Insurance Co., an employee health and life insurance firm with headquarters in Newport Beach.

Over the last year, PM Group Life, which earned $10 million and had $328 million in assets in 1989, completed a takeover of Mutual of New York’s group life and health insurance business.

In an interview with Times staff writer Leslie Berkman, Ferris acknowledged that the health insurance industry and America’s health care system are in need of reform to control rising medical costs and to give relief to the millions of working people who have no medical insurance benefits.

He said Pacific Mutual is lobbying in Sacramento for state legislation that, among other things, would prevent companies from precluding individuals with potentially costly medical problems from getting insurance.

Q. Why is your company expanding in the group medical insurance business when so many other firms are getting out of the field?

A. We have been in the medical business a long time and feel we can make money at it. In fact, over the last three or four years we have generally outperformed the industry by a significant margin. In 1989, the industry lost billions and we made money, and last year the industry turned profitable and we had a higher level of profit.

Q. Do you participate in bidding wars for new business?

A. No. We sustain profit margins and generate growth the hard way with new products and good salesmanship as opposed to being out there as a low-cost insurer. If you are in this business for the long run, you go for stability. If you have to sacrifice growth of new business for that, you do that. It is a tough kind of decision to make.

Q. Your company started as a traditional indemnity insurer that reimbursed hospitals and doctors whatever they charged for their services. Are you now trying to keep medical costs down by using managed care systems like health maintenance and preferred provider organizations and reviewing hospital utilization?

A. Managed care is definitely affecting us. We have a relationship with Capp Care Inc., a utilization review and preferred provider organization located right next to our offices in Fountain Valley. We have an ownership position in Capp Care along with five other insurance carriers and with the physician who founded the firm.

We offer our customers the choice of a modified indemnity plan that will provide better coverage if they go to doctors that have signed an agreement with Capp Care to charge discounted prices for their services. The nationwide network of physicians contracting with Capp Care is a preferred provider organization.

Q. How popular is your preferred provider plan?

A. We have been writing over half of our business with a preferred provider feature for the last three years.

Q. When did you enter into an agreement with Capp Care?

A. Back in 1984. Then we were the only insurance company in the organization. We took a large ownership position with Capp Care and sort of got the company going. Since then two other insurance carriers, Home Life Insurance and Continental American, have become investors in Capp Care and 18 other companies are customers but don’t have an ownership position.

Q. You are all competitors but jointly use the same organization? Is this unusual?

A. There is one other major managed-care organization, Private Health Care Systems near Boston, to which we also belong. It was also formed by a conglomerate of insurance carriers.

You won’t find insurers as large as Metropolitan or Prudential in these kinds of joint ventures because they develop everything on their own. But when you are the size of Pacific Mutual, which is probably 25th in size among medical group insurers, it pays to join with other insurers to get the contracting clout that you need.

Q. Couldn’t you buy an existing health maintenance organization?

A. In 1986 we embarked on a strategy to develop a couple of HMOs on our own. But they are even more expensive to develop than preferred provider organizations. We were negotiating to buy one and develop another in California. But we abandoned both plans when we saw it was going to be extremely expensive and time-consuming.

Q. So do you provide an HMO option to your customers?

A. We have an affiliation agreement with an HMO, Health Plan of America in Orange, that is fairly unique in the industry. We put together a package that lets employees choose between our indemnity insurance and the HMO. But we actually encourage our employee groups to use the HMO because we want to control health care costs. No matter which choice they make, the HMO and Pacific Mutual share any profits or losses.

Q. What is the advantage of the HMO?

A. What HMOs offer are contracts in which doctors and other health care providers are paid a set amount of money per month to provide services. The employer knows ahead what it will cost him, and the provider is accepting the risk rather than the insurance carriers. That is a plausible avenue of insurance. I don’t think it will ever go away. But many companies won’t choose HMOs because of the quality-of-care issue.

Q. Isn’t the quality of care under HMOs as good as under indemnity insurance?

A. Today there are not quality review programs for HMOs that are sufficiently effective. On the other side of the coin, I really do think there is going to have to be a change in the way that indemnity insurers contract with health care providers that will better contain costs.

Right now the government is the only one that successfully contracts with health care providers. Medicare now pays hospitals on the DRG (diagnostic related guidelines) system (which specifies how much it will reimburse for each hospital procedure). It has been very effective and shifted costs to the private insurance industry.

As the next step, in 1992, Medicare is going to pay physicians on what is called the Resource-Based Relative Value schedule, which will say how much physicians can charge the program for certain procedures.

Q. So the government is expanding its cost-containment regulations from hospitals to physicians?

A. Yes. And if the private insurance industry doesn’t react to that, we are all in for a lot of trouble because the cost shifting (of physician costs from Medicare recipients to the privately insured) will be much more severe than it was with hospitals. We are girding our loins for it and trying to figure out how to react.

Q. What are the possible solutions to the problem?

A. One is to enact legislation that would limit the amount of cost shifting allowed by limiting the range between the highest and lowest prices that a doctor charges for similar services.

Another alternative would be for private insurers to adopt the same schedule of payment as Medicare uses for reimbursing physicians. Doctors in our preferred provider networks would agree not to shift costs to our members. And those employees who belong to PPO plans may be advised that if they choose doctors outside the network, we will pay only as much of their bills as Medicare would pay and they will have to pay the difference.

