Medical Care Reform May Be Reaching Turning Point : Health: Soaring costs nudge even organized medicine and big business to agree it is time for major change.

When Karin Allen, a 49-year-old receptionist, had to undergo back surgery three years ago, she suffered a double-edged trauma--the after-effects of the operation, and sticker shock.

When all the bills were in, the otherwise-routine laminectomy (removal of bone from a vertebra) and spinal fusion cost a whopping $19,000--including scores of separate charges ranging from $536 a night for a four-person room to $25.50 for a Vaseline-treated gauze bandage.

“It was pretty incredible, and I’m sure those costs have risen since,” Allen says. “I was very grateful I had this major medical policy. It covered almost everything.”

But now, Allen is eyeing the future with a fear that she might someday face an even bigger shock--the prospect that she may not have insurance to cover any further back repairs.

With her boss about ready to retire, Allen is facing the possibility that she may need to find another job. However, under new cost-cutting procedures, her new insurance company seems almost certain to refuse to cover “pre-existing conditions” such as her back problem. And the way things are going, her next job may not offer employee medical coverage at all.

“My chances of maintaining health insurance benefits are extremely slim,” she says.

Allen’s experiences are typical of those of many Americans as the 1990s get under way.

Over the past three decades, demand for health care has exploded, spawning a sharp proliferation of private insurance, physicians, hospitals and costly new equipment and technology.

The result: Health care spending has leaped from 4.6% of the gross national product in the early 1960s to 12%--or about $671 billion--today.

Moreover, it is still growing. Federal Budget Director Richard G. Darman predicts that by the end of the century the share of the nation’s output devoted to medical expenses will top 17%. By the year 2030, it will soar to 37% unless something is done to stop the climb.

Perhaps not surprisingly, businesses, which foot the bulk of the nation’s health insurance costs, also have begun to sit up and take notice--and are moving rapidly to cut their costs.

Today, five times as many companies as in 1980 require employees to pay deductibles of $100 or more. Many employees are required to pay higher premiums. And companies have set up sweeping review programs to keep better tabs on how workers use medical services.

Many businesses now also require employees in non-emergencies to obtain pre-certification for hospital admissions and second opinions for surgeries.

In the face of pressure from businesses, insurance companies, too, are cutting back--by restricting their coverage and raising premiums.

In other cases, the insurers are simply discontinuing coverage for expensive illnesses.

And by raising rates sharply, many insurers in effect are refusing to cover entire industries or groups that they regard as high risks--such as loggers, roofers and (because of the AIDS scare) beauticians or interior decorators.

In Indiana, one health insurance plan is being sued for setting a lifetime limit for AIDS-related care at $50,000.

One result of all this change is that fewer and fewer Americans are being covered by health insurance each year. Today, some 60 million or more Americans have inadequate medical insurance--or are on the verge of losing their coverage, largely because hard-hit businesses and government programs are drastically cutting back in the face of runaway health care spending that is eating up profits and busting budgets.

Kenneth E. Thorpe, a University of North Carolina health expert, estimates that there has been a 25% increase in the number of uninsured since the 1970s, with one in four Americans likely to be without coverage during the next two years.

In 1989, he reports, 14% of the insured non-elderly population lost its coverage--an increase of more than 700,000 people in just one year.

“More and more of the working middle class are being left without health insurance and will be exposed to potential medical indigence,” warns Uwe E. Reinhardt, a Princeton University political economist.

Not unexpectedly, employees are resisting such efforts. A recent study by the Employee Benefit Research Institute found that 78% of all labor disputes in 1989 involved health benefits.

“There’s a lot of fear--real fear--and a lot of confusion out there,” says Robert J. Blendon, a researcher at the Harvard University School of Public Health.

Rashi Fein, another Harvard analyst, agrees: “The system is coming apart--this has become a societal problem.”

The growing plight of people such as Karin Allen has engendered a rising clamor for reform from virtually every segment of society--even organized medicine and big business.

The groundswell of discontent seems all but certain to produce sweeping changes in the nation’s fractious medical care system--although any such reforms are at least several years away, analysts and policy-makers say.

