Health care crisis: health care costs are soaring and employees don't want to pay, leaving CEOs with one very expensive problem.

Mention "heath care" to the CEO of any large company and the prevailing reaction is an outpouring of frustration. And for good reason. Continuing a trend of double-digit increases, health insurance premiums rose an average of 14 percent last year and are expected to jump by 11 to 20 percent annually for the next three years. Small wonder that there are a rising number of Americans--some 43 million at present--without any insurance whatsoever. What's more, as 77 million baby boomers head into retirement, increasing longevity and corporate cutbacks on retirement health care benefits are taxing an already shaky Medicare system.

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For myriad reasons, the burden of shouldering this spiraling health care cost disproportionately falls on large U.S. corporations. With small businesses increasingly unable or unwilling to offer affordable health insurance, employees of large corporations frequently bring entire families into their firms' insurance fold. Worse yet, thanks to price controls and restrictive national health programs in overseas markets, U.S. health care consumers pay the highest prices for drug therapies and medical diagnostic and treatment technologies, effectively subsidizing both health care R & D and treatment in industrialized nations as well as developing countries.

Efforts to manage these costs are fraught with problems. At best, attempts to cut health care benefits or raise employee contributions provoke outrage among employees or diminished morale; at worst, in the case of a unionized employee base, the cuts spur outright revolt. At the same time, pressure for private-sector solutions to the looming health care crisis continues to build, thanks to the real and growing fear that Congress will step up to the plate with a health reform bill.

The bottom line? From manufacturing industries to the service sector, CEOs are suddenly finding themselves in the health insurance business, desperately seeking solutions and strategies that will enable them to provide quality care at an affordable price.

Cost Control

For many, the invisibility of health care costs to the end consumers--in this case employees--is at the root of the problem. "People's standards change when they're not paying the cost for their choices," Brian Ferguson, chairman and CEO of Eastman Chemical, told a recent roundtable discussion held in partnership with the Blue Cross Blue Shield Association. "If I were buying cars for people, what car would they pick versus if they were paying for it themselves? There's an insulation between the users of health care and the cost that doesn't exist in other situations--transportation, housing, education, food. The dilemma we see is, how do we connect our employees more personally with the costs and the choices of health care?"

But efforts to increase co-payments and health care deductibles so that employees "feel" the cost of their doctor visits and prescription drug medications tend to be met with strong resistance. As Vicky Gregg, CEO of Blue Cross Blue Shield of Tennessee, noted, employee expectations have risen over time to the point where they not only want health care benefits, they want them "free, perfect and now."

And who can blame them? Spurred by ad campaigns for prescription drugs, Americans have become avid consumers of brand-name prescription medications for everything from allergies to heartburn. The resulting spike in what some view as unnecessary doctor visits and medications, experts say, has contributed to health care cost hikes.

At the same time, important medical advancements also spur cost increases. And, in most cases, treatment with these expensive innovations--even pricey ones with uncertain outcomes--is warranted. After all, when facing a serious condition, a costly treatment therapy with a small chance of success is vastly preferable to having no chance of recovery at all.

It's an irony not lost on CEOs and health care professionals that improvements in medical technology, diagnostic tests and health care treatment success rates are, in part, fueling the coming health care crisis. It's hard to fault medical advancements for raising the average life span, and yet those very increases in longevity translate to a burgeoning population of retirees, many of whom will require decades of health care. "At a time when Medicare is going through dramatic changes and we know what the viability of Social Security is, how do we make retiree medical coverage affordable for people?" asked Thomas O'Reilly, director of group benefits at Illinois Tool Works. "Can we make it affordable for them once they switch over from being a wage earner to being a nonwage earner?"

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As Raymond McCaskey, CEO of Health Care Service, pointed out, the cutting edge medical technology and new treatments don't come cheap--and yet no one wants to slow advancement in medical treatment, let alone be denied, or deny, access to them. "Would you go back to paying 1950s cost levels and be willing to take the best 1950s medical treatment you'd get?" he asked. "Few want to go there. There has been rapid escalation in unit cost, but the unit today is a very different unit from the unit we had in the '50s. So it's a highly complex issue. And yet [the rising costs] and having 15 percent or more of the population not being able to get adequate health care or health care at all are a huge societal problem."

A growing number of companies are attempting to address the issue through new variants of health care programs and plan offerings. Recognizing the 80/20 principle--that 80 percent of health care usage comes from 20 percent of the employee base--more companies are adopting wellness programs that educate workers about the benefits of healthier lifestyles and provide incentives for behavior modifications proven to prevent health issues or slow the progression of existing diseases. Often, such programs include educating employees on proactive management of chronic conditions such as diabetes, arthritis, asthma and heart disease and offering financial incentives for following the care protocol. These can range from waiving copayments for necessary medical monitoring visits to a reduction in health care contribution costs if recommendations on smoking cessation or weight reduction goals are met.

While acknowledging that wellness initiatives and disease-management programs have proven effective for reducing costs in some benefit plans, some CEOs expressed concern about potential legal issues arising from the programs. "If I give a person incentives not to smoke, drink, be fat or live wrong in other ways, when do I cross the line between a lifestyle choice and a disability?" asked Ferguson. "If we declare that drinking or obesity is a genetic problem more than a lifestyle choice, at what point do lawyers step in and make me the target of the next class-action suit?"

Cost-benefit issues also come into play with wellness programs, noted McCaskey. "The biggest barrier we've found is the mobility of the work force," he said. "Employers make an investment in getting somebody healthy only to have them move to their competitor across the street who reaps the rewards."

