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The expert provider organization.

Just as the private sector is bringing health care costs under control, big government is looking to lend a "helping hand." With friends like that... well, it's still not too late for business to do the job right.

For the coach, it had been a particularly difficult Sunday afternoon. After three quarters, his team was behind by three touchdowns. The offense had made some strong drives, but no scores. In the fourth quarter, the exasperated coach decided to remove his starting quarterback from the game, and put in his place a promising rookie. The rookie soon accomplished what his predecessor had failed to do: He scored. The team and the stadium fans began to come alive. Although time was running out, and the opponent was still far ahead, just maybe, they thought, this rookei quarterback could catch the opponent and salvage the game.

Then, the coach did something inexplicable. He decided to replace the rookie with till another quarterback, one whose success record was mixed at best.

If this decision appears strange, then consider what many business leaders are proposing as a strategy for controlling health care costs. They are proposing that we replace private sector attempts to control health care costs--attempts that are beginning to work--in favor of a public sector solution. An increasing number of CEOs appear willing to embrace a Canadian-style national health care system.

This trend is understandable; many CEOs ar frustrated by the fact that, after nearly two decades of health care cost containment programs, health care costs continue to threaten company profits. Many aspects of health cost inflation, such as excessive medical malpractice cost and the spread of expensive new technology, appear beyond the control of individual companies and require public sector intervention. Our national problem of 35 million uninsured people is also beyond the control of individual companies.

Yet, turning the health care cost problem entirely over to the public sector is similar to the coach replacing the young quarterback just as he is beginning to turn the game around.

The fact is that several companies, using varied approaches, have succeeded in limiting their health care cost increases to about one third of the national average increases.

To change course abruptly and pursue public sector control of health care will most likely sacrifice the very real progress these companies have made. Let us instead learn from, and improve upon, the success of these companies. Let us also find ways to replicate these achievements among large companies and small, private sector employers.

In this regard, a new model is emerging, one that will improve control of health care costs and improve quality. This model will in time supersede today's managed care entities: health maintenance organizations (HMOs) and preferred provider organizations (PPOs).

I call the new model the expert provider organization. This model combines incentives and knowledge to aid physicians in providing higher quality, more cost-effective care. Put another way, the model calls for continued use of market power by employers and insurers, coupled with more widespread use of available information technology, to assist physicians and their patients in making better health care decisions. Because the model is technology based, its benefits can be distributed to medium and small companies a well as large.


During the late 1980s, several companies maintained health care cost increases of one-third to one-half of the national average increase. Their approaches had several features in common, as well as some differences.

Allied Signal. Following a 39 percent annual increase in health care costs, this diversified manufacturer called upon its insurance carrier, Cigna, to establish a national network of doctors for Allied Signal employees. The company established incentives for employees to use the network doctors in lieu of outside doctors. These efforts resulted in health cost increases of about 7 percent in 1988 and 1989 - about one third the national average increase. Employee satisfaction was reasonably high, since 75 percent of employees reportedly used the network 90 percent of the time.

Southern California Edison. This utility company had also experienced punitive health cost increases. The cornerstone of their response was to set up a system of company-owned primary care clinics. They calculated that the services of physicians in the clinics cost the company about 20 percent less than those of outside physicians. In addition, the company purchased pharmaceuticals at less than wholesale prices, for a savings of 40 percent. Again, the company created incentives for employee participation in the program: 90 percent reimbursement for use of clinic doctors, versus 70 percent reimbursement for use of outside doctors.

In 1989, Southern California Edison's health care costs showed no increase over the previous year.

Baxter HealthCare Corporation. Baxter took a comprehensive approach to restraining health care costs. The company contracted directly with health care providers in major cities in which it operates, introduced a more rigorous selection process for HMOs, provided alternate delivery (such as home health care) for selected employee health problems, used employee assistance programs, utilization review and case management programs. and regularly analyzed health care data to spot problems and take necessary actions. By doing a number of things right, the company kept health cost increases to 7 percent in 1988 and 1989.

Pepsico also too a comprehensive approach, making health care management a high busines priority, and carefully managing employee incentives for participating in cost control measures. The company held health care cost increases below 10 percent for five years through 1990 IBM exerted control of health care costs by controlling disability. Honeywell paid careful attention to managing high-cost cases. The company has embarked on a forward-thinking strategy of pursuing quality care by developing close working relationships with medical providers and focusing on appropriateness of care.

While these examples are large companies, medium-sized companies have also achieved success in controlling benefits costs. The John Breuner Company, a furniture store chain employing about 1200, cuts its medical inflation rate significantly by requring employees to choose among two HMOs. Walbro Corporation, a manufacturer of fuel system components with about 900 domestic employees, reduced it worker's compensation costs by more than 50 percent through a program in which on-site personnel coordinate with area physicians to guide the medical management of injured workers. Sprague Electric, employing about 900, also used a medical management program to achieve close to a 90 percent decrease in worker's compensation costs.