Scores of specific proposals already have been advanced, ranging from the adoption of medical care systems similar to those used in Canada or Germany to granting tax deductions for individual contributions for health insurance premiums--an idea that intrigues the Bush Administration, which is still developing its own vision for change. A Democratic proposal would require businesses either to offer all their employees health insurance or to pay a tax to help finance an insurance plan for the needy.

Even as the debate rages on, employers’ moves to hold down costs by closely monitoring and restricting employee use of medical services are evoking anxiety and anger in an aging work force that has become accustomed to getting the most and the best that medicine has to offer.

Yet even the most successful corporate programs are doing little more than holding off the inevitable. Jacque J. Sokolov, medical director of Southern California Edison Co., which has one of the most wide-ranging, likens his job to piling sandbags on the banks of a raging, rain-swollen river. “What we need is flood-control reform,” he says.

Admittedly, calls for reform of the medical care system are not new. They have been heard in virtually every decade this century--going back to 1912, when Theodore Roosevelt and his breakaway Bull Moose Party embraced the issue. But until the enactment of the federal Medicare and Medicaid programs in 1965, none of the proposals got anywhere, largely because of the strong opposition of the American Medical Assn. and corporate America.

“In the past, when we didn’t do anything, we could still be optimistic that we were moving in the right direction: More and more people had more and more insurance,” says Fein, a longtime champion of universal health insurance. “Now we’re moving in the other direction. And we’re on the road to major catastrophe.”

But with the AMA and big business now on board, and with a growing number of middle-class Americans becoming disenchanted with the status quo, the issue may be reaching a turning point.

Already, 34 million to 37 million Americans have no medical insurance, including entire families with full-time job holders.

But even the 189 million Americans who have private health insurance are being squeezed. And some, like Karin Allen, have all but stopped seeking medical attention--lest their premiums rise still further. The Maryland woman skipped a Pap test for two straight years--until a serious problem developed. She has yet to get a mammogram.

“I don’t know anybody--other than those working for very stable employers--who hasn’t told me a tale of woe about their insurance or a relative’s insurance and the cutbacks they’ve faced,” Fein says.

Carl J. Schramm, president of the Health Insurance Assn. of America, dismisses such expressions of concern as unsubstantiated “free-floating anxiety.” Says Schramm: “The vast majority of Americans are well covered and not concerned about it.”

But that sanguine view is not widely shared by business executives.

A 1991 Gallup survey sponsored by the Robert Wood Johnson Foundation found that 90% of 384 heads of the nation’s largest companies said the health care system needs to be completely rebuilt or fundamentally changed.

“In the 1970s, they didn’t want any government intervention,” says Sharon Canner, an analyst at the National Assn. of Manufacturers. “But the costs have gone up so dramatically.”

In 1965, for instance, businesses paid 17% of the nation’s total health care spending bill of $38.2 billion. By 1989, businesses paid 29.7% with total spending of $583.5 billion.

“This increase in burden, projected over the next decade or two, cannot be sustained by American business,” warns Southern California Edison’s president, Michael R. Peevey.

Fringe benefits such as medical insurance have become the most rapidly growing component of labor compensation. For nearly a decade now, health care bills have exceeded 50% of pretax corporate profits, with such expenses now costing businesses, on average, an amount equal to 26% of their net income.

Another dire picture of health care’s impact on industry will come in 1992 when businesses will be required by the Financial Accounting Standards Board, the accounting profession’s own regulatory body, to report the estimated future cost of retirees’ health benefits. This unfunded liability--already promised but previously unrecorded on financial statements--could amount to $227 billion in 1988 dollars, the General Accounting Office warns.

Some physicians and hospitals also are being deeply affected by the health care crisis.

A recent American Medical Assn. survey found that doctors had accumulated $6.3 billion in uncollected revenues in 1988, mostly “charity” cases.

The American Hospital Assn. says hospitals provided $11.1 billion in uncompensated care in 1989--an increase of $7.2 billion over 1980. But that burden has fallen largely on the teaching hospitals and other public facilities--especially in the inner cities--leaving them to cope under the pressures of treating AIDS, drug abuse, problem pregnancies, increased trauma and other afflictions stemming from poverty.

As a result, says Chicago analyst Emily Friedman, “there is quarreling among hospitals, between hospitals and physicians, and between hospitals and government as the cost of treating the uninsured increases while subsidies decline.”

