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Business Officer Magazine

A Clean Bill of Health

The health care crunch prompted the California Institute of Technology to take matters into its own hands. Now faculty and staff have a less bitter pill to swallow when it comes to benefits costs.

By Mike McNamee

"We met with our benefits committee and resolved to look at every option," says Schmitt, associate vice president for human resources at the Pasadena, California, institution. The goals were ambitious: Keep Caltech's overall fringe benefit rate flat and cut an anticipated 13 percent hike in health premiums by half or more—while having as little impact as possible on employees' relations with their usual doctors, hospitals, and pharmacies. Meeting those goals would be complicated by the economic diversity of the university workforce and Caltech's culture, which firmly held that all employees—ranging from senior faculty to cafeteria workers and groundskeepers—should share the same benefit choices and costs.

The effort took nine months of study, negotiation, constant communication, and intensive follow-through by the human resources staff. It amounted to nothing less than "do-it-yourself health care reform," Schmitt says. In the end, Caltech resisted the urge to make radical changes to its benefits plan. Instead, it drove hard bargains with insurance vendors, reducing the number of plans it offered to increase its negotiating clout, and won savings not only for 2004 but for 2005 as well.

Caltech's experience illustrates the challenges that colleges and universities face in struggling with ever-growing health care expenses. Although some experts predict that medical inflation will ease somewhat in the next few years, benefits costs are still likely to outpace the growth that institutions can reasonably expect in income from tuition, endowment, or sponsored research. Despite its success with its 2004 benefits package, Caltech's $52 million tab for health care this year is at least 50 percent more than it was in 2000. Educational institutions must constantly review benefits programs and look for ways—new and old—to balance costs and quality.

How to Squeeze Costs

As they launched the intensive effort to trim Caltech's 2004 benefits bill, the HR staff looked at several approaches.

Change plan design. One of the simplest ways for employers to save money is to change what employees pay directly for medical services. Raising a worker's co-payment for a doctor visit from, say, $10 to $15, shifts part of the rising doctor bill to the patient; the higher costs also should reduce somewhat the trips to the doctor. Caltech ran detailed calculations on what would happen to its medical bill if it paired that hike in co-pays with similar increases for prescription drug payments. The result: $2.4 million in savings, but still an 8.5 percent increase in overall spending.

The limited payoff illustrates that the favorite cost-control tool of the 1990s is less effective nowadays. A dozen years ago, employers raced to embrace "managed care"—the generic name for health-maintenance organizations (HMOs) and preferred-provider organizations (PPOs), both of which shepherd workers into networks of doctors, hospitals, and other providers. With discounted fees and tighter limits on specialist referrals, PPOs and HMOs helped crack the health-cost spiral of the late 1980s. But patients forced employers to relax the limits on referrals, and ample choices among provider fees are no longer available. Nicholas Paulish, a director in the Human Capital Advisory Services practice at Deloitte Consulting, notes that HMOs had the highest cost increases, at 15.4 percent, followed by PPOs and the hybrid point-of-service plans (as reported in the company's 2003 managed care survey). In 2001, Deloitte Consulting's figures show, 52 percent of employers modified plan designs in an effort to control costs; by 2003, that method was used by only 44 percent.

Schmitt and his colleagues faced two other factors: Even a $5 increase in co-pays would weigh heavily on lower-paid workers. And with more than 80 percent of employees enrolled in restrictive HMOs, "we felt like we already had the incentives right," Schmitt says. So Caltech adopted only one plan-design change: It eliminated a retiree indemnity plan that paid 80 to 90 percent of bills for any doctor the retiree chose.

Change cost sharing. Caltech's 2000 pledge to pick up 80 percent of insurance premium hikes was intended to put the institute on a path toward an 80/20 split of all medical costs with employees. But the 2003 spike drove the institute's share of costs down to 78 percent and made it question the notion of paying a fixed percentage of costs.

Caltech looked at two ideas: Return to the pre-2000 practice of paying a fixed dollar contribution to all plans based on the premium of the lowest-priced plan, or cut the share of premiums Caltech paid to 75 percent. Either approach would drive up employees' bills sharply—by 15 to 25 percent in the most popular PPO options. Again, Caltech's HR team thought that was too much of a hit to impose on staff and faculty. (Other employers are more prone to shifting costs to workers: 20 percent used that strategy in 2003, the same as in 2000, Deloitte Consulting's surveys show.)

Taking Control of Your Care

A dozen years after it surged into prominence, managed care has lost its sway as an alternative for containing health care costs. The dominant form of private insurance, with more than 90 percent of covered workers, these plans based on networks of physicians and hospitals posted 15 percent price hikes in 2003. But even worse, says health care consultant Nick Paulish, are the bad habits that these plans have taught a generation of Americans.

"We've created a group of people who think that it costs more to get a haircut than to go to the doctor," says Paulish, a director of the Human Capital Advisory Services practice for Deloitte Consulting. To encourage patients to use doctors and facilities in their networks, managed-care plans charge their members nominal co-payments—$10 to $25 per visit. That replaced the old system where patients paid the full bill, sent it to their insurer, and got back reimbursement for, say, 80 percent of the cost. In 1970, under the old system, patients paid 33 cents of every health care dollar out of their own pockets; now, patients' direct payments have fallen to 15 cents on the dollar. In short, managed care has watered down patients' often-limited grasp of what their employer-sponsored medical care actually costs.

