BUSINESS
Chemical Industry Shifting To Managed Health Care Benefits Limited success in controlling costs is forcing firms to increase employee cost sharing, control medical care use, rethink retiree benefits Ann M. Thayer, C&EN Northeast News Bureau
In the past decade, many companies, including those in the chemical industry, have turned to sharing costs of health care benefits with their employees through premium contributions, deductibles, and copayments. No longer can employees expect free, first-dollar medical coverage as a given condition of employment. However, with limited success in containing costs, many companies are now looking toward increasing their management of health care utilization. In the U.S., more than $600 billion per year, or nearly 12% of the country's gross national product, is spent on health care. With industry footing ithe bill for about 60% of the population, such astronomical expenses are expected to be a factor in the ability of U.S. companies to compete. Although health insurance is not yet the most expensive benefit for employers—time off and pensions still lead—it is prone to the highest rates of inflation and considered by many to be the least predictable expense to manage. The high inflation in health care costs of the early 1980s was slowed somewhat with the introduction of what insurers call "comprehensive medical plans." Covering both basic and major medical expenses, these plans shift some costs to employees. However, as employees and providers adjusted to the changes, prices
Coyle: "blank check" coverage costly once again began to escalate. A breaking point for many companies came again in the late 1980s. Alt h o u g h hospital admissions and lengths of stay have decreased as employees use alternatives such as outpatient care, overall medical costs continue to rise faster than other consumer prices. Employees, required to bear more of the burden of rising costs, may now face even stronger incentives to curb use of medical care. According to the Health Insurance Association of America, monthly premiums for health insurance average about $100 for an individual and more than $200 for a family. In HIAA's 1988 survey, employers paid about 90% of the cost of individual and 75% of family premiums. The majority of c o n v e n t i o n a l plans also have other cost-sharing features, such as individual deductibles of $100 to $200 and copayments, a percentage of the cost of
treatment, usually about 20%, not paid by the company. These features, as well as an annual out-ofpocket maximum on the order of $1000 for an individual, are typical of the comprehensive benefit plans provided to employees and their dependents by nine major chemical companies surveyed here by C&EN. Stepping away from cost-free plans with 100% coverage had at least two related objectives. By shifting costs to employees, companies could decrease their expenses. Having done so, based on the theory that consumers are sensitive to prices, it was hoped that employees would become better consumers. "But employees can view it merely as the unwillingness of the company to pay the whole thing," says Patricia Coyle, manager of employee benefits at Rohm & Haas. "It's time to say that we have contributed to a lot of what is happening in the medical field by designing programs that encourage employees not to worry about the cost of anything they buy and that encourage doctors and hospitals not to worry about the price of anything they sell," adds Coyle. In addition, the aging U.S. population, higih costs of new medical technology, and "defensive medicine" (the belief that doctors overprescribe treatment and tests to protect against malpractice) are factors frequently cited as contributing to rising costs. Medical i n s u r a n c e i n d e m n i t y plans with "blank check" coverage by a third party are becoming too expensive to continue. "It's essentially becoming the dinosaur of health plan designs," says Coyle. "It's basically a plan that has absolutely no incentive for employees to consider costs." Rohm & Haas introduced cost sharing on premiums several years ago but the impact was October 22, 1990 C&EN 9
Business minimal until 1989 when escalating costs drove up premiums. With n o changes in plan design, says Coyle, employee contributions that are now $40 would have neared $100 p e r month in 1991. Having spent about $32 million in 1989 on health care, a 24% increase over the previous year, the company is look ing to control its costs. Starting in 1991, Rohm & Haas plans to intro duce an optional comprehensive plan with deductibles and copayments, but lower monthly premi ums. With a similar plan at Dow Chemical, Heino Zell, director of compensation and benefits, believes that the firm has "a pretty good han dle on keeping down costs." Along with cost sharing, efforts to make employees educated consum ers is a trend followed by major chemical companies. All actively in form their employees about t h e