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A growing burden for the food industry.

If the Surgeon General of the U.S. were to issue the warning that "health care costs are hazardous to the health of your business," he would hear no demands from the grocery industry for a second opinion.

There is a growing conviction within the industry that the cost of maintaining health care has reached the crisis stage. Words like unbearable, runaway, out-of-control and sky-high have become common whenever the subject is discussed. Not since the energy crisis has there been a topic of such concern.

Consider the electrifying opening statement of John L. Repass, senior vice president of Safeway, in his recent address to the Western Association of Food Chains. "I am here today," he said, "to talk about a crisis that could bankrupt the food industry if left unchecked. I'm talking about health care costs."

To illustrate the magnitude of the problem, he noted that "the payment for physician services, hospital stays and nursing homes has more than doubled in the past six years. Where it took $394 to keep a person healthy in 1971, it now costs nearly $1,300. Last year the Consumer Price Index went up only 3.8%... the lowest increase since Wage and Price Controls in 1972. By comparison, medical costs climbed at more than twice that rate in 1983." He went on to say that Safeway's medical insurance premiums are nearly 200% higher than they were 10 years ago. "At Safeway in 1983," he said, "we paid out more than $190 million in health care claims--a 13.9% increase over the previous year. In comparison, our 1983 corporate profits were $183.3 million."

John Shields, president of First National Stores Ohio division, in a company newsletter said of just-concluded negotiations with union locals, "The increased costs relating to the maintenance of benefits programs have already been incurred...and they are staggering." Calling the almost 30% increase for 1984 over the previous year "a tremendous burden," he told employees that the costs "jeopardize the health of your company."

Super Valu in its company publication decried the 19% increase in health costs it had suffered in 1983, atop an increase of 16% in 1982, and noted that its costs had increased 160% over the past 10 years.

Using 1982 results, Super Valu cited the frightening realities:

* Over the past 20 years the cost of health care has outpaced every item on the U.S. government's Consumer Price Index except gasoline.

* Almost 15 cents of every federal tax dollar went to the health care industry in 1982: $1,300 for every man, woman and child in America.

* The cost of health benefits is estimated at 70% of the 1982 Fortune 500 companies' profits. U.S. companies paid more in health insurance premiums than they paid out in dividends to shareholders. Small Retailers Are Hurting

It isn't just the big fellows that are feeling the heat. Smaller chains and independents are alarmed too. Gerry Peck, president of the National-American Wholesale Grocers' Association, whose members supply most of the nation's independent stores, calls health care costs "the largest unmanaged cost in all of food distribution."

Even unions are aware of the danger. William Campe, vice president of Local 655 of the retail clerks in St. Louis, says, "We're trying to give our people alternatives that provide as good health care but at a lower cost. We're putting a lot of stress on educating our members to become better shoppers for health care. We're paying incentives to members who use their health benefits wisely and we're imposing penalties on those who don't. In this respect, labor and management have a common concern: Get the best possible care for the most reasonable price."

William Vaughan, vice president of labor relations for Stop & Shop, says that in negotiating, "More and more we argue with facts rather than on emotion. Both labor and management have come to the conclusion that health and welfare issues are becoming among the most difficult to settle and that the sheer cost is leaving little money to spend on other issues." Why the Increases?

Along with the belief that greater cooperation between labor and management can be a "win-win" situation for both sides there is an appreciation that the problem is deep-seated, complex, and incapable of being solved by the health care industry alone or by government fiat.

The consensus seems to be that everyone is to blame: employers, employees, unions, insurers, doctors, hospitals and government. The social good of health care was so evident that we all simply "went along."

Ron Zachary, vice president of personnel services for Safeway, says, "For years, employers maintained in contract negotiations that all we wanted was 'parity' and that we could continue to operate a profitable business as long as our costs were no greater than our competition's.

"Well, when we signed health and welfare contracts for medical services in the 1950s and '60s we signed a blank check. We agreed to provide first dollar coverage, which eliminated any incentive for our employees to be concerned about costs."

Employers also agreed to levels of benefits that emphasized staying in hospitals, with a disincentive for walk-in or outpatient care, Zachary says. "We acceded to pressures of labor unions, insurance carriers and consultants to accept the prevailing fee that was 'usual and customary.' We compounded the problem by agreeing to 'maintenance of benefits' clauses. Now, employees in most unions have come to expect a 'free ride.' There no longer exists any reason for most employees to be concerned about medical costs."

Zachary concludes, "Industry has been a major cause of health care escalation. We have been a passive payor."

The insurance industry is also part of the problem. Over the past 25 years the industry has developed and marketed thousands of medical insurance packages that took financial responsibility from the individual patient and the providers of medical care and transferred it to a third party. When Medicare and Medicaid came into being in 1965 the third party system became enormously swollen and even more institutionalized.