Pay-to-Play Programs

Revamping benefit plans to address cost issues is another emerging approach to deal with rising health care costs. Some firms adopt tiered plans, where employees choose from an assortment of plans at different contribution cost levels to the employee, who pays more for greater flexibility and lower co-pays and deductibles. Others make the jump to consumer-driven health care plans, which combine a high-deductible health insurance policy with a tax-advantaged, employee-managed medical savings account that covers some or all of the deductible. Money left in the account at the end of the year generally rolls over to the next year, providing an incentive for prudent spending.

While both plans theoretically give employees an incentive to use their health care benefits wisely, critics argue that they simply shift costs to employees--particularly those with chronic illnesses--or actually create disincentives to seek preventive care. "There are no silver bullet solutions," noted Robert Greczyn Jr. of Blue Cross Blue Shield of North Carolina. "With consumer-driven plans, the incentive is perverse--to create a tax-free savings vehicle that may, in fact, drive people away from preventive care."

Such efforts may also have unintended consequences for lower-income employees. "There's a huge social aspect to the decisions we make," noted McCaskey. "For example, increasing a deductible from $500 to $2,500 might be easily absorbed at the senior executive level, but be devastating at the entry level."

While far from ideal, for the companies adopting them, these programs are seen as preferable to an across-the-board increase in employee benefit contributions. "I describe it as palatable cost-shifting," explained Tom Beauregard, global health management practice leader of Hewitt Associates. "The idea is offering more choices or health savings accounts that meet the criteria of a catastrophic health plan. But there's limit on generic institution rates and drugs and to how much high-deductible plans will control demand. If all we're doing is giving people plan choice, we are just running out the clock. Ultimately, it won't work. Decreasing primary care office visits doesn't get to the underlying problems, which is that there is tremendous inefficiency in the health care system."

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Solution Strategies

Rather than simple attempts to defray increases through cost shifts and incentive programs, a more wholesale approach is required, argued Beauregard and other roundtable participants, who noted that there is plenty of room for improvement. Health care accounts for 15 percent of the national GDP, or $1.7 trillion, yet broad performance metrics are virtually nonexistent, fraud and abuse taps in at between $50 billion and $75 billion a year, and the little quality outcome information that exists is not available to the majority of consumers.

"If you think about it as the equivalent of a manufacturer not having the systems and information flow to understand and measure quality, that's pretty scary," said Blue Cross Blue Shield of Tennessee's Gregg, who pointed out that predominantly paper-based medical records impede the information-sharing essential to the development of best practices in medicine. "You would think it would be fairly simple to say that for a given condition this treatment has the best outcome. But if you take a simple example--a urinary tract infection without any complications--there are 135 different ways that physicians treat that same urinary tract infection. Which is the best? Which is the most cost efficient? And why don't all physicians use whatever that is?" To bridge the information gap, Gregg urged a shift to electronic record keeping, which would facilitate the kind of data crunching essential to quantifying results.

Even when information on quality of care exists, consumers may be unaware that it's available or unable to access it, said Diane Swonk, senior vice president and chief economist at Bank One. "The information issue is huge," she noted. "My son has severe asthma, and as someone who has used a lot of health care, I've found that the burden is on me to find the information about the best specialists and best facilities. It shouldn't be that hard. In any market situation, if you want to get markets to reduce costs and work more effectively you have to free up information."

Health care, however, is currently plagued by a dearth of information and asymmetric information--a disconnect where employers understand costs and may even have access to data on results, but employees don't. Happily, progress on that front is under way, according to Scott Serota, CEO of Blue Cross Blue Shield Association. "We have made great strides in defining quality, and we're reaching consensus with some of the specialty groups as to what defines quality service," he said.

Ideally, as insurers and employers gain information on the quality of health care providers, access to that information will change the way employers and employees make health care choices. As O'Reilly of Illinois Tool Works put it, "I don't think I can tell my union employees, 'Go to these hospitals and these doctors or you won't have health care.' But I can say, 'You will be reimbursed 60 percent here versus 80 or 90 percent there and this is why."

Ultimately, the hope is that making information about quality of care widely available will improve both the care and cost side of the health insurance equation.

RELATED ARTICLE: WHO'S WHO 

* Tom Beauregard is global health management practice leader at Hewitt Associates, a $2 billion global human resources outsourcing and consulting firm in Norwalk, Conn.

* Brian Ferguson is chairman and CEO of Eastman Chemical Co., a $5.8 billion manufacturer and marketer of plastics, chemicals and fibers in Kingsport, Tenn.

* Robert J. Greczyn Jr. is president and CEO of Blue Cross Blue Shield of North Carolina, a $3.2 billion heath care provider in Chapel Hill, N.C.

* Vicky B. Gregg is president and CEO of Blue Cross Blue Shield of Tennessee, a not-for-profit health benefits company in Chattanooga, Tenn.

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

* 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.

* Raymond F. McCaskey is president and CEO of Health Care Service Corp., a Chicago-based mutual company made up of Blue Cross Blue Shield of Illinois, Blue Cross Blue Shield of Texas and Blue Cross and Blue Shield of New Mexico.

* Thomas O'Reilly is director of group benefits at Illinois Tool Works, a $10 billion multinational manufacturer of highly engineered fasteners, components, assemblies and systems, based in Glenview, Ill.

* Edward Rabin is president of Hyatt Hotels Corp., a Chicago-based upscale hotel and resort chain with 123 Hyatt Hotels & Resorts in the United States, Canada and the Caribbean.

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

* Diane C. Swonk is chief economist and senior vice president of Bank One, a $16.2 billion financial services company based in Chicago.