In addition to shifting costs, many employers have adopted utilizations-review programs to better keep tabs on worker usage of medical services. Today about 75% of large companies have such a program. Many of the largest firms also have chosen to become self-insured, in effect paying their own medical bills.

Still others, such as AT&T;, Southwestern Bell and Allied Signal, have instituted preferred-provider organizations, whereby they promise doctors and hospitals a greater patient flow in exchange for lower rates. Employees may still go to a physician or hospital of their choice, but they must pay more for it.

Many firms also are finding it cheaper to provide some medical services themselves. Among those with their own clinics now are Goodyear Tire & Rubber, Tenneco and America West Airlines. Goodyear says it saves $500,000 a year just by running its own drugstore. Gillette saves $125,000 a year by offering in-house X-rays.

Perhaps the most elaborate and widely hailed in-house health care system is that of Southern California Edison, whose annual health care spending quadrupled in 10 years, reaching $88 million by last year.

Edison 2 1/2 years ago implemented a comprehensive “managed care” system for its 55,000 employees, retirees and their families. Building on its own network of 10 company-run clinics staffed by 115 full-time and part-time medical personnel, Edison integrated its self-insured medical plans with an in-house claims payment system and a preferred providers organization with 7,500 doctors and 85 hospitals.

At the time, Edison’s health care costs were rising at an annual rate of 23%. Costs today are rising at less than 5%, says Sokolov, Edison’s vice president and medical director.

But whether such efforts will have much effect beyond an individual company’s bottom line is open to question.

“You can cite example after good example--like Edison. But, overall, managed care is not having an impact on the (aggregate) bottom line,” says Stuart H. Altman, interim president of Brandeis University and dean of its Heller Graduate School for Social Policy.

“We totally agree,” says Sokolov. “Our savings cannot be translated unless there’s a national system of reform.”

Another increasingly popular cost-cutting approach is the corporate emphasis on preventive care and healthier lifestyles.

After concluding that 15% to 25% of illnesses among its 35,000 employees were preventable, Johnson & Johnson instituted a $7-million-a-year wellness program that offers checkups and emphasizes healthy habits.

The program’s cost averaged $200 per employee, says Curtis Wilbur, director of “Live For Life.” But after just three years, Johnson & Johnson is realizing a savings of $370 per employee.

“You’re not going to find any one silver bullet to this multifaceted health care problem,” Wilbur says. “And encouraging people to get healthier has to be one leg of this strategic stool.” Other firms, such as U-Haul, tie the price of premiums to five “modifiable” risk factors--blood pressure, diabetes, cholesterol, weight and smoking. Employees who smoke or are heavily overweight, for example, must pay an extra $120 in annual premiums.

The Adolph Coors Co. pays 90% instead of 85% of an employee’s medical bill if he is found to be fit and follows a healthy lifestyle. And Du Pont has launched an awareness campaign against back injuries, which were costing the company $40 million a year in lost work time and medical bills. The firm says it has cut such losses by 25%.

And in a major breakthrough, the Blue Cross and Blue Shield Assn., the nation’s largest private health insurer, with some 73 member organizations around the country, last month recommended coverage for routine medical screenings for cancer, heart disease, cholesterol and blood in the stool as well as mammograms and Pap smears.

While the new benefits would raise monthly premiums by $3 for individuals and $7.50 for families, the increase will be more than offset by the savings to be realized through prevention, early detection and treatment, the association says.

“These changes are useful, nice and good,” Harvard’s Fein notes. “At their very best, they provide individual companies and subscribers something that is more efficient and therefore presumably somewhat cheaper. But they alone are not going to solve the problem.”

Just what will solve the problem--and when--is anybody’s guess.

The ultimate reforms likely will be “substantially different” from any of the proposals now being debated, says North Carolina’s Thorpe.

Adds Princeton’s Reinhardt: “No single interest group seems strong enough to shepherd a coherent health care reform package into legislation--because every group seems powerful enough to sabotage whatever someone else proposes.”

Budget Director Darman agrees: “This is one which raises so many difficult, technical, structural and ideological issues all at once that it’s going to be very hard to develop a political consensus for any one of the plans.”

It may take a special commission to come up with the answers, says Paul Ellwood, an Excelsior, Minn., pediatrician and a veteran health care reform activist. But Ellwood thinks the time is ripe. “And we probably only have one shot,” he warns.