causes and impacts of rising health care costs and encourage employees to ask questions and consider costs of providers. Benefits managers at Rohm & Haas and Air Products & Chemicals, both based in Pennsylva nia, look to local and state programs for needed data to supply employ ees, evaluate options, and possibly even negotiate rates. Although pre liminary at this time, data being col lected on hospitals by the Pennsyl vania Health Care Cost Contain ment Council is one of t h e first attempts to provide a measure of the price and quality of care. Companies that put cost sharing in place a few years ago report somewhat limited success in con trolling costs in the long term. Air Products, with about 10,000 active employees and early retirees cov ered under a comprehensive plan since 1985, saw single-digit increas es until 1989, when costs rose more than 20% over the previous year. To tal health care spending for 1989 reached about $24 million. Similar ly, Monsanto, which spent about $60 million in 1989 on 15,000 active em ployees, saw its costs rise 18%. Effec tive January 1990, both Air Products and Monsanto changed their benefit plans to include managed care costcontainment elements. Alan Geer, manager of employee benefits at Air Products, decribes in creases in deductibles, premiums, 10
October 22, 1990 C&EN
and copayments as "tinkering" to ease inflation in the short term. Cost sharing as a means to long-term re form is generally believed to be hin dered because health care does not operate like a traditional market place with consumerism, competi tion, and a clear relationship be tween cost and value. "Essentially, medical services are the only service or good where the seller tells the buyer what to buy, how much of it to buy, and how much to pay for it," says Michael F. Carter, senior vice president for benefits consulting firm Hay/Huggins in Philadelphia. However, "it's now beginning to be controlled by managed care." Until several years ago, managed care options for most employees con sisted primarily of health mainte nance organizations (HMOs). These groups provide a high level of cover age for a prepaid fixed monthly fee. They promote preventive care fea tures such as annual physical exami nations and well-baby care, and man age utilization through a primary care physician or "gatekeeper." But individuals are restricted in their ability to select doctors or treatment outside the HMO system. Although some major chemical firms offer HMOs as an option among other h e a l t h care p l a n s , participation among total employees on average seldom reaches as high as 20%, about the national average. In addition, benefit managers suggest that HMOs, with premiums only about 10 to 15% lower than for other plans, are not immune to cost increases as once expected. According to HIAA, more than 70% of Americans with employersponsored coverage are in some type of managed care plan—either an HMO, preferred provider organiza tion or network, or managed fee-forservice plan. Many companies are moving toward managed care plans that combine aspects of HMOs and, to provide much-valued freedom of choice to employees, more tradition al indemnity plans. Allied-Signal became t h e first among chemical companies to design such a plan after costs for its compre hensive plan jumped 39% in 1987 af ter years of modest growth. AlliedSignal contracted with CIGNA, an insurance company, to provide a net
work of primary health care provid ers for 43,000 employees at 200 sites. The network plan, which manages care and utilization not unlike an HMO, offers financial incentives for use with no deductibles, low or no copayments, and coverage of preven tive care. Employees are free to choose to go outside the network and coverage will be provided under an indemnity-type plan but at a reduced level of benefits. Beyond cost sharing with employ ees and attempts to curb unneces sary care, managed care is "aimed at increasing market disciplines on health care providers," says Edward L. Hennessy Jr., chairman and chief executive officer of Allied-Signal. For employers, he adds, such plans allow firms to begin m a n a g i n g health care costs as they would any other part of their businesses. The contract with CIGNA, now in its last year, promised a single-digit fixed rate of increase as it was expected to offer greater cost control and admin istrative convenience. This year Al lied-Signal said that during the first 18 months, health care costs for those enrolled were 23%, or $750 per employee, less than for those not enrolled. At this time, not all companies have access to network or even HMO-type coverage for all employ ees at all locations. However, ele ments of managed care are being in troduced into the comprehensive plans of Air Products, Du Pont, Union Carbide, Monsanto, Hercules,
Health care costs outpace consumer prices Indexes, 1980 = 100
zzu\ 200
180
160
140
120 Consumer prices 1001 198C
B1 82 83 84 85 86 87 88 89 !