At a recent convention of the International Foundation of Employee Benefit Plans, a union trustee, bemoaning the ever-larger share of wage settlements going for maintenance of benefits, said, "It isn't going to be easy to turn this situation around. A whole generation has been ingrained with the knowledge that the way to assure minimum costs for themselves was to go into the hospital. Whether a treatment was really necessary, or what the costs were, made no matter because the prevailing attitude was 'the insurance company is paying.'" DRGs--a Beginning

After years of meeting escalating hospital charges, the federal government has finally acted. As of October 1984, Medicare will switch to fixed payments for 467 categories of care called diagnostic-related groups or DRGs. Several states already have them.

DRGs are an incentive. If a hospital can treat a Medicare patient for less than the established price, it gets to keep the difference. If it can't, the hospital bears the extra cost.

The carrot and stick is working. The length of stay has dropped significantly in test hospitals that have used DRGs for the past six months. But the Health Insurance Association of America says the carrot is too small and warns of accelerated layoffs and a decline in non-medical services. Some costs such as bad debts, charity care, education and research are excluded from government payments. Already about $8 billion in these costs have shifted to the private sector, according to the association, making the raw figures appear better than they really are. Everybody's Scapegoats

There are plenty of other villains in the health care picture.

* Life expectancy is at an all-time high and the death rate is at a record low. The U.S. already has 26 million people over 65 and by 2000 the number of senior citizens is expected to top 36 million. This compounds today's problem because an over-65 American accounts for about three times as much in health care cost as any other citizen except a newborn.

* Medical technology is increasingly expensive--but also increases longevity.

* In many areas of the country there is an excess supply of hospital beds, with a matching zeal of the medical industry to make use of them.

* Medical liability costs have gone through the ceiling. In 1983, physicians paid $1.8 billion for malpractice insurance, while another $15 billion went for excessive defensive medicine to avoid malpractice suits.

* Careless health habits--from smoking, alcohol and drug abuse, to failure to use seat belts--are costly. For instance: Employees who smoke miss 5-1/2 more days work annually and use health care and hospitals 50% more than non-smokers at a cost to the employer of $200 to $5,000 more annually.

* Abuses exist. Lee Iacocca, chairman of the Chrysler Corp., which paid more than $600 million for medical care last year, cites "atrocities like 240,000 blood tests being administered each year to 60,000 workers because the doctors own the labs." The Pace Slows

There are some encouraging reports that efforts to contain health care costs are beginning to work. The Business Roundtable's Task Force on Health reports "substantially reduced rate of increases in employee health care costs without reducing the quality of medical care."

The American Hospital Association Trends report for the first quarter for 1984 claims that "declining utilization, cost containment incentives and moderate inflationary pressures, coupled with physicians' and hospitals' responses to this environment, led to continued moderation in total hospital growth."

Medicare has seen the most dramatic cost declines in its 18-year history. According to Health and Human Services, "The rate of inflation in medical care costs has been cut almost in half, from 6.3% at present."

Food industry executives should bear in mind that the federal government's good showing comes at least partly from shifting the burden to the private sector.

They should also take heart. Runaway health care costs can be tamed; see suggestions listed within this article. 23 Ways to Cut Health Care Costs

1 Communicate your problems--and intentions--to employees. Most changes in health care plans shift at least some of the burden to insured employees. If they understand the rationale, there will be little or no resistance. Use company publications, messages in with paychecks, company bulletin boards or, if possible, group meetings.

2 Add a new line the payroll stub. The costs of health care benefits to the company are largely unknown and little appreciated by the average employee. Have payroll software amended so that the company's contribution to the health care shows alongside each employee's individual contribution for the pay period. If this is impractical, at least add the information to the employee's periodic review form.

3 Help employees shop smarter at the drugstore. Teach them to ask their doctors and pharmacists if a generic or store brand can't be substituted for the higher-priced brand name drugs. Some union locals cover 100% of the cost of generic drugs, but only 80% of the brand name drugs. Also point out that "the large economy size" is no bargain if the medicine ends up going largely unused.

4 Require a second opinion on elective surgery. Depending upon employees to voluntarily secure a second opinion on non-emergency operations doesn't work because of the reluctance to "challenge" their doctors. Most new plans require a second opinion, sometimes from non-surgeons, on anywhere from 12 to 24 elective surgical procedures. Plans pay 100% of the cost of second opinions.

5 Start a self-audit program for hospital bills. A recent study of hospital charges in 16 states unearthed incorrect charges on almost 90% of the bills issued to insurance companies, with an average overcharge of 7%. Employers are now issuing checklists for employees, with the incentive of a portion of the savings uncovered going to the employee. Caution: The IRS appears to be taking the view that such rewards are untaxed income. They may have to be processed like a bonus and have all appropriate taxes deducted.

6 Have employees secure pre-estimates on costs. Physicians often have floating rates, charging more if they know the patient has group coverage. More companies are providing pre-estimate forms so that charges can be determined as usual, customary and reasonable. This prevents employees from unexpectedly footing a portion of the bill. It may also lead to more realistic charges on the part of the doctor and, possibly, reduction in unneeded services. Caution: Secure the cooperation of insurance carriers in calculating the benefits payable quickly. Some employers insist on rulings made within three working days.

