In search of solutions: solving the health care crisis will mean a joint effort by CEOs, patients and providers.

Unsustainable." "Unacceptable." "A zero-sum game."

[ILLUSTRATION OMITTED]

The subject is health care costs, and business leaders are clearly not happy with what they're seeing. Sensing a looming financial disaster, CEOs are beginning to speak out--loudly. "There's more than just a breakdown in the health care system," said Joseph Berenato, chairman and CEO of Ducommun, an aerospace component manufacturer in Long Beach, Calif. "This health care dysfunction is a breakdown in Corporate America, the way we do business."

The problems are compounding quickly. Health care costs continue rising at quadruple the rate of inflation, causing companies to cut employee benefits. That in turn harms loyalty, employee retention and perhaps the health of the work force. Competition from developing nations--relatively unencumbered by benefit costs--continues to grow. In most businesses, competition is as tough as ever, so it really hurts when health care costs squeeze margins that much tighter.

After years of double-digit increases, health premium costs will rise in the high single digits this year, according to Hewitt Associates. But soon the hikes will be back to annual rises of 12 to 14 percent, the consultancy says. That's on average. Health costs at individual companies could rise anywhere from 5 to 30 percent, or more. "You know, I can predict better where my stock price is going to be than what it's going to cost me to pay health care next year," said Berenato. "That's a problem." Berenato joined other CEOs from several Western states for the most recent Chief Executive roundtable, cosponsored by Blue Cross and Blue Shield Association, in Marina del Rey, Calif., near Los Angeles.

The health care challenge is complex because there are so many players and no one is in charge of it all. If payers, comprising employers and their insurance programs, are one leg of a three-legged stool, two other important legs are patients and providers. Looming in the shadows is the possibility of a new and increasingly assertive player, namely government.

Smart Choices

Give them some skin in the game." That's the now-cliche directive referring to giving employees the economic incentive to make smarter health care decisions--that is, to get the care they need to stay healthy without overusing the system.

Over the past few years, the most common way to give employees more of a financial stake in their decisions has been to raise premiums, deductibles and copayments for prescriptions drugs and visits to the doctor. Of course, that saves the company a bundle in cash. It's a strategy that Ducommun's Berenato said his company is experimenting with. "The first step was that we increased the copays so that [employees] would think more about going to access the market," he said. His company is currently considering a plan with up-front deductibles as high as $1,000, with a generous level of company coverage after that.

The trick is to make sure the economic trade-offs do what you want them to do. "If we're just doing cost-shifting, it's not going to work," said Mary McWilliams, president of Regence BlueShield insurance in Seattle. "You really have to engage the employees so they have a reason to look for a generic or to really examine what care is required." On the other hand, you don't want to discourage preventive care or necessary treatment for symptoms that, if left festering, could turn into something much worse. "When copays get to a certain level, people stop getting care and that creates its own problem," says Bruce Bodaken, chairman and CEO of Blue Shield of California.

William Coffee, executive vice president of Stockman Bank in Billings, Mont., noted that employees are facing a deluge of marketing information encouraging the purchase of premium drugs. Those messages will have to be countered if employees are to make smart choices. "We need to find a way give our employees an incentive or a buy-in so that when they see the Nexium ad on TV three times on the morning news, they have some incentive to get the generic instead."

Done right, spending a little money up front can give employees the motivation to stay healthy, said Bodaken, who pointed to a plan called Healthy Choices, used by several companies. According to the plan, members receive a maximum of $200 a year to work with medical staff on developing lifestyles to keep them well.

Some employers are experimenting with programs like FourFront, offered by Regence BlueShield, which pays for the first four office visits, some lab and X-ray work and preventive programs, after which copayments and deductibles kick in. Regence competitors in Seattle have begun offering similar programs.

The counter-idea of charging employees who live unhealthy lifestyles more for their insurance is another possibility, including increasing premiums for smokers and excessive drinkers, for those continually involved in car accidents or even for those whose weight has become a health problem. Many states, including California, make it difficult or impossible to levy such surcharges. But clearly, it's an area CEOs want to explore further.

