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Health care: where do we go now?

What steps are companies taking to contain employee health care costs?

And what form of national health care will be most effective in providing coverage for all those who need it?

Financial Executive spoke with five financial executives to learn what solutions they have found to deal with rising health care costs in their companies and what they feel is necessary to make the U.S. health care system work. Four of the five serve on Financial Executives Institute's Committee on Employee Benefits.


Like most employers, Gillette is concerned with the continuing double-digit cost increases we are experiencing in our health care programs. While we have been instituting controls, such as pre-admission hospital certification, second opinions for certain surgical procedures, and concurrent case review, none of these has enabled us to bring the cost increases to an acceptable level.

Because the medical care delivery system is so complex, we find that controls initiated in one area, such as hospital admissions, create a bulge in the health care cost balloon in another area, such as outpatient costs. The complexity is further aggravated by the cost shifts within the system because of the uninsured and the government's limited Medicare reimbursements.

With all these issues, a second major problem has to be recognized because of the adoption of FAS 106. Many of our companies promised employees postretirement medical benefits at a time when there were few retirees. FAS 106 is forcing us to recognize these liabilities.

At Gillette, we will be relying more on managed care techniques to control costs. We have just completed a major analysis of our claims data using an outside consultant, and are now establishing managed care performance targets with our primary health benefit insurer. The analysis has also uncovered some flaws in our plan design which result in the use of more expensive facilities than is needed. Needless to say, we are correcting these defects. And when we have major cost concentrations, such as at several local hospitals, we will be negotiating some kind of discount structure.

One interesting thing that has come out of our analysis is the impact our extensive in-house medical facility has on our costs. We are finding that our employees have much better cost profiles than their dependents, who do not use the facility, so we are evaluating whether we should broaden the role of the in-house medical center to include dependents.

In the retiree medical area, we introduced an ESOP to replace the retiree medical benefit for all employees hired after july 1, 1990. Employees hired before that date will also begin paying a portion of their retiree medical costs. Both groups will have the ESOP accumulations to pay for retiree medical costs. In effect, we have substituted the defined-contribution ESOP for the open-ended retiree medical liabilities.

While most companies provide health insurance for their employees and may be tempted to resist programs to cover the uninsured, this view is shortsighted. We pay for the health care the uninsured receive through cost shifting or hidden premium taxes. An improved U.S. health care delivery system must address access and coverage for the uninsured. As an example, prenatal care for the uninsured might very well save the system significant catastrophic cost.

There are some obvious changes that should be made to the system, among which are malpractice reform and the preemption of state mandates through a national program. Some kind of system is needed to provide better balance between health care providers and health care purchasers. And the current tax treatment of health care benefits for employees is not as efficient as it should be.

Our administrative costs are much too high. Have you ever tried to sort out Medicare and employer-covered claims for a loved one? It is almost impossible. This question, of course, leads to consideration of the single-payer system.

As a society, we should also face the question of the major expenditures that occur in the months just before death. Are they all necessary, or even humane? The concept of living wills or health care proxies needs to be encouraged.

FEI's Committee on Employee Benefits is developing a discussion draft position on these and other national health care questions. It is no easy task. One recent speaker before our group finished with this axiom:

"The successful solution to a problem must be at least as complex as the problem itself."


General Motors is the largest non-governmental purchaser of health care in the U.S., spending over $3 billion on health care for about 1.8 million employees, retirees, and family members in 1990. GM's health care costs per covered life have risen about 12.6 percent per year since 1965 and are expected to continue to rise 15 percent per year. In 1990, the cost of health care per member was $1,720, compared with 625 in 1980. In 1990, the health care cost for each car we made was $772, but in 1960 it was only $50. In 1979, health care represented 45 percent of benefit costs, but by 1989, health care costs rose to 60 percent of benefit costs. As health care costs continue to escalate and consume an ever-increasing share of total compensation, fewer resources and less funding is available for other employee and business needs.

In 1984, GM began offering PPOs and expanded its offering of HMO plans to GM enrollees in an attempt to control health care costs without reducing the level of benefits. Elements of managed care-utilization management techniques and selective contracting for certain services-were also introduced into the "traditional" offering.

In 1984, PPOs were virtually non-existent in the geographic areas in which GM employees and retirees were located, and, as a result, our carriers were required to introduce the PPO concept to new market areas. Since then, we have gained considerable experience in learning how to determine the effectiveness of managed health care plans and how to introduce managed care techniques to control costs and improve quality. Critical to this process has been an increased sophistication in our ability to gather and analyze data. Using selected measures of performance, GM regularly compares its health care plans, adjusting the data to account for the demographic, geographic, and plan design differences that exist between the plans. The managed health care plans are also evaluated by a number of organizational measures, such as how providers are selected and monitored, how provider payment levels are established, and the effectiveness of utilization management and the quality assurance programs. Using this information, we have been able to identify those managed care plans that are not performing as effectively as they appear to be. Managed care plans that are not performing satisfactorily are either encouraged to improve their performance or eliminated.

