Operation Cost Control : Medicine: While Congress contemplates various bills, the private sector is reforming health care with clout.
Once a darling of the health care reform movement, Southern California Edison is chucking its carefully assembled network of 7,000 doctors and 91 hospitals and starting over again in its crusade to control medical spending.
On Jan. 1, the giant utility will abandon its 5-year-old HealthFlex system, in which Edison had directly recruited doctors, hospitals and pharmacists to care for its workers and their families. Instead, the company will offer six different health plans operated by outside firms.
Edison expects to save millions of dollars because the outside contractors will have to promise to keep their charges stable for several years. “We want them to be at risk for cost increases,” said Margaret Jordan, Edison’s vice president of health care and employee services.
Edison’s latest switch in health care is typical of the experiments, trials and errors, and searches for fiscal control occurring at thousands of companies in the throes of an accelerating health care revolution.
American corporations have been pressing to save money on their medical costs for years, but the effort has been moving forward at a frantic pace at the same time Congress is laboring to pass landmark health care reform legislation this summer.
The chances of actually passing health care reform legislation remain highly uncertain. President Clinton’s desire to require all companies to offer health insurance--the so-called employer mandate--faces an uphill fight in Congress.
Many of those businesses offering health insurance are deeply skeptical of the Clinton plan because they feel it hampers their continuing efforts to control health care costs. No bill is better than legislation that would take away their independence, many believe.
Regardless of what happens here, however, the private-sector reform has already had a dramatic impact. Businesses have become increasingly confident that they can lower health care costs by taking direct action against medical organizations.
Employers now fully realize that “they, as a group, can make a difference,” said Frank M. Brocato, president of the Florida Gulf Coast Health Coalition.
Brocato also heads the Employer Purchasing Alliance, which runs a collective buying program for business coalitions in Florida and Michigan. In two years the alliance has grown from buying health services for 250 firms with 700,000 covered workers to making deals on behalf of 450 companies with nearly 2.5 million workers and their family members.
Last month, a group of big employers in the San Francisco area--including such giants as Chevron, Bank of America, PG&E; and Pacific Telesis--won discounts of 10% and more from a group of health maintenance organizations. In Houston, a similar coalition began receiving price discounts from local hospitals in January, and this month, more than 1,000 Houston physicians will begin working for a fee schedule arranged with the business alliance.
“We’re saying to health care providers: ‘If you don’t change, you won’t get any of our business,’ ” said Thomas E. Murphy, group vice president at Kroger, the big grocery firm that is a driving force behind employer coalitions in Cincinnati, Phoenix and a new one starting this summer in Nashville, Tenn.
Employers are also increasingly requiring workers to pay a bigger share of the health care bills and restricting their choice of doctors; offering low-fat meals in the company cafeteria; providing cash payments to employees who use lower-cost hospitals, and operating 24-hour gyms where workers can work out and relieve tension.
The numbers reflect the overall effort. Between 1965 and 1991, what corporations spent on health care per employee rose an astonishing 451%. But total per-employee spending rose an average of only 8% in 1993, the smallest increase in six years, according to Foster Higgins, a benefits consulting firm, in a newly released national survey of corporate health plans.
The bad news is that 8% was nearly triple the general level of inflation last year.
As businesses continues their battle to tame the health care beast, here are some of the latest strategies being employed on the front lines.
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Working in an alliance, corporations in Memphis, Tenn., saved $43 million last year through discounts from hospitals, doctors and drug companies. Their power of group purchasing activity is potent.
In 1985, the 60 members of the Memphis Business Group of Health coalition spent $1,880 for each worker on their payrolls, just $105 below the national average. Last year, the Memphis tab was $2,499 per worker--$1,467 below the U.S. average.
The Memphis group, which includes Federal Express among other major firms, is a granddaddy among corporate health alliances, operating since 1984. Key to its keeping costs down was a years-long effort to force hospitals to open their books so companies could examine where the increases were coming from.
Armed with the financial facts, the corporate alliance arranged a group purchase deal for its members with hospitals, doctors and home health agencies. The discount price structure has helped keep health care inflation for corporate members to 6% a year since 1987, less than half the national rate.
