What Comes After Managed Care?

Companies--and employees--have had it with HMOs. Here's how they're coping

General Motors Corp. (GM) has 217,000 employees in the U.S., including 180,000 auto workers, 16,000 engineers, and 2,000 managers. And one pharmacist. Why a pharmacist? It's a new strategy GM is using to rein in employee medical costs that, after years of being tame, are expected to jump by 11% this year, to nearly $4 billion. And the prescription-drug portion is expected to shoot up 31%, to $1 billion. "We needed to understand the situation better, and who better to help us understand pharmacy?" says James Cubbin, GM's head of health-care initiatives. The pharmacist, Cynthia Kirman, who started in 1999, tracks the drugs workers use most and uses the information to negotiate discounts with drugmakers.

After almost a decade in which managed care has kept a lid on costs, medical expenses for companies across the U.S. are expected to rise by 7.5% this year, according to benefits consultant William M. Mercer. And they are likely to jump by 12% in 2001--the largest gain since 1991. To cope, Corporate America is taking tentative steps into the post-managed-care era. Instead of simply relying on insurers and managed-care outfits, companies are experimenting with a range of do-it-yourself approaches that override the traditional health-care intermediaries--or exclude them altogether (table, page 152).

Some, such as GM and Honeywell International Inc. (HON), are hiring specialists to advise them or their employees on available health-care choices. Motorola Inc. (MOT) and others have set up their own doctor and hospital networks in the hope that they can negotiate better deals. And groups of companies are banding together to form purchasing coalitions, giving them more clout when buying medical services from doctors, hospitals, and managed-care plans. "There's an increased sense that employers can't win in the managed-care market anymore, so they're in an investigative mode," says Robert O'Brien, head of the global health-care practice at consultant William M. Mercer.

At the same time, the patient backlash against managed-care restrictions is prompting companies to push for more choices and higher quality. The goals may seem contradictory, and sometimes are. But some companies think they can achieve both aims by adding preventive care or by helping employees make more informed choices about what care to get. "The theory is, if you get it right the first time--if physicians and hospitals are committed to quality health care--you detect things early," reducing re-admission rates and saving money, says Liz Rossman, vice-president for benefits at Sears, Roebuck & Co. (S)

MAD SCRAMBLE. Insurers and HMOs are being forced to adapt to the changing landscape. Some are retooling to help employers set up proprietary networks, offer customized products, or provide employee information online. What's not yet clear is how much the new corporate efforts are a threat to health insurers or simply a business opportunity.

Employers, for their part, are being driven by the growing realization that the managed-care revolution seems to have run its course. When medical costs last rose at double-digit rates in the late '80s, employers embraced HMOs and preferred provider organizations (PPOs). While the improvement was dramatic--health-care costs actually lagged overall inflation in 1994--the gains haven't lasted. There are several reasons. Much of the progress came from eliminating unnecessary procedures and hospitalizations--a one-time savings. At the same time, an explosion of new medical technologies and drug treatments has jacked up prices again. The population has also aged, further spiking expenses. Meanwhile, hospitals and doctors have balked at lower reimbursement rates. And employees have rebelled against managed-care limits on doctors and procedures.

EARLY BIRDS. With the labor market at its tightest point in a generation, the result has been a mad scramble for alternatives to managed care. One answer is for companies to build their own national network of doctors to supplant the HMOs and PPOs run by insurers. The concept, often called direct contracting, began in the early '90s and has been adopted by about 5% of large companies, says consultant Watson Wyatt Worldwide. Usually, companies contract with existing doctor groups, including those that belong to larger networks formed by insurers. Ford (F) and General Motors, among others, are testing the idea.

Motorola is one of the early birds. In 1996, it hired an outside company to create a network that now includes 118,000 doctors. Since Motorola, rather than an insurer, is in charge, it set higher standards for doctors than those in previous plans. A proprietary network also allows the company to customize care to meet its needs. For example, Motorola has added doctors in Chicago and Detroit, where it has a high concentration of workers. And it hired Health International, a Scottsdale (Ariz.) firm, to regularly contact employees with conditions such as asthma to discuss new products for their illnesses.

The thinking is that patients are more likely to respond to individual attention and take better care of themselves, reducing illness--and costs--later on. "It's a warm and fuzzy kind of program" that saves money, says Randy Johnson, Motorola's director of benefits for North America. Already, he estimates that every dollar Motorola spends on its network saves $3 to $9 on medical care. It's part of the reason Motorola's overall health-care tab has risen by less than 5% a year since 1996, with no increase at all expected in 2001.

And employees say care is better. More than 70% of Motorola's 70,000 U.S. employees have chosen to participate in the plan, while the rest use HMOs or traditional fee-for-service plans. More than 95% of participants say they're satisfied, says Rick Dorazil, Motorola's vice-president for global rewards and benefits. A key reason: Workers aren't forced to switch doctors all the time, since fewer than 1% of physicians have left the network.

