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Putting the lid on health benefits costs.

Putting the Lid On Health Benefits Costs

The recent increase in health care expenses has far outpaced the rate of inflation, and as a result, insurance costs have skyrocketed. In response, an industry has sprung up to help employers control their employee health benefit expenses. Among the many participants in the rapidly growing field of health care cost containment are consultants who evaluate and recommend changes to health benefit plans; hospitals and practitioners which provide discounted services; and utilization management (UM) companies which reduce excessive use of benefits.

Even alternative health care systems such as HMOs and PPOs use UM programs to control utilization. The goal of UM programs is to make medical care more efficient by eliminating medically unnecessary and inappropriate services. The traditional components of UM programs are hospital admission review, concurrent review and second surgical opinion. While there are other services such as catastrophic case management, ancillary services review and prenatal review, this article will focus on the basic UM services which are used by most employers.

Pre-admittance Testing

Not long ago, it was common for a patient to be admitted to the hospital for a few days so the doctor could run some tests. Today, pre-admission testing can be done more efficiently and less expensively on an outpatient basis. Most hospital admission review programs monitor all acute inpatient care, including medical, surgical, obstetrical and psychiatric admissions. Reviews of these cases are usually conducted prior to or shortly after admission by specially trained nurses and physicians. Utilization management firms perform these reviews over the telephone by collecting the relevant clinical data from the attending physician or hospital staff. They then compare this information to pre-established criteria. If the admission is determined to be necessary, a length-of-stay is assigned based upon diagnosis, procedure, age and other criteria.

Concurrent review is performed periodically or when a patient remains in the hospital longer than expected. If a patient needs to stay in the hospital beyond his doctor's original estimate, UM nurses and physicians review the relevant clinical information to ensure that additional days of inpatient care are appropriate. With the average cost for a day of hospital care over $500 in many parts of the country, and utilization rates from 450 to 650 days per 1,000 covered lives, it is easy to see how eliminating unnecessary hospital days can reduce a company's claims costs.

Cost Containment

Second surgical opinion (SSO) programs were one of the first cost containment strategies used by employers to control unnecessary treatment. However, equivocal reports from the health insurance industry and critical articles in trade journals have questioned the effectiveness of SSO programs. There are few guidelines for determining whether or not SSO programs are effective at reducing claims costs. Consequently, the decision to use SSO for a health plan is often based on intuitive appeal rather than valid and meaningful data.

The goals of UM programs are clear, however, it is difficult for a company to know if its program is cutting expenses. Employers and insurers have jumped on the cost containment bandwagon so fast that they have often outpaced the availability of hard data regarding the effectiveness of UM programs in reducing claims expenses. This situation is beginning to improve as the results of retrospective studies of these programs are finding their way into print. However, research findings are often predicated on limited data or have involved unique circumstances which make it difficult to apply them to another employer or situation.

Finding the Savings

In the face of a shortage of hard data, the marketing departments for the hundreds of UM vendors have willingly filled the void. UM vendors often claim impressive savings in their advertisements. Employers are told by the vendors that they might reduce health care costs by 30 percent or better. Regrettably, most of these numbers appear to be based on faulty assumptions or one-of-a-kind scenarios.

The majority of savings estimates are calculated by multiplying a highly unreliable statistic referred to as "days saved" by an average hospital per diem. Days saved is the number of hospital days requested by a physician minus the number of days either approved by the UM firm or actually used by the patient. Obviously, the days saved statistics are suspect since treating physicians may inflate their initial estimates to bargain with the UM nurse or physician reviewer. Using this strategy, attending physicians can get the number of days they want and the UM companies can report savings even if there were none.

The almost universal lack of valid data on the efficacy and cost effectiveness of utilization management programs does not mean that cost containment efforts are superfluous. Rather, it suggests that employers have to become better informed and demand standardized and valid data from their UM vendors. Employers should no longer be satisfied with the quick and easy days saved statistics.

