The next front in health care.

Local health care costs are usually low on the list of overseas business challenges. But now that governments are getting out of the health care business, you may have to pick up the slack.

For the great majority of American corporations, one of the central challenges of the past two decades has been getting employee health care costs under control. Until recently, however, very few companies have extended their cost control initiatives to the medical benefit plans covering their local national employees outside the United States.

But that attitude is beginning to change. An American International Group survey of several hundred U.S. multinational companies found that 35 percent expect annual increases of 10 percent to 14 percent in the cost of providing health insurance benefits to their overseas employees over the next five years. Sixty-two percent of the surveyed companies plan to develop a more centralized, global approach to managing international health care costs in response to these increasing costs.

Historically, governments in countries outside the United States have paid the lion's share of health care costs, with the private sector (both employer plans and individual plans) providing smaller proportions of the total expenditure. However, the cost of providing health care is now increasing at alarming rates in almost all countries around the world, and it's forcing governments to shift more of the financial burden to the private sector. This has been most evident in Europe.

For example, the French state medical program experienced a deficit of 32.2 billion francs in 1994. An initiative was launched to reduce the deficit by reducing the benefits paid by the program. The effort showed early promise, but recently announced figures indicate the deficit will be 48 billion francs in 1996. Therefore, further reductions in benefits are expected. Most employers, including U.S. multinationals in France, provide supplemental medical benefits that integrate directly with the state program and are likely to bear the burden of the reduction in state benefits.

Plus, most of the employer plans are insured, and 60 percent of these were also in a deficit position before the government benefits cutbacks were announced. That's because in many cases, the plans were underrated, and negative claims experience is now catching up with the insurers.

Recent surveys indicate that during the past 12 months, more than 22 percent of all employers in France have been subjected to medical insurance rate increases of about 12 percent to 15 percent, and another 33 percent have changed insurers to avoid rate increases.

In Italy, the government significantly reduced the levels of benefits for outpatient treatment available from the state medical system in 1995. For example, prescription drug coverage, previously available at near 100 percent, was reduced to 50 percent or even zero in some circumstances. A database review of leading companies in Italy indicates that half of all employers provide private medical coverage tO dirigenti (senior managers), and the number of employers providing coverage to lower-level employees is increasing.

The U.K. government has introduced changes to the National Health Service during the past several years, with the goal of promoting competitive forces and increasing efficiencies within the system. There are indications the changes are having positive effects, including some reduction in the wait times for nonemergency treatment.

Still, the impression remains that supplemental coverage is necessary in order for an employer to provide a competitive benefits package. In a 1995 survey, 90 percent of employers said they provide some form of supplemental medical coverage, and 43 percent said they provide supplemental coverage to all employees (up from 35 percent in 1991). The greatest increase in specific benefits was in the dental and vision areas, where the percentage of surveyed employers providing these benefits rose from 2 percent in 1991 to 26 percent in 1995. This is widely seen as a direct result of decreases in NHS benefits.

Governments in Canada, Germany and the Netherlands have also announced or implemented reductions in government-provided health care benefits. Similar developments are taking place in Asia as well. The American International Group survey revealed that U.S. multinational companies are concerned over the deterioration of government health care systems in Latin America, and cited Brazil and Mexico as the Latin American countries where U.S. companies most needed to gain control over employee health care costs. In these and other developed countries, the health care systems are going through large-scale changes similar to those the U.S. health care system went through 10 or 15 years ago.

WHO'S GOING TO PAY FOR THAT X-RAY?

Government vs. private sector percentage of country's total
health-care bill

                       Gov't %             Private sector %

Belgium                  77                       23
Denmark                  87                       13
France                   73                       27
Germany                  78                       22
Italy                    75                       25
Netherlands              70                       30
Sweden                   85                       15
United Kingdom           80                       20
United States            44                       56

TAKING INVENTORY

The shift in burden from governments to employers is occurring at a time when many U.S. multinationals find their overseas populations growing. Therefore, many organizations are developing specific strategies for managing their health care benefit costs globally. For large, established multinationals, a clearly articulated strategy can guide an inventory and review of health care provisions at overseas locations, and identify the critical areas where cost control mechanisms will add the most value. For a company setting up its first overseas operations, a global health care strategy can ensure that any medical benefit plans that are established incorporate an appropriate focus on cost control and support the organization's business mission. The following questions can provide a useful framework for managing health care costs worldwide:

* How can we determine the adequacy of local government health care systems, and to what extent should we supplement these systems?

