Strength in Numbers : 11 Firms Join to Get Cuts in Health Insurance Rates

With federal health care reform on shaky ground, U.S. employers are taking a harder look at self-help strategies for driving medical costs to rock bottom. They might look to California, where a group of major corporations have demonstrated how to squeeze costs by pooling their purchasing power--without help from government.

Last month, the Bay Area Business Group on Health accomplished what was nearly unthinkable a year ago: It won big rate reductions from health insurers vying for the business of 11 big employers and their 300,000 workers.

By enticing health plans with about $400 million in potential premiums, the group--including such influential employers as Bank of America, Pacific Telesis and Safeway--got 17 health maintenance organizations to roll back rates from 5% to 10%. In contrast, health insurance costs statewide increased 6% to 8% in 1993.

The rate reductions will slash millions from the employers’ health care bills in 1995.

Health care executives say the rate rollbacks--accomplished through competitive bidding--will serve as leverage for other California employers when they sit down with insurers to negotiate next year’s contracts.

“This is bellwether change,” said Albert Green, chief executive of Alta Bates Medical Center in Berkeley. “Other purchasers of health care--employers, the union trust funds and CalPERS (the California Public Employees Retirement System)--are going to say, ‘Wait a minute, if this coalition got this type of rate decrease, we want the same thing.’ ”

Jay Gelbert, a former chief executive of a Northern California health plan who headed the negotiations for the Bay Area Business Group, added, “I think we started a process that won’t stop.”

The group, in fact, didn’t start the premium deflation process; it just gave it a big shove forward.

CalPERS, which negotiates health care coverage for 920,000 public employees, won a 1.1% decrease in premiums this year. And the Health Insurance Plan of California, the state-run purchasing alliance for small businesses, recently won a 6% average drop in premiums for its 45,000 members.

Big and small businesses across the country have formed insurance-purchasing coalitions, and in California efforts are also under way among employers in Orange County and Silicon Valley. But members of the Bay Area Business Group--whose employees are equally split between Northern and Southern California--is believed to be the largest effort by private employers in the nation.

“This is an example of how a group of large employers that are already knowledgeable about managing their health costs can get together and do it even better,” said Sean Sullivan, president of the National Business Coalition on Health, a Washington-based group representing 85 employer groups.

Insurance purchasing cooperatives that pool their power to drive down health care costs are at the heart of the “managed competition” concept that underpins President Clinton’s health care reform plan. Congress seems likely to reject Clinton’s approach--calling for state-organized regional health care purchasing alliances--but experts say the California effort shows how private business can accomplish similar objectives.

Benefits managers say the premium cuts reflect the shake-up in health care over the past year. Industry consolidation in California, where insurers and hospitals are merging frantically, has emboldened employers to take a tougher stance with health care providers.

“Employers can exercise a lot more influence now, much more than they did when the market was more fragmented,” Gelbert said.

The Bay Area group, which has worked closely with HMOs and hospitals, says it has told health care providers they must do more to slash costs.

“I think we’re saying there is a lot of room for efficiencies,” said Patricia E. Powers, executive director of the San Francisco-based business group. Employers can see that hospitals around the state are half empty and that health plans are madly scrambling for market share.

As employers pressures HMOs to reduce costs, hospitals, doctors and other health care providers worry that health plans will try to pass the buck.

“The HMOs are already coming back to us and saying we want you to cut your rates,” said Jack Fries, chief executive of St. Luke’s Hospital in San Francisco. “They’re saying, ‘We’re getting less, so you have to take less.’ We say, ‘You guys are getting 30% of the health care dollar, and that’s outrageous. You need to absorb (the rate cuts).’ ”

Alain C. Enthoven, a health economist at Stanford University and the main theorist of managed competition, said the unique nature of California’s medical marketplace is a big reason for the success of the state’s purchasing alliances.

California has “the best-developed managed care system, more doctors in group practice and more doctors in HMOs than any state,” he said. “This illustrates that the only forces known to man that can reduce costs are market forces. Government controls simply do not reduce costs.”

Surprised by the unexpectedly aggressive bids by the HMOs, the Bay Area Business Group also took steps to prevent insurers from trying to recover revenue by seeking big increases in subsequent years. The group negotiated caps on potential premium increases for 1996 and 1997. Powers wouldn’t provide specifics on those caps, except to say they will be closely tied to consumer inflation.

The agreement with the HMOs--including such firms as Aetna, Kaiser Permanente, Health Net and Pacificare--wasn’t aimed only at slashing costs.

The 17 health plans also agreed to bid on a standard benefits package and to meet an extensive list of performance standards covering such areas as quality of care, preventive services and customer satisfaction. In the quality area, for example, the benefits package includes mammograms for women every one to two years after age 50 and yearly clinical breast exams after age 40.

The employers also put some teeth in those guidelines: If an HMOs fails to meet the minimum performance standards, it is required to return 2% of its premium dollars to the firms.

“The unsung benefit in all this is we have a common rate and a common benefit,” said Arlene K. Singer, a vice president for Wells Fargo Bank. “You looked at the 11 different companies and there were 11 different rates out there.”

That price disparity among the HMOs was one of the key reasons the employers--a diverse group of organizations, with very different work forces, corporate cultures and employee benefits strategies--opted for joint negotiations.

Pacific Telesis, which spends more than $170 million a year to buy medical insurance for its employees, is an example.

The telecommunications giant had long assumed that its sheer size gave it lots of bargaining clout with health insurers, said Marianne P. De Luca, director of benefit planning for Pacific Telesis. It found out how wrong it was after learning the results of a private survey of health care benefits funded by the Bay Area Business Group.

The study showed “that we, with 212,000 workers, weren’t getting any bigger discounts than employers that were delivering 5,000 members” to the health plans, De Luca said. “And companies with similar health plans and similar health risks had lower premiums than us.”

Now that these 11 employers have locked in their rate cuts, they must decide whether to pass on the savings to their workers. Most say they will pass on at least some of the savings.

Powers said the group will consider next year whether to add members. The nonprofit group now includes 19 employers, only 11 of which participated in the group negotiations with the HMOs. The group may also consider a similar joint purchasing effort for another type of insurance known as “preferred provider organizations,” another form of managed care that typically allows greater choice of doctors.