Firms See ‘Managed Care’ as Remedy to Medical Costs : Health: Companies are using a hands-on approach to cut expenses. Critics say the programs are too complex.

When Steve McMenamin, a systems manager at Southern California Edison Co., told his supervisors that he needed a heart transplant earlier this year, Paula Nordhoff sprang into action.

Nordhoff, an Edison medical benefits manager, and her staff frantically pored over prices and success rates at heart-transplant facilities throughout the country. And they negotiated with Cedars-Sinai Medical Center in Los Angeles for a flat $200,000 fee for the transplant operation and follow-up services, including hiring of a special “utilization” nurse to guide McMenamin through a yearlong rehabilitation. “They ran the whole show, and I’m grateful,” he said, recalling his transplant in February.

Nordhoff and her crew weren’t motivated entirely by compassion. With business outlays for medical costs skyrocketing--by more than 40% over the last two years alone--McMenamin’s heart transplant easily could have cost Edison $500,000 or more. Nordhoff’s job was to cut costs any way she could while still ensuring quality care.

Edison’s new program is at the forefront of a new, often-contentious cost-containment movement that is sweeping corporate America. Following Edison’s lead, employers are increasingly trying to stanch health care spending by imposing a new system called “managed care,” which essentially restricts the way workers may utilize medical services.

But the practice has become highly controversial because it often requires employees to forsake their own doctors for those who are willing to join a network of physicians who contract to discount their fees by up to 30% in return for a guaranteed flow of patients.

Critics charge that rather than simply containing medical costs, managed-care programs are too complex, too often transfer more of the financial burden to workers and sometimes even deprive patients of necessary treatment--occasionally with deadly consequences.

Willie Stewart, assistant business manager of Local 47 of the International Brotherhood of Electrical Workers, which has 5,000 members at Edison, complains that under the new plan workers often end up paying as much as 30% of their medical bills--up from nothing before the program went into effect. He also says that the rules are so complex that trying to understand them is like “walking through a maze.”

Many physicians also oppose “managed care”--partly because of its oversight procedures, which call for review of all bills and procedures by computers in order to compare them to company manuals. Physicians “resent” the fact that their decisions are reviewed “by nurses or clerks who know nothing about the patient but make decisions based on some recipe,” said Dr. C. J. Tupper, a Davis internist who is a past president of the American Medical Assn.

Many physicians’ groups--joined by hospitals and other major providers--are belatedly lobbying state legislatures for curbs on managed-care programs. But with many businesses spending an average 26% of their net income on medical bills, that effort seems largely a rear-guard action.

“Managed care is here, and it’s spreading fast,” said William S. Custer of the Employee Benefit Research Institute.

Not every major corporation is following Edison’s example of instituting a sweeping managed-care program. Many are using a more surgical approach, trying to deal with specific problems, such as mushrooming costs of prescription drugs. Goodyear Tire & Rubber Co. saves $500,000 a year by running its own pharmacy. The Gillette Co. saves $125,000 a year doing its own medical X-rays.

And when Du Pont & Co. realized a few years ago that employee back injuries were costing it $40 million a year, the chemical giant designed an education and prevention program that has cut the rate of such injuries by 25%, saving about $10 million in the process.

Some firms, such as the Chesapeake & Potomac Telephone Co. in the Washington, D.C., area, maintain their own medical clinics to perform free annual checkups in hopes of detecting conditions early enough to avoid more costly problems later.

And Johnson & Johnson, concluding that up to 25% of illnesses among its 35,000 employees were potentially preventable, began a $7-million “Live for Life” program that offers free checkups and encourages healthy lifestyles by maintaining a gym for employees and stocking the company cafeteria with “healthy heart” foods.

Although the program costs Johnson & Johnson $200 a year for each employee, the firm is saving $370 per employee and holding increases in its health care spending to about 10% a year--after a rise of more than 300% during the last decade.

Nevertheless, most analysts agree that whatever its flaws, the managed-care approach seems to be the wave of the future, at least for the moment. And no company has tackled the problem with more zest or determination than Rosemead-based Edison, the country’s second-largest public utility.

Edison’s motivation in establishing the new program was almost entirely economic. During the 1980s, the company’s spending for medical benefits soared, eventually quadrupling to $88 million near the end of the decade. Dr. Jacque J. Sokolov, Edison’s medical director and vice president, says worried company executives decided “to throw out all the old paradigms” and design an entirely new medical insurance program. “Health care costs are Edison’s fourth-largest budget item,” he said. “If I don’t control them, there’s not as much money left for our core business--generating electricity.”

The payoff has been impressive. Sokolov says the cost of providing medical benefits is still rising, but at a 5% annual rate instead of 23%, as before. He figures that by the end of 1992, Edison will have saved more than $100 million--a staggering amount even for a large corporation.

Besides its own network of physicians under contract, Edison maintains 10 in-house clinics staffed by 15 full-time physicians and 100 part-time workers, treating everything from hypertension to pink eye and registering 100,000 patient visits a year. It also has its own pharmacy, which dispenses $7 million a year in medications, making the utility one of the largest wholesale buyers of drugs in California. And it offers employees several HMO options if they choose not to use the managed-care program.