And this year, the Memphis group opened its doors to “the last group left for cost shifting, the very small employers,” said Donna Miller, president of the organization. Companies in Memphis with two or more workers can now get the same mass purchasing power and discounts enjoyed by Federal Express.
In San Francisco, the Bay Area Business Group on Health, after long and intricate negotiations, used its economic muscle to win unprecedented cost concessions from 18 health maintenance organizations last month.
More than 300,000 workers, dependents and retirees are represented by the 11 major employers in the group, giving them greater leverage in dealing with HMOs than any individual company could enjoy.
For small employers, with four to 50 workers, the state’s Health Insurance Plan of California offers a selection of 18 health plans. The fast-growing HIPC just completed its first year of operation, and now has more than 3,000 companies and 50,000 workers and family members enrolled.
Some corporate heavyweights in Houston--Compaq Computer, Baker Hughes, and Mitchell Energy & Development--created the Houston Health Care Purchasing Organization, which began operations Jan. 1, with its members enjoying a negotiated rate structure at 46 local hospitals.
The hospitals supplied reams of data on operations and outcomes for everything from appendectomies to coronary bypass surgery. This helped establish “quality benchmarks” that the hospitals must meet to stay in the network assembled by the purchasing group.
The negotiated rates are in the middle range of local hospital prices, said Ralph Smith, purchasing group chairman. “Our goal is not to be the lowest price in the marketplace,” he said. “We need to focus on quality and value and price will fall out of that.”
The network has 75,000 workers and dependents, and Smith expects that to triple in a year, as other firms see the advantages. Savings already are apparent--Baker Hughes said it saved $17,000 in hospital charges during January alone.
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Sometimes a business coalition can save money without asking directly for a break on prices.
The Central Florida Health Care Coalition represents 500,000 workers and dependents from 108 firms, including Walt Disney World, General Mills restaurants and Martin Marietta’s electronics and missiles division.
“We’ve formed a partnership with our hospitals,” said coalition President Becky Churney. “We’ve realized the issue is quality.”
The coalition gets patient records from the hospitals, and looks for extreme variations in treatment patterns: the doctor who keeps a patient hospitalized longer than any other physicians, the cases with too many tests or too many prescriptions.
When the hospital administrators and doctors pore over the data, they learn to change the way they deliver medical care. “Last year, we saved the community $75 million in medical costs,” Churney said.
From the hospital side, “We recognized that businesses were very concerned and we worked together” to save money, said Beth Rudloff, corporate team leader at the Orlando Regional Health Care System, which includes four hospitals.
The average cost of coronary bypass surgery was trimmed to $43,000 last year, down from $51,000 the year before, and the average hospital stay dropped to 11 days from 13. The average bill for a Cesarean section dropped 13% to $7,800.
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For Southern California Edison, the competitive market in the state among HMOs and insurers is now so appealing that company officials have decided to scrap the unique health care network they once bragged about.
The man who created the Edison network, Dr. Jacque Sokolov, the company’s former medical director, agrees that Edison made the right decision to scrap his network of specially recruited hospitals and doctors. “It was creative for its time,” he said, “but like every creative idea, it has become dated.”
Since 1989, he said, commercial HMOs and insurers in Southern California have become much bigger and more efficient, and can deliver care more cheaply than Edison’s in-house system. “I have no disagreement with their strategy,” Sokolov said of Edison.
But for thousands of nervous Edison workers, the end of HealthFlex will mean searching through new books of authorized health providers, hoping to find the names of their current internists, pediatricians and gynecologists. Edison’s new system will force “a lot of people to change their primary physicians or receive a reduced benefit,” said Carl Wood, business agent for Local 246 of the Utility Workers Union of America.
Under Edison’s new system, workers will still be free to select any doctor, as they did under HealthFlex, but going outside the new networks will cost them more money out of pocket, Wood noted.
“We would have liked to have had easier access to doctors outside the network,” he said. “But there were compromises, and we saw this as the least-painful transition to the new health care environment.”
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Some companies have chosen to focus their cost-cutting efforts on a special area of health care.
