A CFO would have to be in a deep coma not to notice the skyrocketing cost of health benefits, which are expected to jump another 9.8 percent this year, according to a recent survey by Watson Wyatt Worldwide. Having plucked all the low-hanging cost-cutting opportunities through health maintenance organizations, companies now seem willing to try any approach to fight back–decreasing coverage in a range of ways or shifting costs to employees.

The benefit-slashing mentality only exacerbates today’s deterioration in worker satisfaction with employer-sponsored plans, of course– not a good thing when the new watchwords are employee retention. But perhaps companies believe that’s just a necessary price to be paid in the war to control costs.

If indeed there is a willingness to try anything, though, how about adopting a plan that sets health-care quality as its main goal, as a means of controlling costs? Counterintuitive as that may seem, it’s the approach Wausau, Wisconsin-based Wausau Benefits Inc. is taking in its health-care self-insurance program for 800 employees. And it is far from alone in the experiment, having joined larger companies, such as Sears and Roebuck Inc., Circuit City Stores Inc., American Express Corp., and– one of the first companies to try the controversial approach–Merrill Lynch & Co. In fact, some 1 million employees in all are now covered by the plans, which were designed by Active Health Management Inc. (AHM), a New York­based health-care software provider.

The logic behind the approach is that a portion of a company’s total health-care bill reflects costs associated with poor preventive screening for disease, redundant or inappropriate treatment, or simple medical mistakes and lack of oversight. Other costs result from patients failing to follow through on such basics as completing their full dosage of medication.

To combat those factors, quality-care management seeks to identify what are potentially the most expensive cases, by analyzing data for such elements. It then attacks the cases early, delivering more- personalized, proactive treatment. And for the 20 percent of patients who generally account for 80 percent of health-plan costs, quality-care proponents figure that such savings largely offset the price plans pay for higher-quality care.

Adding to their argument are two factors with positive implications for cost control: improved technology that lets administrators and insurers aggregate and analyze a patient’s medical data in beneficial new ways, and a push to give doctors better access to their patients’ entire medical history and records. Such access–one of the original promises of HMO-style care–has been extremely spotty in most cases.

Does quality cost less?

Wausau’s so-called CareLink2Health plan has certainly scored points with the company’s workforce, 75 percent of which have chosen the new pilot program over more-traditional options. But the jury is still out on whether Wausau and the other companies really can get a handle on costs with the new approach. Despite experiencing some health-cost increases, Merrill Lynch has kept its care expenditure per employee below average. And Wausau hasn’t seen its planned benefit budget shoot out of sight, as some would expect.

But Wausau controller Jim Sweeney points out that “it’s going to take some time to see how this controls costs, compared with some of the other approaches,” even though “we know the others haven’t produced the cost-cutting results.” The CareLink2Health program should be measured over the long term, he says, because its greatest impact is in reducing the incidence of disease. Still, “when you know the other methodologies aren’t working, and you see employers’ health-care costs continuing to rise, not to pursue it puts you behind the eight ball.”

Skeptics abound, with most arguing that cost-control needs to be the primary focus of health-care management, and others challenging the quality-care model. Some say the time it takes to reduce costs is itself a problem. “With all of these strategies and initiatives to ‘improve health,’ there are systemwide savings over the lifetime of an individual. From an employer point of view, given that employees change jobs every two years, who’s going to see the savings?” asks Cynthia Burghard, research director of health- care advisory services at Gartner Group Inc. She says the focus on improving quality and outcomes is “an idealized view,” although she suspects it’s “the model we’re beginning to move toward.”

Wausau CEO Fred Moore says that has certainly been his company’s experience as a plan administrator. “In talking with many of our customers, we’ve identified a big shift. They are now realizing that, in the long term, quality costs less,” he says. “The way they would handle health care before was like, ‘1-800-Deny-Care.’ Now, it’s ‘1-800-Right-Care.'” And with the way the new system allows Wausau and other claims administrators to accumulate valuable health-care data, “the confluence of information we have access to can be used to give doctors another means to help their patients.” Companies trying the quality-care approach are treading cautiously–aware that costs could surge out of control. Such a possibility always exists in an environment that gives so much attention to ensuring that covered employees receive the most efficacious, efficient, and appropriate type of health care, without at least an equal emphasis on reducing medical expenses under the plan.

Flagging A Prescription

Until recently, Wausau attempted the traditional cost- control approaches for its employee plan, using such techniques as precertification. Still, the costs continued to rise. So, about a year ago, Moore decided to try the new quality-care approach as a way of breaking the link between the cycle of cost cutting and employee dissatisfaction.

In September 1999, Wausau rolled out the CareLink2Health program as a pilot for two of its own customers that it declines to identify, one an HMO, the other a self-insured corporate client. At the heart of the product are a huge database and an algorithmic engine powered by AHM, which tracks all the medical activity related to the employees at a particular employer location. In the software program, every bit of medical data about an employee is aggregated, including lab reports, prescription information, medical notes, and previously processed health claims. The data can be run through some 400 medical best- practice matrices that send up red flags whenever a high-risk patient or an inconsistency in care is identified. A 56-year-old man with extremely high blood pressure and a history of heart disease, for instance, would be flagged if he were not on beta- blockers, as would a diabetic who hadn’t renewed a needed prescription or had missed an important eye exam. Once the patient has been identified, a person from the Wausau medical team contacts the patient’s doctor to note the problem and make care recommendations.

