From the trenches: strategies that work; Southwestern Bell, Chevron, Detroit Edison, and six other companies disclose why their cost containment programs are successful - includes related information on health care coalitions

Business & Health, May, 1991 by Nancy N. Bell

American companies have had it with the high cost of insuring the health of their workers. Steadily increasing costs over the last decade have given way in the last few years to dramatic yearly price leaps that take an ever bigger bite out of corporate profits. In fact, according to a national survey of nearly 2,000 employers released earlier this year by A. Foster Higgins & Co., a consultancy headquartered in New York City, health benefits now consume more than one out of every four dollars (26 percent) of the average employer's net earnings.

"Controlling medical expenses through traditional health plans has become a losing proposition," says John Erb, a Foster Higgins managing consultant and the study's author. "In fact, if costs continue to increase at the current rate, the annual cost of providing medical benefits will exceed $22,000 per employee by the year 2000. Employers who have put off addressing the health care crisis are now being forced to consider a managed care approach."

But what kind of managed care approach works? The term is an umbrella for a variety of cost containment strategies. Some of the most common include scrapping traditional fee-for-service indemnity policies and negotiating services directly with hospitals and doctors; exchanging large patient pools for price breaks; case management and utilization review to monitor service delivery and cost effectiveness; restricted coverage; wellness programs; shifting a portion of health insurance expense to employees in the form of higher deductibles, copayments, and premiums; and penalties for unhealthy lifestyles.

All the above are good ideas. But what specific cost containment plans are actually working for individual companies and realizing documented, hard dollar savings? What follows is a sampling of strategies from nine companies across the country: what they're doing to hold down the rate of increase, if not actually reverse the flow.

Southwestern Bell:

Integrated approach

Southwestern Bell Corporation (SBC), based in St. Louis, is an international communications corporation with 66,000 employees and 26,000 retirees. The company was one of the first nationally to develop a managed care plan following analysis showing that health benefits spending had jumped 217 percent between 1979 and 1985.

According to Southwestern Bell, its CustomCare plan, introduced in April 1987, has become a model for corporate health insurance plans nationwide because it blends the best features of health maintenance organizations, preferred provider organizations, and indemnity plans. From HMOs come CustomCare's pre-certification, utilization review, and a wellness focus; from PPOs, negotiated provider discounts; and from traditional indemnity plans, flexibility and freedom of choice.

The Prudential Insurance Company, which administers the plan, created local networks of doctors, hospitals, and other providers in the 13 major metropolitan areas where 65 percent of SBC's employees and retirees live. A primary care physican acts as gatekeeper, and office visits are covered at 100 percent after a $10 copayment is met by the patient.

Claims, pre-certification, second surgical opinions, and utilization review are all handled by the primary care doctor. Employees may use non-network providers if they pay a fron-end deductible and a 20 percent copayment. Employees and retirees who live outside the 13 CustomCare network areas are covered under a first-dollar indemnity plan with an overlay of cost containment features.

SBC's integrated managed care approach is working. The company reports that from 1987 to 1988, the per person claim cost increase was 12 percent, compared with the national average of 18 to 20 percent, and the increase from 1988 to 1989 was less than 10 percent, whereas the national average that year was between 20 and 24 percent. Employee response has been favorable, with 82 percent "thinking highly" of the care received.

In the first 2 1/2 years of the plan, per employee costs were 13 percent lower than would have been expected under the old fee-for-service arrangement. In the network cities, costs for employees staying within the network rose 6 percent in 1989, compared with 16 percent for employees who chose outside doctors.

Baker Hughes:

Targeting lifestyles

Baker Hughes is a Houston-based company that manufactures oil processing equipment and provides oil field services. The company has 23,000 employees worldwide, with 12,500 in the United States.

"In 1989 we put together a task force to analyze our rising health care costs and redesign our benefit program," says Joe Vinson, director of compensation and benefits. "We were doubling our costs every three years and expected to hit $100 million by 1993. To see exactly who was spending money on what, we actually broke down our $50 million in total costs by diagnostic category. We found we were spending half our money in just four of 16 categories: respiratory, digestive, circulatory, and musculoskeletal. The key is that these were all lifestyle-based health problems, or 'ailments of choice'."