Delta Air Lines offers workers needing heart surgery the option of going to one of six special hospital centers around the country, noted for their expertise in coronary care. The airline pays the travel and lodging costs for two family members to accompany the patient. One of the centers is the Cleveland Clinic, which does more heart surgeries than any other hospital in the United States.
Even with the family travel and lodging costs included, Delta saved more than $2 million during the program’s first year, compared with the costs of using local community hospitals for heart surgery.
“We are able to negotiate very high quality care at better prices than our people would get out in the open market--we are talking 35% to 50% lower,” said spokesman Clay McConnell.
He said Delta workers have been happy: “If you have a choice between a smaller area hospital or a world-renowned hospital specializing in cardiac care, which would you choose?”
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All the sophisticated corporate efforts to find the best managed-care networks, get the biggest discounts and organize the most powerful alliances are supplemented by another, common-sense approach: making workers more health-conscious.
Hughes Aircraft, worried about the costs of caring for premature babies, gives a free infant car seat, a $50 value, to any woman who gets prenatal care in the first four months of pregnancy.
Gyms, workout rooms and fitness centers are an increasingly common feature in the corporate world. Union Pacific has a variety of fitness centers for 28,000 workers scattered over 19 states. When the repair crews are out along the tracks, sleeping in rail cars, the company often sends along another car fitted out as a gym. In some cities, the firm has contracts with local health clubs.
Voluntary screening programs for cholesterol and high blood pressure, combined with counseling, are helping reduce health care claims.
In Jacksonville, Fla., a gym is open around the clock, seven days a week for workers at AT&T;’s universal card services divisions, which handles customer inquiries and marketing for the firms’s credit card program.
“Fitness fare” low-fat meals are available in the cafeteria. A new “invest in yourself” program promises a monthly prize drawing for anyone who has at least 12 “workouts” a month (a gym visit, a game of tennis, some jogging). Prizes this year have included a dune buggy, a trip to Hawaii and a home exercise machine.
The wide range of business tools, from hard bargaining with doctors to corporate jogging tracks, should help in the war on medical inflation. But thoughtful executives, while welcoming progress, are aware of the limits and dangers.
“We are all under pressure to cut costs,” said Luke Larocca, general manager of the health care arm for the Illinois Central railroad. “There is no doubt in my mind that competitiveness will result in reduced costs, in health care as in anything else.
“But in medicine, the risks can be far more disastrous than in ordinary business. In pushing for reduced costs, we have to be careful that we don’t put too much pressure on providers, so they cut corners, and harm employees.”
Contributing to this article were Times researchers Doug Conner in Seattle, Lianne Hart in Houston, Ann Rovin in Denver, Edith Stanley in Atlanta and Anna M. Virtue in Miami.
High Cost of Medicine
Since the early 1980s, medical care costs in the United States have risen at a pace roughly double the rate of inflation, as measured by the consumer price index. Increases in medical care costs have abated as inflation has fallen in recent years, while medical care expenses for business, as measured by average cost per employee, rose 8% in 1993, the smallest increase in years.
Comparing Medical Cost Inflation to the CPI
1992-93 medical care: 5.94%
1992-93 CPI: 3.00%
Health Benefit Costs for Business
Comparing 1992 and 1993 cost per employee by industry group: 1992 Manufacturing: $3,729
1993 Manufacturing: $3,991
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1992 Wholesale, retail: $2,743
1993 Wholesale, retail: $2,938
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1992 Services: $3,379
1993 Services: $3,681
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1992 Transportation, communications, utilities: $4,234
1993 Transportation, communications, utilities: $4,639
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1992 Health care: $3,056
1993 Health care: $3,242
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1992 Finance: $3,694
1993 Finance: $4,067
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1992 Government: $3,872
1993 Government: $4,219
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1992 Average: $3,502
1993 Average: $3,781
Note: Cost includes spending for medical, dental, prescription drug, mental health, vision and hearing benefits for active and retired workers and their dependents. Total spending is divided by the number of active covered workers to give the cost per worker.
Source: Labor Department; Foster Higgins national survey of employer-sponsored health plans.
