Human Capital & Careers

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With costs rising again, employers are scrambling for a fix.
Joe McCaffertyFebruary 1, 2000

One digit crisis has passed, but another looms. This time it’s the double-digit growth in the cost of health care, a sector that defies the economy’s low-inflation trend. But employers are not rushing to share the burden with employees as they have in the past, for fear of risking a worse headache–the flight of top talent to a more generous company.

Instead, companies face having to eat the increases, which are expected to average from 9 to 12 percent this year. Growing drug costs, the aging population, and costly technology continue to be the major underlying factors that are pushing health care rates through the roof. And the insurers are stubborn, burnt out by years of low margins from market-share wars. “Some [health care organizations] are not even negotiating,” says Paula Breslin, executive director of Massachusetts Healthcare Purchasing Group (MHPG). “They are saying, ‘Take it or leave it.’”

So instead of knuckling under providers’ demands or performing “actuarial acrobatics,” such as raised co- payments and fewer plan choices, employers are trying to shave costs in other ways. Some are turning to the Internet to cut administration and communication costs. Others are exploring ways to make their employees better consumers of health care, and are allowing them to share in company health-care savings. And some are borrowing best practices from their purchasing departments and applying them to health care. While companies can’t single-handedly reverse broad macroeconomic trends, they don’t have to sit still and take it on the chin, either.

Efforts to mitigate health care cost increases come at a time when past systemic reforms are starting to show cracks. In November, United Healthcare stunned the industry when it announced that it was reversing its practice of using administrators to review recommended treatments and instead giving doctors the final say. The shift marks a retreat from one of managed care’s core principles, administrative overview. While publicly employers are cheering United’s move, the decision has clearly made some of them uneasy. “It’s a public-relations ploy,” says E. J. Holland Jr., assistant vice president of corporate benefits at Sprint Corp. “It’s not clear that it was a meaningful change, because [United] has not said exactly what it is going to do instead.”

One reason employers are concerned is that United’s decision raises questions about the future of managed care, which was supposed to end years of double- digit cost increases for good. Now that promise is waning. Still, Holland maintains that the death of managed care has been greatly exaggerated. “We’re not ready to throw in the towel yet,” he says. “Managed care is here to stay.”

Communicating At Sprint

Rather than reverse the managed- care movement, Sprint continues to embrace it. The telecommunications giant contracts with roughly 100 HMOs around the country to provide care for its 78,000 employees. In addition, the company provides a self-branded point-of-service network administered by health insurer Cigna Corp., as well as three different levels of indemnity programs, also administered by Cigna. With half its employees in HMOs, Sprint is seeing significant increases in costs. Holland anticipates hikes of 9 to 15 percent this year, depending on the plan. But even with rates going up so fast, Sprint is encouraging employees to join managed-care organizations. “The indemnity plans still cost twice as much,” says Holland. “If we can encourage employees to move from the least- efficient plans to the most- efficient, we can save them a lot of money.”

To that end, Sprint has unleashed an intensive communications effort to convince employees that it is in their own best interest to be shrewd consumers of health care. “We are educating them to be better purchasers of care, and explaining to them that it is their money,” says Holland. To drive home the message, Sprint provides itemized, annualized compensation and benefits summaries that draw attention to the portion of compensation employees receive as health benefits. Employees who choose lower-cost plans also pay fewer out-of-pocket expenses. For example, Sprint pays 100 percent of its point-of-service plan and employees pay the difference if they choose higher-cost HMOs. Sprint also provides a high-deductible, low-cost indemnity plan, and reimburses employees who choose that option. The message is that if Sprint spends less on health care, employees reap the benefits.

Healthcare.Co m

Another initiative Sprint is undertaking is moving more of the administration of its plan online. Most of Sprint’s HMOs have access to its intranet, where they can post electronic versions of the summary plan description. They also provide online versions of the physician directories. This year, Sprint hopes to conduct its annual enrollment online, as well as by phone. According to Joseph Checkley, a benefits consultant at PricewaterhouseCoopers, companies can save a great deal of money by moving enrollment to the Web. “A Web enrollment costs about $1 to $2 per employee; a call- in service can run as much as $12 to $15,” he says. Currently, about one-fourth of large employers use Internet or intranet applications to handle open enrollment.