ι First half. Source: Department of Labor
and B. F. Goodrich. Psychiatrie and substance abuse care, where costs are rising significantly faster than the overall cost of medical care services, is almost universally managed through employee assistance programs. Managed care often uses a primary care physician, as in an HMO, or an outside service to direct the utilization of health care services. These generally require that an employee call the service before or during treatment. Utilization review may apply to one or several types of procedures or occur at various points of treatment—preadmission certification for inpatient or outpatient procedures, concurrent review of hospital stays, case management programs for long-term or catastrophic cases, and patient information or advice services. Unlike an HMO, in which one is locked into choice of provider with an annual enrollment, managed care tends to operate on a "point-ofservice" basis. As with the AlliedSignal plan, employees can choose at any time to use services outside or other than those suggested by the managed care or utilization review network. Financial incentives through increased copayments or deductibles are common if the managed care program is not followed. The goal of managed care is not only to control prices, as might be possible through fee negotiation, but also to cut out excess or unnecessary use. "What managed care aims to achieve, beyond controlling prices," says Wendy Gray of the Conference Board, a business research firm in New York City, "is also controlling volume." Many firms have dropped mandatory second opinions finding that doctors will not second guess each other. However, it is hoped that managing utilization before and during treatment will help to minimize excess or unnecessary use. The design and goals of managed care are complex, adds Gray. But most plans meet a common definition: the channeling of patients to high-quality and efficient providers, creating r e i m b u r s e m e n t systems that make doctors and hospitals financially accountable for cost and quality of services, monitoring and analyzing practice patterns, desig-
Most employees enroll in managed care plans Managed fee-f or-service s 43%
Unmanaged fee-for* 1 s. services J
\' 2 8 % J
1988 estimated total = 160 million Source: Health Insurance Association of America
nating primary care physicians and case managers, and establishing quality assurance programs. With health care costs and use increasing dramatically by 1989, especially in outpatient procedures, Air Products began offering a choice of p l a n s in 1990. Employees may choose a plan with utilization review and a lower deductible and out-of-pocket limit, or one without review but with a higher deductible and out-of-pocket limit. Both plans have a 20% copayment level and premiums are paid by the company. If the managed care program is not followed under one option, benefits are reduced. With about 98% enrollment in the managed care plan, the company expects its costs to increase less than 12% this year. In 1987, Union Carbide began a comprehensive plan with pretreatment certification aspects that now covers about 27,000 employees and retirees under age 65. With its plan in effect, annual cost increases have dropped from 21% to 17% and are expected to be even lower this year. Total spending in 1989 was about $81 million. Du Pont established its comprehensive plan in the mid-1980s and has seen costs grow steadily, reaching 16% in 1989. With 150,000 employees and retirees, the company spent $450 million on health care in 1989. This month, Du Pont introduced a program with preadmission
certification, continuous review of hospital stays, and case management. In addition to managed care, other companies are controlling costs by offering less expensive coverage. Financial incentives for employees are put up front in the form of lower premiums for choosing plans with higher deductibles and out-ofpocket limits. Monsanto, Hercules, and Goodrich offer such choices in their flexible benefits plans. Typically, employees are given credits with which to buy medical, dental, and life insurance and other benefits. "The one-size-fits-all benefit plan concept is really in the past," says Robert Lahr, manager of employee benefits at Monsanto. Started this year, Monsanto's plan offers three levels of deductibles from $125 to $500 for an individual or the option to select no medical coverage at all. Hercules and Goodrich offer similar plan options. At its St. Louis location, Monsanto's plans also include point-of-service managed care. For the lowest deductible coverage, employees generally have to contribute toward premiums. Other levels of coverage may cost less than available credits, freeing up credits to apply toward other benefits or to take as cash. When opting out of coverage at Monsanto and Hercules, an employee receives $50 or about $42 per month, respectively. Goodrich pays back $50 a month for its highest deductible plan, says Robert Schumacher, director of benefits and compensation, to ensure that all employees have catastrophic protection. For Goodrich's plan, in effect since 1987, increases have averaged slightly more than 10% per year over the past two years. The company spent about $42 million for 6000 employees in 1989. Above minimum amounts set for each of its plans, Hercules ties deductibles and out-of-pocket limits to a percentage of salary, explains Patrick Donahue, manager of welfare plans. Hercules put its plan in effect in 1989, adding some utilization review. Costs increased about 14% in 1989, but are expected to increase only about 9% for 1990 and 1991, with case management being a m o n g the most effective costcontainment measures implementOctober 22, 1990 C&EN 11