7 Encourage preoperation and preadmission tests outside the hospital. This avoids a hospital stay and often entails lower fees. If the hospital facilities are used, testing should be on an outpatient basis only. Newer plans will pay 100% of such testing, but only 50% to 80% for non-emergency, inpatient testing.

8 Give employees a health expense account. Where companies have shifted some cost to employees in the form of larger deductibles, for example, they establish an up-front health pool, usually $300 to $500 but sometimes more, which the employee can use to pay for deductibles or for uncovered items such as eyeglasses, dental work or whatever. Unused funds are then accumulated for the employee's retirement fund or paid directly to him. This method might require withholding of appropriate federal and other taxes.

9 Offer health insurance as an option. About 60% of married couples have two incomes and double coverage, as a result. Making coverage optional could save an employer as much as $250 a week per employee.

10 Change carriers--carefully. Switching to another insurer to reduce costs is probably not the answer because often the new carrier will not be able to match existing conditions for less money. Savings usually come at the expense of existing benefits.

11 Reduce use of hospital emergency rooms for non-emergencies. Super Valu's plan, for example, pays only 50% of the cost for using the emergency room for non-emergencies, where the plan pays 80% for non-emergency treatment at the doctor's office or suitable substitute. Some plans are paying 100% for such non-emergency room treatments.

12 Promote outpatient surgery. New plans pay 100% of the cost of the procedure outside the hospital compared with only 50% to 80% of the cost on an in-patient basis.

13 Include a subrogation clause in your plan. This gives the right to pursue possible recoveries of medical costs incurred by your employee as a result of the actions of a third party.

14 Process claims aggressively. Whether you do-it-yourself or hire outside auditors, make sure the claimant is covered and is not insured elsewhere. Screen all large bills carefully and on really large ones, $25,000 and over, say, see if you can negotiate a lower price.

15 Give incentives to health care providers. One program offers a three tiered-payment system. If ambulatory surgery is performed in the hospital without good medical reason, the physician is reimbursed at 75%. If it is done at the least expensive outpatient location (like the physician's office), the physician is paid 125% of cost. If the procedure is handled in other non-inpatient settings, 100% is reimbursed.

16 Get the facts on hospital utilization. Retrospective reviews are good. You can see what you're paying for. Concurrent reviews performed by services are better. They monitor what's happening on a daily basis, and can head off problems of improper or unwarranted care. Best are prospective reviews, before the fact. Medical boards will provide preadmission certification that the intended treatment is necessary and appropriate. This is important because 55% of the premium dollar paid by the employer goes to the hospital.

17 Consider a cafeteria plan. Allowing employees to select a limited number of benefits they want from a menu of coverages reportedly can bring reductions of 5% to 6% in health care costs. Under a cafeteria plan, young employees might choose fewer health, life insurance or pension benefits in favor of more vacation time. Caution: This requires extensive data and expertise in all areas of employee benefits.

18 Fund your own plan. For chains and wholesalers with sufficient resources and commitment, self-insuring can reduce costs by 10% to 20%. Only about 10% of companies that are self-funded administer their own plans, however; usually, a third party such as Blue Cross administers the plan and is paid a percentage of total claims. Self-insurers still must buy extra coverage against catastrophic events.

19 Join a coalition. Going it alone in a complicated field like health care is difficult if not hazardous. Consider joining with other area businesses to exchange data, seek more consistent health care practices and even cut costs by contracting jointly with preferred providers. (Caution: Some states view such concerted activity as restraint of trade. Know the ground rules first.) A good contact: Willis Goldbeck, Washington Business Group on Health, (202) 547-6644.

20 Invite organized labor to participate. Coalitions of employers only are effective, but labor union trustees are increasingly being asked to play an equal role in finding ways to reduce health care costs. Best food industry source: The Joint Labor Management Committee, Washington, D.C. Contact: Nick Fidandis, (202) 331-0950.

21 Support state-level prospective payments--that is, billing amounts fixed before treatment rather than after. The federal government recently set Medicare rates for 467 categories of care called diagnostic-related groups (DRGs). These lower payments cause a shift of cost to the private sector, say health care experts. That's why it's important to push for DRGs at state level to prevent that shift.

22 Promote hospices. A place where the terminally ill can live their last days in dignity and comfort can be a preferable alternative to a hospital. For one thing, families can spend far more time with the patient. As for costs, a freestanding hospice might range from $125 to $225 a day against a hospital's $400 to $1,200. Given the choice, some patients and families even opt for care rendered at home, which costs as low as $90 a day.

23 Investigate alternative health care delivery systems. Health Maintenance Organizations (HMOs), where employees choose to go solely to selected physicians and treatment centers, result in 40% fewer hospital days and about 30% lower annual costs per person compared to fee-for-service hospitals. Preferred Provider Organizations (PPOs) cut costs similarly, but are usually predicated upon employers banding together to secure discounts in exchange for volume business, faster payment and other incentives.
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Title Annotation:health care costs
Author:O'Neill, Robert
Publication:Progressive Grocer
Date:Sep 1, 1984
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