The recommended approach is to measure the actual reduction in inappropriate hospital days and surgical procedures achieved by a UM vendor. This approach differs from the days saved statistical method because it must be based on medical records, rather than UM vendor records. Only by checking medical records can an employer ascertain the number of inappropriate hospital days and procedures used by employees and covered by the health plan.

Using this approach to determine the potential savings from a hospital admission and concurrent review program requires the following data: the cost per UM review, the average cost per hospital day, the average length-of-stay in the hospital, the percentage of inappropriate hospital days and the UM review effectiveness. The first three elements should be readily available or easily derived from data provided by the insurance carrier, claims payor and UM firm. The percentage of inappropriate days will require data collection from a sample of medical records.

Review effectiveness measures the performance of the UM program in actually reducing a company's inappropriate admissions. For example, 40 percent inappropriate days means that 400 out of every 1,000 hospital days paid by the health plan are inappropriate. If the UM program eliminates 200 of the inappropriate days, the review effectiveness is 50 percent. Review effectiveness is limited by uncontrollable inefficiencies in the delivery of inpatient hospital care such as environmental and scheduling problems which make it impossible to avoid every inappropriate day. For this reason, approximately five percent of inappropriate hospital days cannot be eliminated, which means that even the best UM program is unlikely to be more than 80 percent effective.

Actual review effectiveness data is generally not available until a year or more after the implementation of a utilization management program. However, by using the following formula one can calculate the maximum feasible level of review effectiveness: (percent inappropriate days--percent hospital inefficiency)/(percent inappropriate days). For example, if an employer finds that he is currently paying for 20 percent inappropriate days, then the maximum level of review effectiveness he should expect from a UM program is 75 percent, i.e., (0.20 - 0.05)/(0.20) = 0.75. The UM program can eliminate only three-fourths of the inappropriate days, since one-fourth (five percent) are uncontrollable.

A sensitivity analysis can also be performed using a spreadsheet program to calculate the potential savings from a UM program. Net savings for 1,000 admissions is the product of average length-of-stay, percent inappropriate days, review effectiveness, inpatient per diem and cost per review.

Consider a fictitious company, ACME Enterprises which has 5,000 employees and a total of 12,500 covered lives. There were 100 psychiatric hospital admissions and 1,000 medical surgical admissions during the past 12 months. The average length-of-stay for psychiatric admissions is 14 days and the average length-of-stay for medical surgical admissions is five days. The company has high claims costs which it suspects are due to high utilization caused by inappropriate hospital days. A retrospective review of a small sample of medical records revealed that 20 percent of the medical and surgical days and 30 percent of the psychiatric days were inappropriate. The estimated UM savings for medical and surgical admissions is $305,000 in addition to a potential savings of $101,100 for psychiatric admissions.

If ACME Enterprises calculated the potential savings based on a straight 30 percent days saved, as suggested by many UM vendors, it would have over-estimated by nearly $500,000. Moreover, if the UM program that ACME implements is only 50 percent effective, which is quite possible, then the days saved based estimate would be nearly $700,000 high of the mark.

In the second year of ACME Enterprises' UM program, assuming the program has been only 50 percent effective, the percent of inappropriate days should have dropped to 10 percent for medical and surgical admissions and 15 percent for psychiatric admissions. This leaves only five to 10 percent room for improvement. Therefore, the maximum review effectiveness in the second year can be no more than 50 percent for medical and surgical admissions and 67 percent for psychiatric admissions. The admission rate and average length-of-stay will also decrease, but let's assume it remains constant. The estimated savings for medical and surgical admissions is now just $30,000, while the savings for psychiatric admissions is only $20,250. In contrast, the 30 percent days saved approach results in a false savings of $897,000.

The cost for UM reviews is generally less important than the other variables just described, provided there is a relatively high percentage of inappropriate days and a high level of review effectiveness. However, when paying for review services on a per employee basis there is a risk of the cost per review being so high that savings are substantially reduced. This can occur when there is either low compliance by employees in the cost containment program or when the actual number of admissions falls short of the expected number.