We believe that managed care techniques are an important voluntary means to control price, to encourage only that care that is appropriate and necessary, to improve quality, and to promote individual responsibility in health and health care costs. But before introducing new managed care plans and activities into a health care benefit program, a careful evaluation of the plan is essential. You need to determine that the managed care plan is financially and administratively sound, that it provides quality services in a cost-effective manner, and that the plan can meet the changing needs of your employees and your organization.

Because many complex factors drive the increases in health care expenditures, even the most well-run managed care plan has little impact on broad, system-wide issues. in fact, these factors are relatively untouched by actions taken by the entire private sector. An aging population, new diseases and technology, the increasing use of health care services, increasing administrative costs, the lack of proper economic incentives for consumers, the cost of malpractice and defensive medicine, and cost shifting from the public, noninsured, and underinsured sectors will push costs up. Clearly, the current rate of increase in total health care expenditures cannot be sustained. The broad-based costs and access problems facing the nation must be addressed. All constituents-employers, providers, individuals, insurance companies, state and federal government agencies, and politicians-must be willing to compromise and to move from their currently entrenched positions. \Wile we feel legislative reform can begin to address the systemic flaws that underlie the health care delivery system, we do not endorse any specific model or approach. We feel, rather, that efforts should be focused on building consensus on the basic issues, and that any health care reforms should be guided by the following principles:

* All Americans should have access to basic health services.

* All plans should include realistic cost-containment provisions to discourage unnecessary utilization and price escalation.

* Cost shifting should be reduced or eliminated.

* Employers should not be hampered in their ability to manage their health care programs effectively.

GM will consider support of legislative reform efforts that will promote a more workable, efficient, and equitable U. S. health care delivery system. The nation is currently spending too much of its resources on health care for the value and level of services received. Thus, programs to expand health coverage must be pursued in conjunction with efforts to maintain and improve the quality of services rendered and reduce the rate of increase of health care costs.


The major health care issue that concerns our company is the ability to provide a medical package that is as complete as those that major corporations provide their employees at a cost we c a

Studies have shown that a good health care plan is one of the most important elements in attracting well-trained, highly motivated professional employees. And many employees decide to stay with an organization or move to another solely because of medical coverage. So providing a good medical plan is essential to attracting and retaining key employees.

To provide an affordable quality plan is difficult enough when a company is faced with the rising costs of medical coverage. But when a medium-sized company such as ours is faced with the costs and administrative burdens of state and federally mandated programs, such as COBRA and the increased Medicare wage base, the total costs of providing coverage can be prohibitive.

To attempt to contain the cost increases in our employee benefit plans, we have undertaken several initiatives:

* We attempt to educate our employees about the level of benefits they are receiving. We feel it is important that the individual employee realize that he has a stake in keeping costs under control if he wants to maintain benefit levels.

* Because COBRA coverage is adverse selection personified, we have made sure that the COBRA rate we charge includes all possible costs. In addi-, tion, because employees tend to load up on coverage between the day of termination and the end of the month, we terminate benefit coverage the da someone leaves the organization, and they pay the COBRA premium immediately.

* Even though we are a rather small company, we have self-insured our medical coverage and use an administrative service provider (ASO) to approve claims. In addition, we have "stop-loss" insurance that pays in the event of abnormally high claims. We have found this to be a more straightforward solution than dealing with insurance providers and their reserve retention methods.

* We request benefit coordination information from our employees each year. We provide this information to our ASO provider so that a spouse or dependent covered under other policies has a portion of his or her claims paid by the other policies.

* We also review and verify dependent coverage each year. For example, we make sure that if dependents say they are in school, they provide us with proof of enrollment.

* We make sure that our retirees and actives, if they are over 65, sign up for Medicare Part B as soon as they are eligible. In addition, we make sure that their spouses sign up for Medicare Part B as soon as they are eligible. In a sense, this is coordination of benefits with the federal government.

The present health care system in the United States is expensive, exclusionary, and inefficient. To make it work will require radical changes. Some of the necessary changes are:

Universal coverage-There is frequent reference in newspapers and periodicals to the 34 million people under 65 who are not covered by insurance or Medicaid. These people must be covered.

They ultimately receive coverage in emergency wards, where the cost is much greater than if they had received preventive coverage. The universal coverage or national health care must be paid for from general tax revenues. It can't be paid by another payroll tax. That will destroy small business. (Some 300,000 small, business jobs have been lost in California alone since the imposition of additional payroll and other taxes this year.)

Malpractice claims must be eliminated. One of the principal reasons that the Canadian system functions at all is that there isn't any malpractice in Canada. In the event of disputes, settlements should come from arbitration boards.

Fixed protocols-In order to protect themselves from mal-practice suits, doctors perform many unnecessary procedures. By establishing recognized protocols to handle certain medical situations and doing away with malpractice suits, significant amounts of money would be saved.

