Benefits managers' new role: selling cost cutting to employees

Business & Health, March, 1993 by Sean T. Barry

Managed competition helps contain costs by making providers compete for purchasers of health care. Providers compete to provide care to the health care buyers in their service. Purchasers--in this case a large employer---can effectively shop from among competing bids for health care services that meet its quality and cost requirements. As managed competition was originally conceived, an employer would tie its contribution to the lowest-cost plan. Employees who choose a more expensive plan would make up the difference in premiums.

Under HealthLink, Xerox contracts with six HMOs--Kaiser Permanente, Blue Cross/Blue Shield of Rochester, FHP, PruCare, The HMO Group, and U.S. Health-care-that serve as managers of the HealthLink program. These six organizations, chosen from the 22 which Xerox originally approached, provide care at their facilities and track quality of care, costs, and patient satisfaction. By competing with each other and helping to select other plans which meet Xerox's demands, the six manager HMOs inject control into the purchase of health care. Through the six organizations, Xerox can effectively shop for the HMOs which provide the best services at the lowest cost. Thus far, Xerox has selected 185 HMOs that satisfy its demands for quality, cost effective care.

"In 1990, we put the program in place on a totally voluntary basis: Here it is--if you want it, that's great," Darling says. Initially, employees could opt to remain in the traditional indemnity plan, if they so chose with little or no difference in out-of-pocket expense between the two plans. But by 1991, when the plan began to show its effectiveness in containing costs, all new employees were automatically enrolled in HealthLink.

Yet other employees, for reasons ranging from preexisting illnesses to a desire for greater flexibility, opted to remain on Xerox's self-insured indemnity plan, which is administered by the Prudential Insurance Co., Roseland, N.J. "The difference if you choose not to enroll in a HealthLink HMO," Darling says, "is that you spend more money out of pocket."

Darling explains that if an employee chooses a HealthLink HMO--one selected under the HealthLink plan and thus offering competitive cost savings--virtually all of the cost is paid. If the employee chooses the indemnity plan, however, he or she must pay 1% of his or her salary for the previous year, plus 20% for each doctor or hospital visit up to a maximum of 4% of pay from the previous year, or $4,000, whichever is lower.

"We believe that it has been very effective," she says. "Even with adverse selection taken into account--when sicker people tend to stay in the indemnity plan, while healthier people tend to switch to the HMOs--there is a real dollar difference of $1,000 per employee."

Noting that Xerox currently has 62% of its employees in HMOs, Darling estimates that annual savings amount to roughly $34 million. Those savings, she notes, are a direct consequence of the more efficient services provided by the 185 HMOs Xerox has under contract.