[ILLUSTRATION OMITTED]

[ILLUSTRATION OMITTED]

Providers: Bringing Them In Line

Though it may seem strictly the domain of insurers to deal with providers, it's becoming increasingly clear that top executives may have to become more involved in negotiations with medical providers if they expect to keep costs down. The reason? They're spending the bulk of the money. They've got the clout.

Achieving the "economic alignment" of all parties may be the best way to put a brake on rising costs and avoid government-mandated systems. It means skin in the game for everybody.

Peter Babin, CEO of BlueCross BlueShield of Montana, noted that, in his state anyway, the group "that's totally out of the loop insofar as alignment is concerned is the providers. I mean, for the most part it's fee-for-service medicine. The more widgets you produce, the more money you make." (Fear of lawsuits is also blamed for increasing the number of procedures; the cost of that so-called "defensive medicine" is hard to quantify.)

[ILLUSTRATION OMITTED]

The price of many medical procedures--the "widgets," such as X-rays, a broken-bone setting or an MRI scan--is based on what Medicare will pay, but prices vary considerably, from doctor to doctor, hospital to hospital, region to region. So does the frequency. "One community can have four or five times as many open-heart operations as the next community, just because of the nature of the medical institutions there," Bodaken said.

The California Public Employees Retirement System recently dropped a large group of hospitals from its health care program because their costs were 60 percent higher than those of competitors. (See sidebar, next page.)

[ILLUSTRATION OMITTED]

Generally, insurers have been stepping up their work with the medical community to develop standard protocols for medical treatment that take quality and efficiency into account. The better standards are derived from "evidence-based medicine," or quantitative studies of which procedures work best. The process is similar to "best practices" in the business world.

Insurers also are working with providers on many small changes they hope will add up to big savings. A group of orthopedic surgeons recently demanded that BCBS of Montana pay more money for procedures. "We said, 'We'll identify areas that are kind of peripheral to your practice, such as physical therapy and other post-operation services. If you can reduce those costs, we'll take the savings and cut it in half,'" said Babin, calling it the "half-carrot approach." The contract was signed in October.

In Arizona, Karsten Manufacturing Corp., maker of Ping golf clubs, used data from its insurer to find its employees used the emergency room too often for non-emergencies. BCBS offered to pay an urgent care center provider extra money to keep its centers open longer, if they'd regularly communicate their hours to Karsten employees. In two months, expensive emergency room visits dropped 18 percent.

And in California's Silicon Valley, doctors are being paid one-third the price of a physical visit to do consultations with patients online.

Besides coming up with creative incentives to save money, employers can also use their raw negotiating power with providers. "It's becoming common for us to take a large employer and go to a hospital or a large physician group and actually have the employer by our side in contract negotiations," said BCBS of Montana's Babin. "I would tell you that your voice means a lot."

Government: The Fourth Leg

Few CEOs would express support for heavy-handed government programs like, say, the single-payer health care in England and Canada. "I was born in England and I've had some experience with state aid health care, and certainly it's nothing to look forward to. So finding a solution that doesn't involve that would be preferable," said Jeremy Anwyl, president of Edmunds.com, an automobile information company based in Santa Monica. Calif. "When I lived there, it was not unusual for people to wait for two years for some sort of elective procedures. Obviously, emergencies were faster."

Anwyl also pointed out some cultural differences: "It's a very different mind-set. People there do not expect a lot of the treatments that we take for granted. I think that death there is viewed as much more a natural part of life than perhaps we view it here. Whether that's a good or bad thing, who knows."

Some executives worry about creeping socialism in the U.S. "I'm very much opposed to anything socialized because there's no thinking, no ingenuity," said Joseph Czyzyk, chairman and CEO of the Mercury Air Group, an airline industry service group based in Los Angeles. "I mean, socialism to me is--well, just look at the Soviet Union, which doesn't exist anymore."