Business ed, he adds. Total spending is not expected to exceed $61 million for about 23,000 employees. Companies are seeing the "expected m i g r a t i o n " to less expensive plans and opting out when employees have coverage elsewhere, as through a spouse. Flexible benefits allow companies to save money by several mechanisms, explains Carter of Hay/Huggins. These include repackaging reduced benefits while still making them acceptable to employees; getting employees to "trade d o w n " to less expensive coverage and shifting company credits to benefits less prone to rapid inflation in later years; and by employees opting out in which case the company may spend less in returning cash to employees than it would spend on coverage. In the aggregate, explains Carter, opting out does not save money because it merely shifts costs to other employers. Air Products protects against this by calculating coverage for spouses who have opted out of their employers 7 plans as though they were still covered. Another way companies may try to control h e a l t h care expenses is t h r o u g h wellness programs. Although not specifically part of benefit plans, employees may be offered annual physicals, fitness programs, screenings for early detection of disease, and weight control, smoking cessation, and stress management programs, which may help to improve general health and, it is hoped, the need for medical care. Of the chemical companies surveyed, all offer a few or all such programs. Yet few, if any, have attempted to measure any real cost savings in health care expenses. Intuitively, they believe, or may cite the experience of Johnson & Johnson, that financial savings as well as decreased absenteeism and increased productivity will follow. Johnson & Johnson, which now markets its Live for Life wellness program to other companies, reports net savings of about $178 per employee from a control group study it conducted in the early 1980s. In general, benefit managers express the idea that programs for employee health fit within corporate culture as "the right thing to do." Wellness programs are not without 12
October 22, 1990 C&EN
cost and some trade-off is made on where dollars are being spent. Several of the chemical companies have indicated that they are beginning to investigate health care expenditures to determine what medical care needs are "life-style related." The information may be used to promote or enhance company wellness programs or, as Carter suggests, to actually begin linking benefits to employee health through financial incentives. A major issue that companies are facing, in addition to controlling overall costs, is in the area of retiree benefits. In the past, retiree health costs have been covered on a pay-asyou-go basis, explains Carter. The Financial Accounting Standards Board is formulating rules, expected to go into effect in 1992, that will require that companies disclose and amortize current and future retiree health care liabilities as they do for pensions. This will require estimating not only the number of retirees and dependents, but also utilization rates and the rate of inflation in medical costs. "The FASB expense is somewhere between four and 10 times the pay-as-you-go expense," says Carter, which firms charge against earnings. "That can have quite an impact on the bottom line." With an aging population and increasing numbers of retirees, it is yet to be seen how employers will respond to the increased liability. "It may cause a lot of companies to reduce or dump the benefits," says Carter. And although employers generally have reserved that right, there are ongoing legal and ethical issues of doing so that have not yet been resolved. Short of that, employers are at least considering higher contributions for retirees and dependents. The chemical companies in C&EN's survey are not yet facing the problem of many steel and automobile manufacturers in having many more retirees than active employees. Du Pont and Monsanto have ratios of about 1:1 for active employees to retirees, whereas other companies have ratios near 2:1 or higher. Covering only about 700 early retirees, and none over age 65, Air Products may feel the impact less than other chemical companies. "The FASB issue is going to force some corporations to make some
hard decisions about how they are going to continue to offer medical benefits to retirees," says Miller of Du Pont. "Most companies are probably in the mode where Du Pont is—which is trying to evaluate all the options and to do the right thing, from the side of fiscal responsibility, but also while meeting our obligations to current employees and retirees." Currently early retirees at the major chemical companies receive similar or identical benefits to active employees, but may not be offered all plan options or made to pay premiums. Retirees over the age of 65 are typically required to enroll in Medicare with the company providing supplemental coverage. For employees retiring between 1989 and 1993, Hercules has been gradually increasing retiree contributions toward covering 50% of premiums. Starting with employees retiring in 1990, says Goodrich's Schumacher, retirees will pay part of premiums. In addition, the company has put an annual cap on company contributions toward medical care of $2700 and $1350 for pre-65 and post65 retirees, respectively. For family coverage, the caps are twice the individual limit. An apparently popular approach under consideration by many companies is linking medical benefits to age and /or years of service as is done with pensions. However, unlike pension benefits, no provision has yet been made to allow companies the tax incentives they have in funding pensions. And, comments Carter, with the present federal budget situation, such tax incentives seem unlikely. Tax reforms and other local, state, and national initiatives for controlling health care costs are all part of a major debate to be played out. The debate is complicated by issues surrounding access to health care for millions of uninsured in the U.S., mandated benefits, questions of health care rationing, pool purchasing and negotiating of rates, national health care, and historical problems with the management of Medicare and Medicaid. Through U.S. industry groups, companies in the chemical industry are actively involved in developing plans for health care reform. D
