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How to launch a managed-care effort.

The story of Allied-Signal's Health Care Connection, a nationwide managed-care plan that was the first of its kind in the U.S.

One of the most challenging problems facing our country is the need to control the cost of health care. Health care costs are rising at more than twice the rate of inflation and are expected to exceed $650 billion in 1991. By 1995, the tab is expected to soar to $1 trillion. Health care spending currently accounts for about 12% of the gross national product, yet an estimated 34 million Americans have no health insurance and lack access to routine health care.

Against this background of skyrocketing costs and uncertain solutions, what can companies do? In my view, companies must learn to manage the health care area much as they do any other part of their business.

That's what we have done at Allied-Signal for over three years. The results are interesting and encouraging. Our program, called the Health Care Connection, is a nationwide managed health care plan. It was the first of its kind of the U.S., and in its first 18 months it reduced costs by $700 per employee -- 20% below what those costs would have been under a traditional indemnity-based health insurance program.

Initially, our program suffered from some administrative and start-up difficulties as we learned the nuances of operating a point-of-service plan. Those difficulties were corrected, however, as claims handling and other procedure were improved. As a result, savings to the corporations per employee in 1991 are now projected to be almost $1,400.

The plan cover nearly 50,000 Allied-Signal employees in the U.S. and 80,000 of their dependents. Approximately 80% of our employees covered by the managed-care plan use the network 95% to 100% of the time. We estimate that by year-end 1991, the total savings to Allied-Signal since the program was introduced will reach $163 million.

Like most employers, Allied-Signal first experienced sharp increases in health care costs in the early 1980s. In 1982, we took a series of steps to mitigate rising costs by increasing employee cost-sharing through deductibles and coinsurance, and we increased employee contributions as well. We also introduced utilization management programs like preadmission certification and mandatory second surgical opinions. We encouraged the use of outpatient services to limit questionable hospitalizations and surgery, and offered over 100 health maintenance organizations nationwide. Yet, despite some early success in keeping health care costs under reasonable control, our expenses took off with a vengeance in 1987, rising by 24%.

We calculated that if such trends continued and our company took no action, our health care costs would escalate to $546 million by 1990, assuming a conservative rise of 20% per year for the three-year period. The increase outpaced, by far, the growth rate projected for Allied-Signal's sales and earnings over the same time frame.

We knew we had to find a way to manage these costs. Our corporate benefits department, which was given the challenge, assembled a task force made up of human resources and employee benefits experts from our three business sectors, plus representatives from the corporate human resources and public affairs staffs.

This task force became a steering committee that guided the project through several stages, including the selection of an outside benefits consulting firm (which, in turn, helped the task force define the company's objectives, design the plan that would accomplish them, and set specifications for a health care manager/insurer), the ultimate selection of CIGNA as our program manager and health care insurer, and the creation of an extensive communications program that described the plan, equally important, explained the very sound business reasons for its adoption.

One manager nationwide

By mid-1987, the task force had concluded that a managed health care program, uniform in design and administered by one insurer, would be the best means to achieving the company's goals. The task force also noted that by having one health care manager nationwide, we also could use our very considerable buying power to negotiate a contract that would stabilize costs over a multiyear period, building into the agreement incentives to ensure the efficient delivery of services.

The cornerstone of the program would be the manager/insurer's prenegotiated reimbursement arrangements with hospitals, physicians, dentists, and other medical providers.

Under the terms of the contract we negotiated, CIGNA guaranteed a single-digit fixed rate of increase in our health care costs for a three-year period from 1988 through 1990. CIGNA would be a risk for any costs that exceeded this guaranteed amount, but if it managed cost below that level it would retain the savings that resulted.

Since our intent was to move quickly and launch our new program in the beginning of 1988, an important element in CIGNA's favor was that it already had extensive provider networks in place, especially where Allied-Signal had very large employee populations.

These established networks could provide immediate access by employees to medical and dental personnel and facilities that had already passed CIGNA's credentials requirements. Where it had not have networks, CIGNA committed to create them so that at lease 85% of our employees would be covered with managed medical plans, and 90% by managed dental plans, by 1990.

Vital to the implementation

From the beginning, we recognized that the new program would be sensitive, emotional issue for employees and their families. Communications, in short, was vital to the successful implementation of the program--communications in easy-to-understand language that explained every detail of the program and the reasons behind its adoption.