A similar approach can be used to determine the potential savings from a second surgical opinion or surgical procedure review program. However, the analysis focuses on eliminating inappropriate surgical procedures instead of eliminating inappropriate hospital days.

The key data elements needed include: the cost per review, the average cost per procedure, the percent of inappropriate procedures being paid by the benefit plan and the review effectiveness. The first two elements should be easy to obtain from the insurance carrier, claims administrator and UM firm. However, unlike ascertaining the number of inappropriate hospital days, there is no widely accepted technique equivalent to the AEP for assessing the number of inappropriate surgical procedures. One solution is to rely on a panel of physicians who retrospectively review a sample of closed cases to determine the percentage of inappropriate surgeries. Another solution is to use nurses who initially screen closed cases using valid surgical procedure criteria. Procedures which failed the criteria would be referred to a panel of physicians for final determination.

In addition to evaluating its hospital admission and continued stay review programs, ACME Enterprises is considering several options for reducing unnecessary surgical procedures. In the past 12 months the company paid an average of $600 for 1,000 surgeries that were on its SSO list. ACME wants to know whether the current SSO program is cost effective, whether it should modify the program or if it should consider implementing a new surgical procedure review program. At present, each mandatory second opinion is costing ACME $120 for the physician consultation alone.

An independent panel of surgeons was asked to review a random sample of all surgical procedures and found that 14 percent of the surgeries were inappropriate. Assuming the SSO program has been 80 percent effective, there will be a net savings of minus $52,800 and the program will have cost more money than it saved. Clearly, ACME's SSO program is not cost effective. However, there are at least two options ACME might consider besides scrapping the program.

One problem may be that second opinions are being performed for too many procedures. Upon examining the list, the panel of surgeons noted that some of the inappropriate procedures performed cost over $1,400 each. If the SSO list were modified to include only procedures costing $1,400 or more, the program could produce a real savings. Assuming that 25 percent of the 1,000 procedures cost in excess of $1,400, the net savings would be $9,200.

Unlike hospital admission and concurrent review, the cost per review is an important factor in determining the net savings which can be obtained from an SSO or surgical procedure review program. Compared with a mandatory SSO program a surgical procedure review program can reduce the review cost from $120 to $60 per case. Surgical procedure reviews function like hospital admission certification. Instead of requiring employees to consult a second opinion physician, UM nurses are used to review cases according to pre-established criteria and refer only questionable procedures to a panel of physicians for final determination. This eliminates the high cost of obtaining second opinions.

If ACME replaces its SSO program with a surgical procedure review program aimed only at procedures with a cost of $1,400 or more, the net savings will increase to $24,200, assuming a review effectiveness of 80 percent. This savings may not be large compared with hospital admission review, but it is a significant improvement over the original SSO program and does represent a real expense reduction.

Given the almost sacrosanct nature of health care benefits and the disruption utilization management programs can cause, employers are justified in asking for hard numbers before making changes to their benefit plans. It is essential for employers to look beyond the self-serving and simplistic estimates of net savings which are reported by most cost containment firms. By conducting an analysis based on net reductions in inappropriate utilization, employers can more objectively and accurately predict the net savings they hope to achieve. Furthermore, the information gained through this process can help make the UM program more effective in cutting future health plan expenses. Because accurate savings data is so important, employers should insist that cost containment vendors develop valid ways of measuring the impact of their utilization management programs.

Joseph W. Avellar is director of marketing at Health Management Strategies (HMS). Mr. Avellar has spent 15 years working in the areas of quality assurance and evaluation. Daniel J. Klein is vice president of marketing with HMS. Mr. Klein has over 10 years experience in health services administration.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Avellar, Joseph W.; Klein, Daniel J.
Publication:Risk Management
Date:Apr 1, 1989
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