When Edison instituted HealthFlex, as the new program is called, it also stopped paying full medical expenses for its employees. For workers who choose physicians and hospitals that are members of its network, the company pays 90% of the doctors’ bills and the cost of prescription drugs. Employees are free to go to outsiders, but if they do, the company pays only 70% of reasonable and customary charges--which could be less than 70% of the actual bill. In the case of life-threatening emergencies, the company pays 90% of reasonable and customary charges, no matter where the employee is treated.

No employee pays more than $2,000 a year, or $3,000 per family, for treatment given by providers in the Edison network.

Monthly premiums typically range from $10 for a single employee to $60 for a family of four. Workers also may select the amount of their deductible, ranging from $100 to $1,000. The higher the deductible, the lower the monthly premium.

Employees and spouses may qualify for an annual $120 rebate on premiums if they meet five standards for a “healthy lifestyle”--control of obesity, blood pressure, blood sugar and cholesterol levels, as well as not smoking. Those who don’t meet the standards receive a rebate just by enrolling in behavior modification programs. And each Edison employee and spouse receives another $100 a year in a “preventive health” account, which can be used for other programs that reduce health risks.

Southwestern Bell Corp. is another “managed-care” pioneer that has kept annual health care costs from rising no more than 10%. From 1979 through 1985, its health care costs increased 217%. Under its 4-year-old CustomCare program, employees who join may pick an approved internist or some other primary-care doctor, who then serves as that worker’s gatekeeper, controlling medical access.

Each visit to a network physician costs a worker a flat $10, with the plan picking up virtually everything else. The plan, which includes home health care and well-child care, is administered by the Prudential Insurance Co. of America, which also screens network doctors for competence.

Under Edison’s program, the focus is on high-cost cases because 85% of its total health care expenditures are generated by just 15% of the employees, Sokolov says. In the first half of 1991, for instance, 26 such cases--including McMenamin’s heart-transplant operation--cost the company more than $23 million.

In McMenamin’s case, the previously fit 36-year-old systems manager first noticed a shortness of breath in early January. By the end of the month, his condition had deteriorated sharply. “I could walk or talk--but not both,” he recalled. In distress at home one Sunday in late January, he went to the emergency room at a nearby hospital. A day later, he learned that he was suffering from a serious viral heart infection. Short of a heart transplant, his chances of survival were practically zero.

Nordhoff and her staff went to work immediately and by the next day, they had reached an agreement with Cedars-Sinai Medical Center. Less than three weeks later, McMenamin got a new heart.

“When we went to HealthFlex, a lot of people were concerned,” he said. “But if my experience is indicative, any concerns I might have had were misplaced.”

Edison takes a similar hands-on approach in all but the most routine cases, Nordhoff says. “Somebody may not need to be in a clinic for three weeks,” she said. “Maybe day visits to Alcoholics Anonymous would do. We try to hit the right level of care.”

But Custer, research director of the Employee Benefit Research Institute, warns that striking the appropriate level of care is far from easy, especially given the dearth of definitive studies on the effectiveness of specific treatments and procedures. “There’s no good consensus yet on what proper, good medical care is,” Custer said. “The tools are very blunt and primitive.”

Just this month, for example, Harvard University researchers reported that hospital treatment for problem drinkers may be cost-effective after all--this at a time when such hospitalizations are a major target of corporate health-cost cutters. The central question is: “What is good medicine, and who determines it?” Custer said. “It’s a very murky area.”

To the chagrin of some corporations, the answer increasingly is being supplied by the courts. In one landmark case, a Los Angeles woman who had vascular surgery to correct a circulation problem was told by her doctor that she needed eight more days of hospitalization, but her insurance company would only authorize four more days; her physician did not appeal or protest. Later, the woman developed complications that required amputation of her right leg.

In a 1987 decision, the California Court of Appeal ruled that the doctor could be sued, adding: “The physician who complies without protest with the limitations imposed by a third-party payer, when his medical judgment dictates otherwise, cannot avoid his ultimate responsibility for his patient’s care. . . . It is essential that cost-limitation programs not be permitted to corrupt medical judgment.”

In a more recent California case, another panel of appellate judges granted the family of a dead Los Angeles man the right to sue Blue Cross of Southern California. In that case, the relatives allege that Blue Cross’ cost-control reviewer had improperly denied the man a three- to four-week hospitalization for depression, anorexia and drug dependency, forcing his discharge after only 10 days. Soon afterward, the man killed himself. The case is set for trial in November in Los Angeles Superior Court.

Despite such risks, many Edison employees say they prefer the new system--now that they are over the trauma of making the switch. “Before, there wasn’t much of a medical system--whatever you needed or wanted, you just go out and get it,” said David M. Black, a steam-generation worker. “At first, HealthFlex aroused a lot of animosity, hostility. People didn’t understand it and felt something was taken away from them.”

Still, for all the attention that the managed-care approach is receiving in the workplace, experts say cost-cutting efforts by individual companies are likely to have relatively little impact on the nation’s worsening health care crisis without some broader national framework.

“These programs are useful, nice and good,” said Harvard University health care economist Rashi Fein. “At best, they provide individual companies something that is more efficient and therefore presumably somewhat cheaper. But there will continue to be 35 million people who are left out (because they have no medical insurance).”

Sokolov agrees. He likens his job to piling sandbags on the banks of a raging, rain-swollen river. “What we need is flood-control reform,” he said.