Employer group proves knowledge is power - Bay Area Business Group on Health and health maintenance organization rates - Coalition Report

Business & Health, Feb, 1995 by Dan Wise

The San Francisco-based Bay Area Business Group on Health (BBGH) garnered headlines and the keen interest of many employers last fall when it won rate decreases of 5 percent to 10 percent from 17 major California HMOs. BBGH officials say the key factor in its success was arming itself with a ream of data on the HMOs' past pricing strategies.

The group was bargaining on behalf of 11 major California employers, including Bank of America, Bechtel Corp., Chevron Corp., McKesson Corp., Safeway Inc., Wells Fargo Bank, and the Federal Reserve Bank of San Francisco. Together, the companies provide benefits to 300,000 employees, dependents, and retirees.

The strategy, says Tracy Rodriguez, BBGH's associate director, was to pool and analyze the pricing practices and contracts the 11 employers had made in both 1993 and 1994 with California HMOs. In the past, it was usually the HMOs and other managed-care plans that came to the bargaining table armed with data, ranging from an employer's medical utilization experience to sophisticated profiles of its work force.

The process started early last year when BBGH persuaded the 11 companies to share data on their employees and managed-care contracts. The coalition compared the employers' 1993 and 1994 HMO rates, adjusting for differences in benefit plans and the characteristics of the employee populations.

BBGH found no pattern to HMO pricing, and concluded that no company, acting alone, had succeeded in getting full value for its premium dollars. For example, employers with the healthiest populations (as determined by demographics of age and sex) weren't given the lowest rates. HMOs often charged employers with very similar health-risk profiles different prices. Size wasn't conferring a volume discount, either: Several of the largest companies, ranked by size of insured population, weren't getting the lowest rates.

Overall, the prices the HMOs charged the 11 employers varied by as much as 20 percent after adjusting for differences in benefit offerings. In contrast, the health-cost potential of the lives covered by the companies differed no more than 10 percent, the BBGH analysis concluded.

For risk-adjustment purposes, the coalition had looked at the age and gender of each company's insured employees, retirees, and dependents. While such demographic adjustment isn't the most sophisticated means of assessing the risk of a population, it served its purpose here, Rodriguez maintains. "Even if it doesn't predict the whole risk, it's instructive," she says.

BBGH chose not to risk-adjust the employee groups based on previous utilization, Rodriguez says, because that could reward inefficient plans that stinted on preventive measures while running up bills for inappropriate care.

In sum, says Rodriguez, the prices charged "didn't relate to the volume of business the employers represented, or to the health risk they posed. The prices looked arbitrary." And too high across the board, she adds.

The information, together with a common benefit design to offer the bidding HMOs, gave the coalition the clout it needed to win significant discounts for the benefit year that started Jan. 1, 1995. The coalition's sheer size didn't hurt, either.

The agreement that was reached also includes customer-service and quality-improvement standards for each HMO. If the HMOs don't meet the standards within specified time frames, they'll have to pay rebates to the employers in the purchasing plan. "Naturally we're pleased with the rate reductions," says Paul Fearer, senior vice president of human resources at Union Bank in San Francisco, who headed the BBGH negotiating team. "Just as important, though, are the quality-improvement measures we've negotiated, involving such things as patient-satisfaction rates and access to urgent and routine care for our employees."