The essential elements of our communications included: a letter from me to the homes of active employees, alerting them to the cost issue and the need to change the benefits programs; letter from our business sector presidents to their work forces, supporting the changes and urging employees' understanding and cooperation; an article in the-company's quarterly magazine, which was distributed to all shareholders (including employees and retirees); and periodic bulletins to employees describing various elements of the program and enrollment procedures.

We also held training seminars for those who were charged with describing the new program at special employee meetings at each location across the country; we provided videotapes and slide presentations for use by meeting leaders; information kits describing benefits and detailing how the program would operate; and enrollment forms and other materials. including CIGNA Healthplan provider directories to assist employees in enrolling for the new coverage and selecting their primary care physicians.

The Allied-Signal Health Care Connection was officially launched on March 1, 1988, in nine cities and/ or regions of the U.S. and at that time it covered approximately 34,000 of the company's domestic work force. Today, the vast majority of our eligible employees is enrolled in 27 CIGNA Healthplan networks across the nation.

How does the Health Care Connection plan actually work?

Employees choose a primary care physician, who is a member of a network (the plan also offers employees the option of using an out-of-network doctor at any time). The network doctor, who serves as the coordinator of all the employees's health service needs, is prepaid by the insurer every month. The fee does not vary no matter how often the employee sees his/her doctor and uses the services.

The primary care physician, usually an internist, family doctor, or pediatrician, provides basic care and is responsible for making the necessary referrals to specialists or hospitals. Behind the primary care physician, the network has an array of specialists, therapists, and labs. In addition, the program includes regional medical centers that are recognized for their expertise with special treatment needs or challenging surgical procedures such as organ transplants.

Encouraging preventative care

Employees using network providers pay no annual deductible, and most services are covered in full. There is, however, a $10 co-payment for office visits and a $5 copayment for prescription drugs. More importantly, the program encourages preventative care and offers annual physical exams and special services like vision and hearing exams and well-child care.

Another distinctive feature of the plan is that is preserves the employees' freedom of choice. They can, at any time, decide to use a provider who is not in the network. But it costs them. Outside the network, the plan requires an annual deductible of 1% of yearly base pay -- 3% for a family -- and a 20% co-payment In fact, one in four have exercised that option since the founding of the program.

Dental coverage is also provided. In the dental plan, however, employees must choose between managed and indemnity plan options on an annual basis. Employees using network providers pay no deductibles, and minimal copayments, for certain major services, including prosthodontics and periodontal surgery.

The Allied-Signal Health Care Connection has completed its first three-year cycle. We evaluated the program in 1990 and renegotiated and renewed the contract with CIGNA.

Initiatives added

Several initiatives were added to the plan toward the end of this year, including a well-care program for expectant mothers. Another is a program to assess through extensive surveys of employees the quality of care delivered by each of the 27 health care networks in the plan.

The Wellcare Program for expectant mothers will emphasize the early identification and physician management of high-risk pregnancies, with special attention to mothers who have previously had Caesarian births. It will also focus on patient education covering nutrition, infant care, and other issues.

While we are very proud of our pioneering role in managed care plans, we also recognize that the transition to managed care was difficult for many of our employees and that the plan itself is not perfect. We are planning continuing improvements to raise the quality level of the program.

Overall, the vast majority of Allied-Signal employees are generally satisfied with the program. Surveys indicate that over 90% of our employees nationwide think that the program meets their needs very or fairly well, about 75% say that their initial expectations were surpassed or generally met, and a large majority (more than 86%) report that they are satisfied with the overall quality of CIGNA's network of health care providers.

Needless to say, Allied-Signal is thoroughly committed to the concept of managed health care as a way to stabilize its costs in the future. We know we cannot reverse the trend and actually reduce our medical costs, but we also know that this innovative program is flattening out the upward curve and putting a brake to the growth rate of our health care costs. Edward L. Hennessy Jr. retired at the end of 1991 as Chairman of Allied-Signal Inc., a Morristown, N.J., technology-based company specializing in aerospace, automotive products, and engineering materials.
COPYRIGHT 1992 Directors and Boards
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Title Annotation:Chairman's Agenda: Managing Health Care Costs; Allied-Signal Inc.'s managed care plan called Health Care Connection
Author:Hennessy, Edward L., Jr.
Publication:Directors & Boards
Date:Jan 1, 1992
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