* How should our supplemental health care plans integrate with government plans to minimize costs while providing appropriately competitive benefits? The objective here is not to provide the same benefits as U.S. employees get, but to offer benefits comparable with those of the local marketplace.

* How much should local employees contribute toward the cost of health care benefits provided by our organization?

* Should our plans provide coverage to employees only? To their families? To retirees?

* To what extent should different classes of employees be treated differently? In the United Kingdom, for example, some companies offer comprehensive "London-scale" benefits to senior executives and more basic "provincial-scale" levels of benefits to other employees.

* Is coordinating health-care benefit provisions among different divisions in the same country to achieve economies of scale more or less important than divisional autonomy?

* What can we do to achieve economies of scale on a multicountry basis?

* Should employees be given flexibility in the design and delivery of their health care benefits? In such instances, employers can use pricing options to motivate employees to use cheaper plans, as they do here.

* How comfortable is the organization in bearing the risk of overseas health care benefits on a self-insured basis?

* What is the appropriate balance between centralized corporate management and local country management of health care provisions and costs?

* How should we prioritize our cost control efforts by country?

Some of the tactics that have been successful in reducing the costs of U.S. health care programs can be extended overseas. These include:

Managed care. Network-based health care provider systems, such as health maintenance organizations and preferred provider organizations, have been widely available in Brazil for several years, and are emerging in other countries, such as the United Kingdom. The use of discounts negotiated with network providers, gate-keeper arrangements, required second and third surgical opinion requirements, preadmission testing, and large-case management are becoming more common outside the United States as employers take on more of the responsibility for financing health care costs.

Flexible benefits. Flexible plans are becoming much more common in Canada and the United Kingdom. As in the United States, these plans give employers a framework for managing the cost of health care benefits within the context of the total compensation and benefits package.

Multinational pooling. Employers can combine the financing of benefit plans in several countries to achieve greater economies of scale through a multinational pooling arrangement, in which an employer's insured coverages in different countries are placed with the local representative companies of the same insurance network, then reinsured to a central insurer in a common currency. Companies have traditionally been reluctant to include health care in their insurance pooling arrangements because of the fear it would "bleed the pool dry," but they're starting to realize that distributing the risk is exactly what a pool is all about.

By including insured medical benefit plans in a pool, an employer can offset negative medical claims experience in certain countries against positive claims experience on medical and other coverages in other countries, and often avoid rate increases that would normally have been applied on the claims-heavy medical plan. Pooling also provides multinational employers with a vehicle for self-insuring medical and other coverages worldwide by allowing them to use the insurance network for administrative services only.

When you're evaluating how best to hold down your benefits costs overseas, build in some flexibility to accommodate the overseas business unit's changing needs. A small overseas unit often adopts a fully insured plan for health care and other benefits. If the unit grows, another form of funding may be more economical. For medical benefits, a more cost-effective approach may be available, such as a minimum-premium or administrative-services-only arrangement.

For insured health care benefits, there may be opportunities for improvements in premium rates. These opportunities can include lower commissions (especially when the broker is providing no administrative services), more frequent premium payment dates, negotiated discounts and better termination clauses.

As you can see, you do have some options to hold down your health care costs overseas. Devising a strategy for these costs can be a complex task, given the rapidly changing economic and political environment, both in the United States and abroad. But in the end, the same market forces driving down health care costs here may exert pressure on costs in other parts of the world. Then you can fine-tune your strategy to take advantage of new market efficiencies.

Mr. LaSorte is a total compensation consultant at Hewitt Associates' global practice group in Lincolnshire, Ill. You can reach him at [phone].