But socialism is part of the system already, said Scott Serota, president of Blue Cross and Blue Shield Association. "I think we've socialized medicine here, but we've socialized it on the back of business."

Ignoring the government is not an option. "We can't manage this on our own," said James Gillette, chairman and CEO of Swinerton, a large San Francisco construction company. "The entire system has to be changed in some fashion."

Exactly, said Kevin Kelly, CEO of Emerald Packaging, a packaging printer based in Union City, Calif. Like it or not, government is a major player in health care and executives need to get involved in politics or lose control over government mandates. "I think you can't be in business today without being politically active in some way," he said. "So I'm up in Sacramento all the time on air pollution issues and OSHA issues and worker's compensation issues. [Health care] seems to me to be one more area of social policy that companies have to be looking at."

It's not just a three-legged stool. "The social consensus [on how to fix health care] is going to be formed at the government level. There's no getting around the fact that the mandates like the Family Leave Medical Act and everything else the government puts on us are a part of what is driving costs," Kelly added. "So, to some degree, it's not going to be solved without government, but [we have to find] a way to engage government as a partner, so it's done in a sane fashion. I've been working with legislators for the last five or six years and that's a very, very difficult process, although I think it can be done."

Blue Shield of California's Bruce Bodaken argued that there must be an achievable consensus. "And we had better come to an agreement relatively soon," he warned. "There have got to be physicians, providers at the table. There have got to be employers and health planners." And politicians. "Medicare is the 800-pound gorilla," he added.

Bottom line: When it comes to health care costs, top executives need to keep communicating, roll up their sleeves--and keep working.

RELATED ARTICLE: WHO'S WHO 

* Jeremy Anwyl is president of Edmunds.com, the Santa Monica-based publisher of online automotive information for consumers.

* Peter J. Babin is president and CEO of BlueCross BlueShield of Montana, a health care and insurance provider in Helena, Mont.

* Joseph C. Berenato is chairman and CEO of Ducommun, a $225 million manufacturer of aerospace components, in Long Beach, Calif.

* Richard L. Boals is president and CEO of Blue Cross and Blue Shield of Arizona, a health care and insurance provider in Phoenix, Ariz.

* Bruce Bodaken is chairman and CEO of Blue Shield of California, a $6 billion health plan provider in San Francisco.

* William E. Coffee is executive vice president of Stockman Bank, a financial services provider with $926 million in assets, based in Billings, Mont.

* Joseph A. Czyzyk is chairman, president and CEO of Mercury Air Group, a $385 million provider of services to the aviation industry, in Los Angeles.

* James R. Gillette is chairman and CEO of Swinerton, a construction services company based in San Francisco.

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

* Kevin Kelly is CEO of Emerald Packaging, a manufacturer of packaging material for the produce industry, in Union City, Calif.

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

* Mary O. McWilliams is president of Regence BlueShield, a health plan provider based in Seattle.

* Gregory A. Mitchell is president and CEO of California National Bank, a Los Angeles-based financial services subsidiary of FBOP, a $12 billion asset-holding company.

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

RELATED ARTICLE: CalPERS: Flexing Its Muscle

California's largest employer told overpriced hospitals to take a hike.

Oh, to wield such market clout. Top executives yearning to exert serious price pressure on health-plan medical providers surely must envy the California Public Employees Retirement System.

After determining that certain hospitals in Northern California were charging 60 percent more than competing hospitals for equivalent care, and after failing to persuade those hospitals to drop their prices, CalPERS got fed up and told them to take a walk--it cut them out of its system. As a result, CalPERS expects to save $50 million a year.

"We have a lot of leverage," says Clark McKinley, CalPERS' health information officer. "We are the biggest employer in California." It is also the third-largest in the U.S., after the federal government and General Motors. In contrast to Congress and the Bush Administration's passage of a Medicare drug bill this year that specifically prevents the government from negotiating drug prices. CalPERS is exercising its negotiating clout with gusto.

