Battle over benefits: CEOs are trying many initiatives to lower their companies' health care costs. But will it be enough?

When Mark Gumz was named president of Olympus America, he decided to take a hard look at the company's spiraling health care costs. After discovering that the U.S. subsidiary of the Japanese camera company was spending far above the national average on health benefits, Gumz spent a year spearheading a series of initiatives, including instituting a no-smoking policy on the corporate campus, adopting wellness programs and overhauling employee benefits.

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"Our health care costs were out of control," he told CEOs gathered for a recent health care summit held by Chief Executive in partnership with the Blue Cross and Blue Shield Association. "So we had a very tough year of restructuring the plan and explaining to employees why we were doing it." To mitigate potential damage to employee morale, Gumz held a series of town hall meetings to communicate the company's position and get as much employee backing as possible.

Such tales of drastic revamping efforts typically end with the happy report of slashed costs, but four years later health care costs at Olympus America have been flat for two years running. Is Gumz disappointed? Hardly. At a time when double-digit increases in health care costs are the norm, he counts it a victory. "Last year, the average company saw costs climb by 14 percent," he said. "So we're very pleased to have not had an increase for two years straight."

The key question is how many CEOs can tame their companies' health care cost explosion? Clearly, the strategies they are currently pursuing can do only so much. A growing number of companies, for example, provide wellness programs that educate workers about healthier lifestyles and offer financial incentives for behavior thought to prevent or effectively manage health issues. But employees aren't always receptive to health awareness and disease management programs, said John McConnell, CEO of Ohio-based Worthington Industries, which offers financial credits to employees who participate in those kinds of programs. "In almost all of these plans," he noted, "it's hard to drive employees beyond a 20 percent participation rate."

Even when participation is high, programs such as smoking cessation and weight reduction offer only short-term relief from rising costs. "I would challenge whether these wellness and prevention programs truly have had an impact," said David Klein, president and CEO of Excellus Blue Cross and Blue Shield in Rochester, N.Y. "For the most part, what you see is a shift for a few years and then the curve comes right back up."

Other initiatives aim to connect end consumers, or employees, more directly with the price of health care to encourage more cost-conscious choices. "We're trying to make people true consumers," explained Tom May, CEO of NSTAR, an electric and gas utility equipment maker in Boston. "Let's face it, if you only pay a $5 to $10 copay to see a doctor, you don't really think about that purchase."

Toward that end, some companies increase copayments and health-care deductibles or adopt consumer-driven health care plans that combine high-deductible health insurance policies with health savings accounts or health reimbursement accounts that roll over from year to year. Others, concerned about the potential impact on employee loyalty, stop short of implementing wholesale changes to their benefits structures. "We're looking at HSAs and other ways to increase the level of coverage and care that we're providing to employees as well as to inject some real economics into it," said William Mitchell, CEO of Arrow Electronics in Melville, N.Y. "But we've had large debates around the [impact on employee morale] with no real results."

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Such efforts must walk a fine line: encouraging employees to make wise decisions without discouraging them from seeking necessary care, said Scott Serota, CEO of Blue Cross and Blue Shield Association in Chicago. "If you fund an HSA and tell employees that if they don't spend that $3,000 on health care they can carry it forward, they may not do the preventive care that they should," he said. "Or if an individual has to pay 30 percent because you restructured your benefits, he may choose not to get an MRI that he would have otherwise gotten. If it turns out he needed it, he ends up in the emergency room and we all pay."

Similarly, efforts to pass on some of the cost of benefits by asking for employee contributions can lead to employees opting out of coverage altogether. "We have terrible participation," reported John Shalam, CEO of Audiovox, whose company switched from carrying 100 percent of medical program costs to requiring employees to contribute toward health care benefits. At salaries of below $21,000, we have 4 percent participation; below $50,000, it's about 7 percent; and above $50,000, it's around 9 percent. We need to step that up desperately, but we're not sure how to handle it."

Ultimately, CEOs by themselves may not be able to do enough to get a grip on health care costs. "Most of the solutions from an employer perspective are just rearranging the deck chairs," Serota argued. "It's about, 'Instead of me paying for health care, I'm going to make my employee or the government pay.' But we have to get at the fundamental drivers. We have to look at how health care is delivered as well as how we pay for it."

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Although touted as the best in the world, America's health care system is plagued by inefficiencies and a dearth of quality-of-care information. In medical care today, free market rules of competing on efficiency and quality simply don't apply, said Steve Martin, CEO of Blue Cross and Blue Shield of Nebraska. "When no one manages supply and a new hospital specializing in heart care opens, competing facilities simply raise their prices to make up the lost revenue," he explained.

