Business knuckling down on its health bill
When the inflation tide rolled out in 1982, Xerox Corporation was on the beach to wave goodbye. Unfortunately, the ebbing tide left something behind - the astronomically high cost of the company's health care benefits.
''When we hit double-digit inflation, the growth rate of our medical costs was 18 or 20 percent,'' says William Skinner, benefits program manager at Xerox. ''In '82, when inflation started turning around, we got rid of the double-digit inflation but didn't get rid of double-digit health costs,'' Mr. Skinner explains. That's when Xerox decided something had to be done.
In this instance, Xerox is simply a microcosm of the rest of corporate America. Behind wages and salaries, the tab for health care is the company's second-biggest benefits expense. That's exactly what Hay-Huggins, the benefits consulting arm of the Hay Group, found to be true in its 1984 survey of 869 large and medium-size companies. For the business sector as a whole, says Michael Carter, senior vice-president at the Philadelphia firm, health costs have been growing about 25 percent per year.
This year that will translate into a total corporate bill of over $100 billion, according to the Washington Business Group on Health. That's about a third of what the nation pays for medical care. It's also more than business is now willing to pay.
That was evident recently at a packed conference here sponsored by the New England Business Council and the New England Employees Benefits Council. It was here that Xerox poured forth its strategy - a plan that follows almost every path trod by business these days to control health costs: shifting some of the cost burden to employees; installing a voluntary ''wellness'' program to help employees stop smoking, excessive drinking, and overeating; and encouraging employees to use medical facilities that are less expensive and more efficient than hospitals.
What it comes down to, say the experts, is that the health system lacks consumerism. ''Generally, when someone buys a good or service, they do some comparison shopping,'' explains Mr. Carter, ''whereas (in the medical market) whatever the doctor says or the hospital says, happens. Part of the problem is that plans pay 100 percent of the cost, and if employees don't pay, they don't care.''
It's tough to inject consumerism in the marketplace, though, when business leaders don't know what the marketplace is doing. This has been the driving force behind an enormous move under way to collect data - all kinds of data: on where employees go for medical attention; what their most frequent needs are; how long they stay in hospitals; and what the going medical rates are in an area.
This has been a primary effort of the Midwest Business Group on Health, which has 150 corporate members in eight Midwestern states. Although there are about 150 business coalitions in the country formed specifically to deal with health cost issues, this is the only major regional coalition, according to the American Enterprise Institute.
''Companies need utilization information by hospital, by physician, by diagnosis,'' says Iris Masotti, project director of the Chicago-based group. ''When they have this information, they can do a lot of things: look at their benefits plan to find high-use areas; compare themselves with other organizations; find out hospital rates.'' She adds that ''we see hospitals that are extremely high in cost or have costs that vary quite a bit.''
For instance, a Chicago hospital-pricing guide produced by Quaker Oats, with help from the business group, showed that the median charges for normal maternity range from $1,200 to $3,200, depending on the hospital. ''Why would people pay three times as much for a comparable level of care?'' the brochure asks employees. ''Only because they didn't know the hospital's charges in advance.''
Hospitals and physicians aren't in the habit of opening their books to the public. But pressure from the business community as well as the government is slowly changing this. Last year the federal government launched its first major offensive against high health costs by installing a pricing system for medicare patients. Under a program called ''diagnosis-related groups,'' the federal government has set prices for 468 treatments. If hospitals cannot cover their costs under this pricing system, too bad. On the other hand, if they are efficient enough, they can keep any profit leftovers.
The medical industry has other reasons to clamp down on costs. Business is encouraging employees to use health maintenance organizations (HMOs) and preferred-provider organizations (PPOs). HMOs are institutions that provide an employee all the health care he needs but for a prepaid, set fee. PPOs are local groups of physicians and hospitals which have made agreements with corporations to handle their employees at a discount. Both services are fairly new entrants to the medical services arena and are whipping up competition because of their efficiencies and discounts.
But it's difficult to move employees onto this new kind of service if they have no incentive to use it. Corporations are taking care of that. The most common move, according to Mr. Carter at Hay-Huggins, is to turn employees into choice-oriented consumers by making them responsible for part of the care - as through deductibles. ''They want the employee to pay a portion that's big enough to hurt but not too much. Big enough to make them careful (consumers),'' Carter says.
Workers ''hate it,'' comments Frederick Lee, director of public policy for the Washington Business Group on Health. Although companies have made HMOs and PPOs more attractive by reducing the deductibles for these services and have also broadened coverage of plans - to include eye care for instance - many are still meeting resistance from employees.
''Senior management must be absolutely behind you,'' warns Patricia Nazemetz, the overall manager of Xerox's benefits. ''These are difficult emotional issues. There is bound to be a lot of screaming and hollering from employees. If nobody is behind you, you find yourself wading upstream alone.'' Xerox got its unions to accept, for the first time, some of the cost burden by making a deal - the company guarantees jobs if employees accept the new plan.
The broad business effort in America is already showing results. Many corporations are seeing cost growth slow, or decline. Hospital admissions and the length of stay for patients fell dramatically this year (although economists say that much of this is simply a shift to HMO service). Hospital mergers are on the move, says Mr. Lee, especially under the urging of business leaders who are hospital trustees or board members.
For the future, business can expect health care costs to continue their upward trend. It will be much more gradual but still stay ahead of inflation increases. The reason, Carter says, is that ''all this increasing use of technology costs a lot of money and tends to keep very sick people alive a lot longer and that's very expensive.''
In planning for the future, business must watch out for a few key areas, people in the field say:
* Quality of care: Discounts offered by newcomer competitors could cause corporations to overlook possible fudging on quality. Quality of care is foremost in the minds of employees and should be put high on the evaluation list when chosing medical service providers.
* The federal government: ''Expect a good deal of aggressive activity (by Congress) in the next few years'' regarding health issues, says Willis Goldbeck, president of the Washington Business Group on Health. The critical issue, he says, is the coming medicare deficit. ''Nothing suggests we won't have one - the quibbling is what year we'll have it.'' As government relieves itself of more health costs, the private sector will have to make up the difference.
* Retirees: ''Health benefits for retirees is a corporate blind spot,'' says John Akula, a partner in the Boston law firm Herrick & Smith. ''It is the big sleeper of health care. Many corporations don't even know what their obligations are to retirees.'' In another 46 years, the number of citizens over 65 will have doubled.
* Communication: Corporations must keep employees informed of changes in health benefits and why they are happening. ''A letter from the chairman and a booklet won't do it,'' says George Green, director of compensation planning at Shawmut Bank of Boston.