“We say, ‘This isn’t something that you have to do, but it would be a good practice,'” says Dr. Elaine Mischler, CareLink2Health’s medical director. “Usually what the physician will say is, ‘I need to get the chart and take a look.'” Of all the physicians contacted, Wausau says, about 45 percent will change treatment because of the recommendations. Patients are also sometimes grouped into one of the plan’s predesignated “disease modules” (there’s one for heart disease and one for diabetes, for example). Follow-up surveys determine the severity of the cases and can lead to even more attention being paid to the condition.

“We make it very clear to the patients that we aren’t treating them,” says Mischler. “We are educating them about their disease, and we encourage them to have a discussion with their doctor about it.”

But as good as this sounds for improving long-term yield, what is it doing for benefit costs? While Wausau won’t disclose the amount of its up-front investment in the program, CEO Moore will say that “it’s definitely a positive IRR”–although that includes the potential for making a profit selling the new product to outside customers. But Moore is confident enough in the concept to put his money where his mouth is: a portion of Wausau’s fee is contingent on observable changes in patient behavior and measured costs within a prenegotiated period.

The Merrill Lynch Connection

Other quality-care offerings have flooded the health-benefits market recently, mostly via Web sites. But most such plans attempt to manage a disease once it is diagnosed, as opposed to the AHM model, in which the goal is to catch illnesses before they become catastrophic or chronic, using both live and historical data and thus eliminating certain long-term costs.

“Without technology, all of this would be a joke,” says Charles Blanksteen, vice chairman of AHM, which itself resulted from a quality initiative that began at Merrill Lynch in the mid-1980s. That initiative at the New York­ based investment giant was designed to cut costs, but also “to make sure we [didn’t] limit access to quality health-care providers and hospitals,” says Ken Reifert, the company’s director of global benefits. “We were not to get in the way of care that was needed.”

The initial effort, however, was not acceptable. “We were very uncomfortable” with the approaches, because “they were so process-oriented,” says Reifert. He remembers sitting in on a prehospitalization telephone conversation between an insurance company representative and a part-time staff physician, Dr. Lonny Reisman. As Reisman described a serious heart condition that required hospitalization, the insurance representative clearly wasn’t interested in the condition of the patient, but, rather, was asking, “Does the patient have a temperature?” says Reifert. “You get real concerned when you hear things like that.”

Together, Reifert and Reisman searched for a medical insurer willing to create an insurance plan that made quality a top priority while using managed-care techniques, but they couldn’t find one. Instead, they found plans that relied on primary- care physicians, with disincentives for bringing in specialists, or plans that outsourced various components of care. “They had created silos, so you had pharmacy data in one place, lab data in another,” says Reifert. “They weren’t consolidating that and feeding it back to the doctor.”

When Merrill Lynch next began an intensive analysis of its highest-cost cases, it brought in Reisman along with Blanksteen, at the time a consultant with William M. Mercer. “We pulled out the cases that cost over $50,000 a year to figure out what information we had on the case,” says Blanksteen. Out of 100 cases, nothing could have been done to make the person better in 50. But another 25 cases “didn’t have to happen at all,” he says. “You look back [at the case history] three years and say, ‘Why didn’t someone catch this?’ The problem is that the system was totally fragmented, and there’s no one paid to watch you.”

Fewer High-Cost Claims

Merrill Lynch eventually redesigned its self-insured health- care plan to more closely resemble what it envisioned, partnering with Empire Blue Cross Blue Shield, which acts as the plan’s administrator and allows Merrill Lynch to tap into its nationwide physician and hospital networks with prenegotiated fee discounts. “We asked ourselves, ‘What kind of coverage would we want for our own family?'” says Reifert. The program sets no cap on mental health services, allows employees to get brand-name drugs if prescribed, and grants what some would call opulent claims. For example, Merrill Lynch once paid to fly the wife of an employee home from a posting in Africa when she developed a medical condition that could not be properly treated there.

In the early 1990s, Reisman and Blanksteen formed AHM, with Merrill’s help, to pursue the quality- care management model. Today, AHM is funded privately (in part by Merrill Lynch) and produces the software that warns insurers and doctors of potential quality-care issues. AHM charges its clients 65 cents per member per month; for Medicare programs, the charge is $1.50 per member.

Merrill Lynch’s own program, which is two years old, has attracted 70 percent of its 50,000 eligible employees. And so far, Reifert considers the program a success. High- cost claims (more than $50,000 annually) have fallen from 3.3 per 1,000 employees in 1995 to 2.2 in 1999, although the cost of health insurance per employee has climbed slightly. That total was $3,600 in 1999, in part due to new service additions, and includes Merrill Lynch’s cost for its preferred provider organization and HMO plans, and all employee copayment amounts. It says per-employee costs are 25 percent below the national average.

Even Merrill Lynch is awaiting evidence that there will be long-term cost savings, though, and it would be forced to end the experiment if higher costs resulted. “We’re committed to the program,” says Reifert, “but if the economics don’t justify it, I can’t imagine continuing something that doesn’t make sense.”

Corporate finance departments will certainly be watching the experiments at Merrill Lynch, Wausau, and other companies that are trying quality-based care.

“CFOs are willing to spend more up front in a tight labor market,” says Michael Barrett, senior analyst on Forrester Research Inc.’s health-care team, who says that the AHM product could well be a product of tight labor market economics. “This could be their moment,” he adds. “Altruism and financial goals mesh right now. But that may not last forever.

“Appealing as it is, the business case has yet to be made,” Barrett notes. But “it would certainly be nice if doing well and doing good reinforced each other.”