What can we learn from these companies that have managed to maintain health care cost increases well below those of their peers? What are the common elements of their success?

First, most of the success profiles have exerted market power to obtain greater control of the health care delivery system. to date, companies have used market power mainly to obtain price discounts. But total cost of health care is a function of price, volume of services, and severity of illness. Therefore, companies in the future must apply market power toward total cost control and quality of care.

Second, these programs have relied on the primary care physician to oversee employee health care and to limit excessive treatment by specialists. Primary care physicians do not generally profit to the same extent as specialists in administering expensive procedures or tests. The primary care physician does, however, profit from seeing a larger number of patients. Many primary care physicians are therefore amenable to collaborative arrangements with employers or insurers that maintain or increase their patient volumes.

Third, these programs have worked to influence employee decisions. Some companies influence employee decisions by creating incentives for employees to use "network" providers. Other companies opt for case management, in which a practitioner, usually a nurse, works directly with the employee and employee's family to develop a rational and cost-effective treatment plan. It is important to note that companies vary widely in their attitudes toward influencing employee health care decisions. Most companies avoid direct intervention, being concerned about their potential liability in the event of a "bad" medical decision that they might make in an employee's behalf. Yet some form of influence, whether it be education regarding health care decisions, or incentives to use certain doctors, is essential to manage costs and improve quality.

Finally, most of these companies profited by managing disability. Since 20 percent of employees generally account for 80 percent of health care costs, providing cost-effective health care to this subset of the population is fundamental to cost control. In a survey study of 77 companies that the Human Resource Health Institute conducted with the Columbia University Business School, we found that companies employing disability management strategies experienced significantly fewer lost work days than those firms without such strategies.

These four elements--use of market power, reliance on the primary care physician, influencing employee health care decisions, and careful disability management--are the essential building blocks for further progress in controlling corporate health care costs, and their dangerous spiral upwards.

Significantly, these same elements are the building blocks for improving the quality of health care. Health care cost control and qualty are not mutually exclusive goals: Most health care industry watchers believe that unnecessary or inappropriate procedures account for 10-30 percent of our national $750 billion health care bill. Clearly, then, controlling costs and improving quality can be pursued simultaneously. These twin goals are not incompatible, and in fact may actually work together synergistically.


This model will emerge as today's managed care organization respond competitively to employer pressures for higher quality health care and better cost control. As employers look more closely at the quality, cost, and service they receive from HMOs and PPOs, these managed care organizations will inevitably look more closely at the quality, cost, and service they receive from their suppliers: physicians and hospitals. In this way, market power will work to the benefit of the ultimate consumers: the employees, who sorely need higher quality, cost effective health care.

The expert provider organization will give primary care physicians both the incentives and the knowledge to be expert providers: to limit unnecessary care, steer patients toward appropriate care, and assist patients in making better informed medical decisions. Incentives will take the form of increased patient volumes, increased reimbursement rates, or both. The expert provider organization will reward primary care physicians for overall successful management of patient care, their success measured in terms of quality and cost control.


The new model represents our best opportunity to control health care costs for two basic reasons:

Primarily, the model represents a market-based approach to health care costs and quality. Each major participant in the model--employer, insurer, primary care physician, and most of all, the employee--stands to gain from its implementation. (See figure 1.)

Secondly, this model represents a total quality approach to the health care problem. Total quality demands that we pay attention to process in addition to results. Further, total quality demands that, instead of spending more and more time and money reviewing the care of physicians, we emphasize development of appropriate incentives and tools to enable physicians to deliver high quality, cost effective care the first time around.


Private sector employers, as the leading buyer of health care services, must speed the development of expert provider organizations. To help accomplish this objective. CEOs need to do the following:

1. View the health care cost problem as manageable. While some aspects of the problem need to be resolved in the public sector, turning the entire problem over to the public sector may make the problem worse for employers, not better.

2. Have your company evaluate managed care organizations against the gold standard of the expert provider organization. Have your human resources and benefits people ask about selection criteria for HMO/PPO professionals, about incentives for quality care, about practice guidelines and how they were derived, about information systems links between managed care organization and physician, and about the service orientation of network practitioners.

3. Work within business coalitions and industry association to urge managed care organizations to hasten development of the expert provider organization model. Demand continuous improvement from these suppliers the way you demand continuous improvement from your suppliers of other goods and services.

Energetic development of the expert provider organization may well accomplish what two decades of health care cost containment have not: more widespread and effective health care cost containment coupled with improvement in quality of care. Whether these companies are given a fair chance remains to be seen. [Figure 1 Omitted]

Steven M. Schecter is CEO and president of Human Resource Health Institute, a New York, NY-based research and consulting firm specializing in health care quality and costs.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Health Care; a model for controlling health care costs
Author:Schecter, Steven M.
Publication:Chief Executive (U.S.)
Date:Nov 1, 1991
Previous Article:Beyond the bar code.
Next Article:How to be a preferred supplier.

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