Regional rate-setting-Because of regional cost differences, regional rate-setting boards, such as those that exist in Germany, should be established to determine the appropriate cost for providing each medical service in their regions. These boards would operate as the ultimate in managed care. By doing so, they would have enough economic bargaining power to keep doctor and hospital cost increases at reasonable levels.


By many criteria, Dynamet would be considered a small company. We have 375 employees, and our sales in 1990 were $93 million. Our premiums for family medical coverage were $325 a month last year, up 45 percent from $180 a month in 1983. We consider medical coverage an important fringe benefit and maintain a philosophy of full coverage for all employees and their families.

We are fortunate in having a strong insurance carrier, whose contracts with local hospitals provide for discounts, and doctors generally accept the carrier's payments for standard procedures. These savings are reflected directly in our premiums.

With a small workforce such as ours, individual employees' major medical problems have a noticeable impact on our premiums-there are simply fewer employees among whom to spread the financial risk. We have found it is important to understand the direct relationship between our actual experience and the premiums, so the insurance carrier is not viewed as the villain when premiums go up.

We are also fortunate in having a young, growing workforce, and so we have fewer of the major medical problems experienced by companies with more mature workforces. Nevertheless, we did explore a managed care plan which would have placed strict controls on employee utilization. We decided against it for several reasons. First, we felt that some employees would violate the restrictions simply because they didn't understand the plan and they would be penalized unfairly. Second, we determined that the costs of our major medical problems would not be significantly reduced by implementing such a plan. And finally, we began to sense that medical providers would structure their billing arrangements to circumvent the restrictions anyway.

We have also considered increasing deductibles. Once again we decided that the savings we would realize were not worth risking the alienation of our workforce.

Dynamet's approach to managing health care costs over the years has been to monitor our experience without reacting by making significant changes. We've been able to keep our plans simple and understandable and our administrative costs down. With few people to administer employee benefit programs, this has been a workable approach. We have also strongly encouraged healthful practices. We openly discourage smoking and, primarily because of the type of manufacturing process we have, excess weight. But the main thing is to educate employees about the importance of controlling health care costs.

Communication is vital. There are many proposals for a national health care policy, but so many of them don't really attack the problems. We've got to stop approaching health care with a blank check. Without appropriate controls, the health care system in this country will be destroyed both fiscally and in terms of the quality of care we can provide.


Today's health care insurers face the challenges as those businesses that purchase health care protection for their employees. Increased utilization of more expensive health care services and an aging population continue to drive up the cost of medical care. Consequently, the cost of providing health care coverage for employees and retirees becomes a financial burden for both employers and employees.

But controlling costs is not an impossibility. Alternative concepts and programs can be effective:

* By implementing higher deductibles, co-insurance, and co-payments to employee benefit packages, employers can meet one of the greatest challenges of the 1990s: to contain the rising costs of health care benefits without sacrificing the quality of coverage.

* In addition to the traditional medical-surgical and fee schedule products for employees, flexible benefit portfolios that include managed care products such as HMOs, PPOs, and the new point-of-service programs can provide the flexibility that both employers and employees want within the framework of a managed care system.

* Wellness programs can help employees understand the need for lifestyle changes that affect their health and how they may actually be contributing to the rising costs of their own health care.

* Preventive programs can help contain rising health care costs over the long run because they emphasize early detection of health problems.

* Utilization data can help employers better plan for health care expenditures and become more aware of precisely the type of services as well as the number of services performed.

* Because mandated benefits drive up the cost of health care insurance, employers need to oppose government efforts to mandate benefits.

Wellness and preventive programs, along with utilization data, can help both employers and employees gain a better understanding of the value of their own health care insurance and how they may be contributing to rising costs.

And finally, both employers and employees need a broader understanding of the health care system. Rising costs and access to affordable health care coverage for uninsured low-income individuals are no longer just financial issues. They are critical social and political issues.

Both employers and employees need to develop a greater understanding that the problem of the uninsured is really a socio-economic one: Business, labor, consumers, health care providers, insurers, and the government all have a stake in resolving these issues.

We must also recognize that the socio-economic problems of the United States, which differ greatly from those of other countries, have had a pronounced impact on the utilization of health care services in this country. Although the United States has far more technology, equipment, procedures, and medical personnel to treat the ill than does Canada or Germany, for example, we also have more poverty, drug and alcohol addiction, more patients who need treatment, and significantly higher costs to run our high-tech system.

The problems of the uninsured should be addressed incrementally by focusing attention and funds toward those people who have the greatest need. The development of low-income fee schedule coverage, including cost-sharing preventive packages and managed care, will help expand access to health care services while potentially helping to control costs.

Traditionally, employers and insurers have, together, sought quality benefits. Today, their shared experiences also must be translated into the social and political arenas.

The insurers' challenge is to create the proper blend of cost and quality in health care benefit plans so they can offer employers and employees the best value for their health care dollar.
COPYRIGHT 1992 Financial Executives International
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Special Report: Health Care
Publication:Financial Executive
Date:Jan 1, 1992
Previous Article:The challenge of containing health care costs.
Next Article:Do GICs and annuities work today?

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