Other employers are forming purchasing coalitions, similar to those envisioned by Hillary Rodham Clinton's 1994 health-care reform plan. As costs start to pinch, these coalitions are starting to catch on. Today, there are about 75 such groups that negotiate health care for member companies, according to Washington's National Business Coalition on Health. Coalitions have become a key cost-control device for many small companies. And they help with quality, too, according to a 1999 study by the Alpha Center, a nonprofit health policy think tank in Washington. In 1994, Safeway (SWY), Chevron (CHV), Bechtel, and other large San Francisco companies began negotiating health-care purchases jointly for their 400,000 employees and dependents through the Pacific Business Group on Health. PBGH sets cost-containment measures and quality-improvement targets for the nine HMOs and point-of-service plans with which it negotiates. The group expects its premium increases for 2001 to be two to three percentage points below the national average.

Some of the savings comes from prodding HMOs to lift quality in ways that will save money later. Example: In 1996, PBGH demanded that its HMOs conduct annual retinal screens for diabetics. Since diabetes often leads to problems such as detached retinas, the tests reduce cases of blindness--a gain in patient care that also means fewer costly hospitalizations. "It's the marriage of cost savings and quality improvement," says PBGH CEO Peter V. Lee.

Some companies think they can save money--and improve care--simply by educating their workers about health issues. In 1999, for example, Honeywell Inc. began a program to encourage employees to participate in decisions about their course of treatment. The company hired Consumer's Medical Resource, a Duxbury (Mass.) health-care specialist, to give information to Honeywell employees who have been diagnosed with any one of 44 critical-care conditions, from cancer to Parkinson's disease. Unlike second-opinion programs, which merely let patients decide whether to ask another doctor for advice, CMR allows each employee to set up an hour-long consultation with a Harvard Medical School doctor, plus a research assistant. Each patient then gets a customized report outlining the latest research and treatment options.

SATISFACTION. The outcome is better-informed patients--and savings. One of the first participants was a 63-year-old Honeywell employee diagnosed with ovarian cancer three years ago. The woman had been taking hormone-replacement therapy ever since she went through menopause in her early 40s. But after reading Harvard research provided by CMR that showed that such hormone therapy can exacerbate ovarian cancer, she discontinued the therapy and switched to a new doctor. The upshot? She got better advice--and Honeywell saved money on the unnecessary treatment. "In managed care, we tried to make the physician the gatekeeper," says Brian Marcotte, Honeywell's vice-president for benefits. "This model makes the consumer the gatekeeper."

So far, Honeywell has saved $2.80 for every dollar it spends on the program, says Marcotte. The service also pleases employees: A survey of 100 Honeywell workers who used it found that 90% rated it "excellent," and fully 100% said they would recommend it to colleagues.

Down the road, companies hope the Web can open up a new customer-driven approach to health care. Sears took a baby step this fall when it began offering workers the ability to sign up for coverage online. But that's just the start. Over the next several years, companies plan to use the Net and their intranet sites to give employees access to medical treatment information as well as sophisticated comparisons of benefit-plan options. Even these small steps will reduce costs by cutting administrative expenses, experts say.

Eventually, more employers hope to rank providers by quality as well as cost. PBGH already does this on its Web site. Next, doctors and hospitals can post prices of individual procedures on the Web. This happens now in New York through Trumbull (Conn.)-based HealthMarket Inc., which markets health plans to consumers.

Soon, employees may have enough information to comparison shop for health care, much the same way they now buy a car. Already, two-thirds of large companies say they're likely to offer health-care benefits online in a "self-service" format in the next two to three years, according to an Oct. 11 Mercer survey of 276 companies. Not only would employees gain control but companies can slash administrative costs. "Patients can sign up on the Internet, get their I.D. cards, choose a doctor, and get a map from their house to the doctor," says Leonard D. Schaeffer, CEO of Thousand Oaks (Calif.)-based WellPoint Health Networks, one of the nation's largest managed-care companies.

NEW DIRECTION. Ultimately, companies may try to wash their hands of the entire business of delivering health care and let employees buy it on their own. The idea--now largely a gleam in the eye of health-care consultants--is to create a defined-contribution health-care plan, much like a 401(k). Companies would give employees a voucher for a set amount of money each year to purchase medical insurance. With sufficient information available on the Web, consultants say, employees could shop for the plan that best suits their needs.

The problem, of course, is that a voucher system would pass the burden of rising costs on to employees. Few employers have yet gotten up the nerve to try this, particularly in today's tight labor market. But it's a hot topic in the industry, with conferences and seminars addressing it. Last year, Xerox Corp. Human Resources Vice-President Patricia Nazemetz mentioned the idea in a speech at a health-care conference. After her remarks were reported in the press, Nazemetz' office got a couple dozen calls and e-mails from concerned employees. In response, she put out a notice saying that a switch "is not going to happen anytime soon"--although she conceded that it's where the company is headed.

Indeed, 20% of employers say they are likely to adopt such a program in the next five years, according to a survey of 3,402 public and private companies released in September by the Kaiser Family Foundation. "Until you're ready to do it, you can't talk about it out loud, and no company is willing to be the first," remarks Joseph Martingale, a principal with Tillinghast-Towers Perrin, a New York consulting firm. Even if employers never go this far, they're likely to continue to put more and more health-care choices--and responsibilities--into the hands of employees.

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