Supplier-induced demand is also viewed as a major cost culprit. When consumers flock to their physicians demanding the latest acid reflux drug, what percentage of the resulting prescriptions reflect need rather than the effect of the latest ad campaign? If a new piece of medical equipment comes into the community and suddenly the number of scans being prescribed shoots up, is the bump attributable to real health issues--or a need to pay off the investment?

The other reality is that health care delivery is a local or regional phenomenon and in each case the economics are different. The relative bargaining power of hospitals and other providers varies. In some markets, alliances have given health care providers the clout to dictate prices, said Anita Smith, CEO of Capital Blue Cross. "We don't have a lot of competition in Harrisburg, Pennsylvania," Smith said. "So providers have bought out each other and have networked, and they now have more of a base to impose increases."

That means some solutions to the quality-versus-cost issues must be regional. "Rather than a one-size-fits-all approach, it involves a patchwork quilt--different solutions in Nebraska, in Western Massachusetts and in Upstate New York," said Excellus Blue Cross and Blue Shield's Klein, who noted that many large companies are ill-equipped to tackle solutions from a community-by-community standpoint. "Most companies large enough to have the resources to throw at this have, at best, a plant manager in a local area who's worried about running a production line or a distribution center," he said. "How do you take that person off-line and get them engaged in the disintermediation of area hospitals? Companies are not structured in the right way to create the power base to affect the types of changes we need."

Regional Remedies

Still, encouraging progress has been made in some communities. In Rochester, for example, a Community Technology Assessment Advisory Board comprised of business and community leaders and health care providers, including doctors and hospital representatives, review new medical technologies or treatments and make recommendations about when they should be introduced and how much capacity is necessary. "During the years this has been around, there's never been a situation where the advice was not accepted," said Klein, noting that similar systems are emerging in Syracuse and Buffalo to limit spiraling costs by avoiding overcapacity. "It's a local coalition coming together to say, 'We're not going to overbuild. We will have programs to attract enough doctors and nurses and community formularies so that we can begin to do volume purchasing.'"

Larger markets where four or more health care delivery systems compete, such as New York, Chicago, Atlanta and Dallas, however, will require a more information-centric approach. Ideally, an open market would reward providers who offer the best quality care in the most efficient manner. "But we have lousy cost and quality information today," Klein said, adding that data will have to be compiled and disseminated for consumers to make more informed decisions.

Given the privacy protection afforded to America's health care consumers through the HIPAA Privacy Regulation that went into effect in 2003, that could take a while. "North America, the hub of capitalism, has an extraordinary challenge," said Sir William Castell, CEO of GE Healthcare, noting that the mandates on privacy that apply to providers, plans and others involved in U.S. health care hamper information sharing. "We'll be looking at efficiency in the treatment of disease at the macro level in Europe very shortly. That is something you won't be able to do in North America, where the concept of individual privacy mitigates the way we can draw upon clinical IT data."

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Uncovering Issues

While promising, community-based initiatives and quality and cost data are just two pieces of a larger health care puzzle. Myriad other issues must also be addressed, and they are beyond the power of individual CEOs. Fueled by rampant litigation and breathtaking jury awards, medical malpractice insurance premiums have skyrocketed--a cost reflected in rising prices from care providers. Concern over litigation also spurs "defensive medicine," or physicians whose fear of lawsuits leads to unnecessary tests, and dissuades doctors in the more litigious areas of practice from opening offices in some markets.

A nationwide epidemic, medical litigation is particularly problematic in "judicial hellholes," as the American Tort Reform Association refers to cities, counties or judicial districts notorious for awarding plaintiffs astronomical sums. The American Medical Association has declared a state of emergency for 18 states where few if any controls have been implemented to cap jury awards.

Beyond driving costs up, litigation can drive health care providers out of a market, reported NSTAR's May. "Tort reform is something that we have to go after on a national basis," he asserted. "We can't get obstetric gynecologists to set up practice in Massachusetts, because the malpractice premium is $200,000. How do you get a kid out of medical school to come up with $200,000 to practice delivering babies?"

Business leaders also question the toll that fraud takes on health care costs (see sidebar, facing page), and what can be done to cut down on abuses. "As a consumer you wonder what effect the fraudulent parts of this puzzle wind up costing," noted Harry Gould, CEO of Gould Paper. "A more concerted effort to stop that kind of chicanery may help reduce costs, which will help all of us."