However, the goal of Sprint’s efforts to move more services online is convenience to employees rather than cost savings. “Our administration costs are under 5 percent, so moving some of it to the Web is not going to solve the problem of rising health care rates,” says Holland. “It is more of a customer-service issue.” That doesn’t mean Holland is giving up on the Web as a tool to cut costs. He expects the Internet to play a vital role in the company’s strategy to make the end users–employees–more efficient purchasers and consumers of health care by providing them with more information. “We’re just not there yet,” he says. Part of the problem is the many different formats that are used to collect and distribute information. “It’s like the VCR-versus- Betamax problem,” he says. “Until information is standardized, it doesn’t do much good.”

Still, some employers have opted not to wait. AlliedSignal Inc., a Morristown, New Jersey­based manufacturing conglomerate that recently merged with Honeywell Inc., has an outside group, Healthpages, collect all the information it can on the company’s plans and physicians and post it on the company intranet. The site includes Hedis measurements, a set of standardized quality measures for managed-care plans; a set of statistical scores that the company has collected on its health plans; and employees’ comments on their own experiences with specific plans and physicians. “We are trying to use the intranet as a tool to engage our employees in the health care purchasing process,” says Brian Marcotte, corporate director of health care and group insurance at Honeywell. Marcotte believes there will be a reduction in administrative costs because more people will make enrollment changes online.

Some experts are studying the broader role the Internet could play in improving health care and lowering costs. Dr. David Friend, managing director of benefits consultancy Watson Wyatt Worldwide and author of Rx for Reform, insists that the Internet will revolutionize the delivery of health care. “Health care is really about moving information around and processing it. The Internet radically improves that capability,” says Friend. He envisions a system in which patients talk to doctors online and specialists can provide diagnosis from anywhere in the world over the Web.

Purchasing Technique

AlliedSignal worked at the other end of the equation to influence its plans to be better health care suppliers. Health care is the second-highest expenditure after payroll. So in 1994, in order to combat large increases, the company decided to borrow some techniques from its purchasing department. In fact, the company enlisted its senior vice president of purchasing to help apply some of the same supply-chain management techniques the company used in purchasing to health care buying.

“It was awkward at first,” says Marcotte. “The teams were from different worlds.” But after they sat down together, they began to take the best from each of those worlds. The end result is a different approach to how the company negotiates contracts and measures improvement. The health care purchasers now use terms like “productivity gains” and “performance guarantees.”

“We decided to approach health care providers the same way we approach other suppliers,” says Checkley, a former director of group insurance at AlliedSignal before joining PricewaterhouseCoopers. “That includes aggressively engaging vendors and asking them what they’re doing to take costs out of the system.”

More recently, AlliedSignal consolidated some health care services, just as it had reduced suppliers on the manufacturing side. “Out of frustration over the level of service we were receiving, we consolidated the [health care] customer-service centers from 18 to 5,” says Marcotte. The move allowed AlliedSignal to focus on improving services at those facilities.

The company then took another page from the manufacturing side when it sent managers onsite to its largest provider, Cigna, to train the Philadelphia- based health insurer to use tools of process improvement. “Forward-thinking companies have said to themselves, ‘We can’t just sit back and complain about managed-care organizations,’” says Checkley. “They are going in and helping [companies] become more efficient, whether they want it or not.”

AlliedSignal follows the precepts of Six Sigma, an iteration of total quality management that works to develop more-efficient manufacturing processes. The company put 27 Cigna claims-processing agents through what it calls “green- belt” training in the ways of Six Sigma. It also placed a Six Sigma “black-belt” employee in its largest customer-service facility, in Phoenix. Although Cigna owns and runs the facility, the employee works for AlliedSignal. “They work on continuous improvement, focusing on a handful of critical measures,” says Marcotte. One measure the training greatly improved was the number of problems that were resolved on an employee’s first call.

Apparently, the experience had an impact on Cigna. Six Sigma is now a corporate initiative for the company.

Bracing For The Worst

While leveraging the power of the Internet and applying the latest purchasing techniques to health care may stem rising costs, the painful reality is that these initiatives don’t get at the root of escalating costs. “With the competition for employees, there’s a good chance that the only option is to absorb the cost,” says MHPG’s Breslin.

With managed care languishing, fundamental change in the health care system could be years away. In the meantime, employers have little control over the real drivers of cost, such as demographics and technology. “It’s going to get a lot worse before it gets better,” predicts Watson Wyatt’s Friend.

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