Three major health care insurers do business with CalPERS: Blue Shield of California, Kaiser Permanente and a physician provider organization, or PPO, which offers fee-for-service care. To reduce hospital costs. Blue Shield worked with CalPERS to analyze data on what the region's hospitals were charging. "We analyzed our contractual rates--what we were actually paying, not the posted rates," says Blue Shield of California's chairman and CEO, Bruce Bodaken.

The analysis, verified by outside auditors, found that 38 hospitals in the Blue Shield-CalPERS provider network charged up to 60 percent more than other, comparable Northern California hospitals and were dropped from the network. Negotiations brought 10 of them back, but notably not 13 hospitals in the region's Sutter Health hospital system. By snapping up hospitals in recent years, Sutter had become a major player on the hospital scene. "Given their ability to extract a premium to the market level, they were pressured to become more efficient," said Bodaken.

Blue Shield-CalPERS patients who used Sutter and other pricey hospitals faced a choice: Shift to another hospital by Oct. 15 or pay higher premiums by moving out of Blue Shield and into the PPO. At press time, the results had yet to be fully tabulated.

Sutter says it is committed to fair pricing of services. "In fact, the overall average charges of our hospitals are right in line with those of other Northern California hospitals," says spokesperson Karen Garner. "Two separate studies of publicly available government data confirm this fact."

CalPERS is using its clout for more than just price negotiations. It is well known that a small minority of chronically or terminally ill patients account for the vast bulk of health care costs. In a program recently begun with Blue Shield, CalPERS is providing more hands-on treatment, pain management, medication management and, when warranted, in-home care for patients, most with cancer, who doctors believe have less than a year to live. The program works to keep patients as comfortable as possible and helps families choose a hospice, if they wish, in the patient's final days.

[ILLUSTRATION OMITTED]

Those patients comprise the most seriously ill I percent, according to Blue Shield. The payback, so far, is 2 to 1: For every dollar spent on the program, two dollars are saved in hospital costs. The program will move into the 2 percent most ill, then 3 percent, and down the line so long as the program shows a return. Blue Shield plans to expand the program to other customers.

Still, says Sean Harrigan, president of the CalPERS board, "while I think what CalPERS is doing is really important, we're still seeing our health care costs go up many times the rate of inflation. Employers who are providing health care for their employees are bearing the burden for employers who don't. We need a national debate on these issues."

RELATED ARTICLE: California: Health Care Battleground

L.A. Chamber of Commerce tries to make the Golden State friendlier to business.

How complex is the health care system in California? "I have one handbook that covers 49 states, and I have one handbook just for California," said Joseph Czyzyk, chairman and chief executive of Mercury Air Group, based in Los Angeles. "California is a tough place to do business."

[ILLUSTRATION OMITTED]

The Los Angeles Chamber of Commerce, revived over the last two years under Chairman George Kieffer and Chief Executive Russell "Rusty" Hammer, is trying hard to make California friendlier to business. Czyzyk, a chamber board member brought on by the new leadership, says health care has become a major focus for the group, whose members branch far beyond Los Angeles throughout a huge chunk of Southern California.

Health care item No. 1 for the chamber this year was Proposition 72, a ballot initiative that would have required all companies with 50 employees or more to offer coverage to workers and extend coverage to family members for companies with 200 or more employees. The chamber helped defeat the measure, which failed by a slim margin.

The chamber is also working to ease strict earthquake retrofit restrictions that are slowing hospital construction and remodeling, and is aiming to trim back state-mandated nursing ratios that Czyzyk said are the highest in the country.

Dealing with the uninsured is a big issue for the L.A. chamber as well. According to Czyzyk, hospitals in the L.A. area "write off" $100 million for attending to the uninsured. "But they don't really write it off, of course, because somebody else pays for it," Czyzyk said. "Who pays for it is employers and employees--who pay higher insurance policies."