While virtually all agree that workable solutions are hard to come by, consensus is building that addressing inequities in the system may mean lobbying for government action. "It's very important for us, as business leaders, to have expectations of both the federal government and the state government," said William Van Faasen, CEO of Blue Cross and Blue Shield of Massachusetts, who notes that under the current system, private companies are subsidizing care for the growing population of retired Americans. "We can't have Medicare and Medicaid continue to underpay and rely on the private commercial market to subsidize their obligations and think we can solve this problem."

Frustration over the rapid rise of prescription drug prices also has traditionally anti-government intervention CEOs humming a new tune. "The pharmaceutical industry has done a good job of saying that prices support R & D, but why does the U.S. have to subsidize everyone else?" asked Worthington Industries' McConnell, who argued that pharmaceutical companies make price concessions to foreign countries on costly drug therapies, but continue to charge sky-high prices in the U.S.

Drug companies counter that price concessions are a necessary evil of doing business in foreign countries. "The French government negotiates prices and will just deny access to the market the same way China denies technology companies access to their markets," said William Manning, CEO of Manning & Napier Advisors, an investment advisory firm based in Rochester, N.Y.

While conceding that price discrepancies are an important issue, GE's Castell argued that America benefits from the less regulated environment it offers drug makers. "We don't want yesterday's technology--we want the best possible health care," he said. "And because prices in most other areas of the world are regulated, the industry has, not surprisingly, moved to North America, which has been a real boost to research and development in this country."

But with drug costs adding to the health care tab, irritation is on the rise. In 2003, American companies footed more than $70 billion in pharmacy benefit costs and, following eight years of double-digit increases, saw drug bills rise by 9.1 percent--hefty enough to have some CEOs longing for public intervention. "Pharmaceuticals will be opening the door for the government foot," said McConnell. "And it will come in, because people like me who love free markets will be demanding it from my representatives."

Ultimately, no single effort will cure the ailing health care system. It will take the combined efforts of leaders in the health care industry and the business community, working on local and national levels, to deliver a "solution cocktail" that will move companies from simply coping with the health care conundrum to finally resolving it.

RELATED ARTICLE: WHO'S WHO 

* William M. Castell is president and CEO of GE Healthcare, a medical technology provider based in the United Kingdom that is a $14 billion unit of General Electric.

* Harry E. Gould, Jr. is chairman, president and CEO of Gould Paper, an $800 million office products, retailing and distribution company in New York.

* F. Mark Gumz is president and COO of Olympus America, a manufacturer of cameras and diagnostic and medical treatment equipment.

* William J. Holstein is editor-in-chief of Chief Executive.

* David H. Klein is president and CEO of Excellus Blue Cross and Blue Shield, a health care service and insurance provider based in Rochester, N.Y.

* Edward M. Kopko is CEO of Butler International, a $263 million strategic outsourcing firm in Montvale, N.J., and chairman and CEO of Chief Executive Group.

* William Manning is CEO of Manning & Napier Advisors, an investment advisory firm in Rochester, N.Y., with $7.5 billion in assets under management.

* Steven S. Martin is president and CEO of Blue Cross and Blue Shield of Nebraska, based in Omaha.

* Thomas J. May is chairman and CEO of NSTAR, a $3 billion gas and electric utility equipment maker based in Boston.

* John P. McConnell is chairman and CEO of Worthington Industries, a $2 billion diversified metal processing company based in Columbus, Ohio.

* William E. Mitchell is president and CEO of Arrow Electronics, an $8.6 billion electronic components and computer products company in Melville, N.Y.

* Scott P. Serota is president and CEO of the Blue Cross and Blue Shield Association, a national federation of 41 independent locally operated Blue Cross and Blue Shield companies with combined revenue of nearly $183 billion.

* John J. Shalam is chairman and CEO of Audiovox, a $1.3 billion electronic equipment maker in Hauppauge, N.Y.

* Anita Smith is president and CEO of Capital Blue Cross, a health insurance provider in Harrisburg, Pa.

* William C. Van Faasen is chairman and CEO of Blue Cross and Blue Shield of Massachusetts based in Boston.

RELATED ARTICLE: Collaboration is Key

To get more bang for its research buck, GE Healthcare is working with insurers to make sure products in development will merit reimbursement.

Innovation can both address cost issues and transform health care, according to Sir William Castell, CEO of GE Healthcare, who talked to Chief Executive about shifts in medical research practices.

You have said communications with health-care insurers are changing the way GE Health-care handles the clinical trial process. How does that work?

Historically, we have identified what we feel are the right products to develop and then moved onto reimbursement. We're now talking to the insurers in the U.S. in advance of FDA trials to see if they feel the products we have under development will be useful. So rather than using our own market skills to say we think this product has good clinical niche to fulfill, we say, "Let's make sure the people who are actually paying for the product will see it as a product they will reimburse and therefore endorse."