Q. Do you feel that physicians are charging too much for their services?

A. Oh, yes. Physicians are in a noble profession and most of them are dedicated and good, upstanding people. But there are those who are making a fortune off of the system, basically through fraud.

Q. Why do you call it fraud?

A. If you are a physician, you can go to a class that teaches you how to “game” the insurance system, how to fragment bills so that you can take what is essentially a single procedure and fragment it, and therefore inflate the charge several hundred percent over what it would be otherwise. It is up to PM Group to find out if our system is good enough to catch that.

Q. Has it been difficult to catch these things?

A. Yes. For one thing, they (doctors) are very bright people. . . . There is a thing called rolling labs. They will roll a big trailer into a shopping center with a health spa and get people to come out for free exams. They say, ‘Tell us who your insurer is and everything will be paid by your insurer. You won’t have to pay your deductible.’ ”

Our medical director got a call from someone advertising this kind of physical. He and his wife went, and between the two of them there were over $13,000 in charges for things they didn’t need and things they didn’t get. He turned it over to fraud investigators. The case is still pending.

Q. Are other physicians just charging too much?

A. Sure, and that’s not fraud. For instance, in Newport Beach you have charges for physician services that are far above the usual customary charges. We won’t insure the full price. Those aren’t difficult to catch. The physician goes after the patient for the remainder.

Those physicians who are in the preferred provider network limit their charges to the contracted amount for patients insured by the PM Group and the difference gets shifted to people in insurance plans that don’t have managed care provisions.

Right now I am convinced our PM Group experience would be much worse if we didn’t offer preferred provider plans.

Q. Why are there so many people without any medical insurance?

A. In California, about 22% of the state’s population is uninsured. Of the approximately 5.5 million people who are uninsured, about 4 million are employed or dependents of employed people.

It is primarily an issue of smaller companies being unable to afford insurance or being uninsurable because a few of their employees have cancer or some other high-cost illness.

Q. Have you seen coverage of small firms change over the years?

A. Yes. What has happened in the small group market is something five or seven years old. Previously, small employers with 25 or fewer workers who banded together in groups to buy insurance were treated the same as larger employers. But all of a sudden insurance carriers said they had the right to rate small employers individually rather than as part of a group.

Q. Did the insurance companies do this because the cost of medicine was rising so fast?

A. Yes. That is what was driving it. The result is that if an employee of a small firm contracts cancer or some other costly disease, the insurance carrier will increase rates dramatically and the employer will look for a different carrier. In turn, the new carrier will refuse to insure that employee for a pre-existing condition and exclude him from coverage.

Q. So it seems as if carriers can avoid covering employees who need it the most.

A. I don’t think there are any bones about it. The insurance industry can’t be too terribly proud of how it has operated within the small-employer market segment. With larger employers, they don’t exclude employees.

Q. Why couldn’t Pacific Mutual decide not to exclude individual employees of small firms?

A. If we did that, all small employee groups with cancer patients would come to Pacific Mutual because everyone else would turn them down. What we need is legislation to require the entire industry to cover such employees.

Q. Is the insurance industry trying to block such legislation?

A. No. The industry as a whole, through the Health Insurance Assn. of America, has put out a position paper asking for reform. As a company, we have been very active for the last 18 months in California and at the national level trying to help shape legislation to bring about the kind of reform that is required.

Q. What is the reform you want?

A. We want employers to be required to provide insurance coverage for the entire working population. We want a bare-bones insurance plan so it is affordable, so you are not just placing a requirement on the small employer and then burying him with expenses. It would provide only primary benefits and limit mental health care benefits, which are now terribly abused. Also, it would be a plan with higher-than-average deductibles and co-payments to discourage employees from overusing it.

Q. What would you do about requiring insurance carriers to cover the uninsured?

A. Insurance companies would be compelled to take an entire group of employees and not exclude anyone. Also insurance companies would be restricted on the rates they are able to charge employers that have workers with expensive medical conditions.

Because insurance companies would not have enough premium dollars to cover expensive diseases such as cancer and AIDS, under the proposed legislation they would be able to place employees with these condition in a separate category that would be insured with special funding. Insurance for such persons would be funded by a combination of sources, including their own employers and the insurance industry statewide.

Q. Why is your company so politically active?

A. Some of the worst legislation that is ever produced happens when there is no participation or only negative participation on the part of the parties at interest. If we can provide assistance and get effective legislation--even if it involves compromise and change on our part--we will be far better off.

Q. Are you concerned that if you don’t find a way to insure the uninsured that consumers will push for an initiative?

A. Yes. And that is even worse than having legislators do it.

Q. Do you think there will be national health insurance?

A. I don’t think so personally. But when I was in Washington last month to talk to congressmen and senators about health reform, I was impressed by the sentiment in Congress supporting federally provided insurance. I did not believe it was quite as strong as it is.

Q. How would your company function if that happened?

A. We would be out (of business). It would be like Medicare, where we are left to provide supplemental coverage, filling in any holes that the federal program doesn’t cover.

Q. So you don’t know where this business will be 10 years from now?

A. That’s right. There is very definitely a possibility that you could be legislated out of a big piece of the medical business. But with the deficit and the need to balance the budget, it is not a very good time in the practical sense for the federal government to enter the insurance business.