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Have discussions with insurers changed the way you approach the development of diagnostic tools and treatments?

We have certainly changed prioritization as a result. There are some products that are much less near the top in terms of clinical development as a result of these discussions. I can't say we have actually dropped products. I think we are getting to the stage where, through discussion, we are just much more focused now on innovation that will bring both patient benefit and efficiency to the health care system.

For example, we have a product in the area of clinical heart failure that came out of that partnership deliberation. We had good discussion with insurers in the U.S. and are now developing as rapidly as possible a product that will adequately differentiate the types of cardiac failure and, therefore, better describes the appropriate therapy. That is an important development that we think will make significant improvements in both the diagnosis and efficiency of health care in chronic cardiac failure.

Do you feel comfortable with insurers taking a role in determining which medical innovations get developed?

U.S. legislation has to an extent coped with what we call orphan drugs, or therapeutic products that have a relatively low incidence within the population. There is no point in us developing products that are not felt to be sufficiently effective to qualify for reimbursement. I am not aware of any product for which we felt there was a real clinical need that we couldn't find reimbursement for or acceptance of, so we have broken our way through that barrier.

You mentioned that Europe will soon begin looking at the efficacy of health care treatments on a macro level. How? And what will be done with the information?

The U.K. government, working through the Medical Research Council and the Wellcome Trust, have established the UK Biobank where 500,000 citizens are being genotyped and followed for the next 15 years. It is also the first major government attempting to digitize health care. For the first time we will have a patient community significant enough to look at disease development and relate it both to genetics and the environment people are living in. It will not happen overnight, but the combination of that research work plus the development of electronic medical records will allow us to have the mechanism for both capturing and analyzing data about the diseases occurring and the therapies being prescribed. Those will be fascinating studies. We may start to see early results within 12 to 14 years, and we will see it becoming a new way of looking at health care in the next 20 to 30 years.

How do you see genetic knowledge or innovations in diagnostics or treatments transforming the industry?

We see more and more articles indicating that if you have a specific gene mutation you are more likely to develop certain diseases, or if your genes are switched on or off you metabolize [chemicals] differently. So we are seeing the importance of genes in the way we process life. That will become a much more critical part of how we deal with the complexity of the body. We will evolve ways to use that information to create a better quality of life and a more cost-effective and safer life because we will be able to better select therapies that work, for their efficacy, and to deselect them for their likely side effects. Over the next 20 years I think we will see society debate how we should use that data and how it should be communicated. There is no doubt that genetics can become an extraordinary instrument in determining how we get the best quality of life and greater efficiency in the provision of medicine.

RELATED ARTICLE: The Fraud Factor

Health care fraud is an $85 billion problem. But CEOs can help fight it.

Between August 2002 and April 2003, an estimated 5,000 people reportedly underwent unnecessary surgeries at a California outpatient center. Recruited by "surgery coyotes," recent immigrants were promised cash payments for receiving unnecessary and invasive medical treatment, such as circumcision, removal of sweat glands, and colonoscopy procedures. The price tag? An estimated $97 million in fraudulent insurance claims.

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The scam ranks as one of the most egregious, and inhumane, examples of insurance fraud. But it's only one of many kinds of abuse contributing to the rising costs of health care, says Scott Serota, president and CEO of the Blue Cross and Blue Shield Association.

"Every day there are unnecessary actions taken that end up costing all of us millions of dollars," says Serota. "And every dollar taken by some con artist is a dollar not available for necessary life-saving treatments, drugs, research or emergency services."

Fraud typically involves billing for medical services that were not provided, misrepresenting services or providing unnecessary treatment. But pharmaceutical fraud is also on the rise, with drugs being diverted for illegal use or street sales. To combat the problem, the Blue Cross and Blue Shield Association recently created the "BCBS Anti-Fraud Strike Force," composed of a team of investigators from 11 of its 41 plans around the country. The team will help facilitate investigation of multi-jurisdictional cases, sharing of best practices, and faster response to fraud alerts.

Consumers, too, play a role in fighting fraud. In 2003, nearly 3,200 consumer reports of suspected fraud that were received through Blue Plan consumer hot lines resulted in investigations. In an effort to expand on that success, the company recently launched a national hot line number and a web site where consumers can report concerns.

The bad news is that fraud is an $85 billion problem today, says Serota. "The good news is there are things we can do," he suggests. "As CEOs we can start by creating a corporate culture that won't tolerate fraud."