With support from Washington, many employers are now trying to restore some price sensitivity. A variety of "consumer-driven" plans try to create financial incentives for families to conserve their health care dollars, both by shopping for the most cost-effective providers and by eliminating unnecessary visits and procedures. In the Deloitte Consulting 2003 Managed Care survey, 19 percent of employers said they were trying to "encourage employee consumerism" to get costs under control—more than twice as many as in 2001.

In a full-blown consumer-driven health plan, an employer would cover each single worker with a $600 "health reimbursement account" and an insurance policy with a $1,500 deductible. (These amounts are illustrative; employers can use other figures.) An employee would thus pay the first $600 in annual medical bills from the employer-provided HRA and the next $900 from her own pocket. Higher costs could be split 90/10, 80/20, and so forth between the insurer and the patient (with a cap on the employee's total annual expense). The sweetener: An employee whose annual tab is less than $600 gets to roll over the unused amounts toward next year's health care expenses.

The financial incentives are clear. An employee who holds down costs saves her own money and may even pocket some of her employer's. While hugely expensive high-tech medical conditions draw the most attention, those cases are rare—and the mass of employees can reap savings by controlling routine costs. "Most people don't need much health care in a given year," Paulish says. (To ensure that employees don't neglect immunizations or other preventive care, those services are generally covered in full with no employee out-of-pocket cost.)

To help control those routing costs, consumer-driven plans provide ample information, usually on customized Web sites, about effective treatments and local hospitals' strengths and weaknesses. (Many state health care systems collect data on hospitals, but tools to rate physicians' quality are sadly lacking.)

So far, Paulish says, employers that have tried consumer-driven plans have found that economic incentives do indeed work. Most of those early adopters are small businesses, but big firms are beginning to show interest. Two things are holding them back: Consumer-driven plans represent a significant transformation in the way that employees think about and access the health care system. And a consumer-driven plan will introduce fewer complications if it's rolled out as the standard plan for an entire workforce. If HRAs are just another option on the benefits menu, they'll attract the young and healthy employees who are most likely to end the year with spare cash in their accounts, leaving regular managed-care plans with workers who require more medical attention. "This is not an off-the-shelf product," says Paulish. "It takes a lot of work and a long lead time to successfully introduce an effective, employee-accepted plan."

But consumer incentives are getting a push from Uncle Sam. Congress has created new tax breaks for Medical Savings Accounts and Health Savings Accounts—versions of HRAs that meet certain federal standards. President Bush has proposed extending those tax breaks to encourage more consumer choice in health care.

Colleges and universities will no doubt watch other large employers to see how well consumer-driven plans perform in large, diverse workforces. But ultimately, "reengaging the employee in the task of controlling health care costs is going to catch on," Paulish predicts. "It's the most promising way to align the interests of employees and employers to get cost-effective health care."

Switch to consumer-driven health care. The buzz in benefits circles these days is all about ways to "consumerize" health by giving employees a personal financial stake in holding down costs (see sidebar, "Taking Control of Your Care"). The share of employers who say they're encouraging "employee consumerism" more than doubled, from 9 percent in 2000 to 19 percent in 2003, according to Deloitte Consulting surveys. Even the federal government is encouraging the consumer-driven movement with new tax breaks.

But for Caltech, the consumer's moment hasn't yet arrived, Schmitt says. With nearly 85 percent of its employees in HMOs, Caltech would have a hard time meshing consumer-driven plans with the controls common in the older plans. And the new plans are complex and require employees to take a great deal of initiative to make the most of their benefits. Although that notion could have a positive effect, "this consumer-driven movement requires a lot of education," Schmitt says. "I think it's about five years from the point where sufficient information will be available to encourage employees to consider signing up."

Sharp Pencils and Bargaining

That left the final approach: Pitting insurers against each other in a competition to cut costs and win business. So Schmitt and his colleagues solicited proposals from 12 carriers, aiming to get the best price while minimizing disruption to employees forced to change doctors. Schmitt's staff narrowed the field to four vendors (plus the Kaiser HMO in which 26 percent of employees were enrolled) for the fully insured plan. Caltech then urged the finalists to squeeze their costs even harder—not just for 2004, but also for 2005.

After extensive consultation with the faculty and staff on Caltech's Benefits Committee, Schmitt and his staff decided to replace two insurers—Blue Cross and CIGNA—with one, HealthNet. They also kept the Kaiser plan. HealthNet not only offered lower costs—a savings of $4.1 million from projected prices with the other carriers—but contracted with a network of doctors that largely overlapped with Blue Cross. The preliminary "disruption analysis" showed that 8,370 employees and retirees would have to change health plans but only 1,265 might face a change in providers.

But Caltech's job wasn't finished when the contract was signed—in fact, it had barely begun. Communicating the change to employees and easing them through the transition was a challenging process that lasted from July 2003 past the new plan's start-up on January 1, 2004. With the help of the benefits committee, HR staff reached out through every channel available—newsletters, customized Web sites, HealthNet presentations on campus, and other staff and faculty meetings—to bring beneficiaries along.

"We spent a lot of time making sure information was available, accurate, and up to date," Schmitt says. "If you send out bum dope or people can't get a voice on the other end of the phone, confidence in the change will really go down." Caltech focused particularly on supervisors. "The first person an employee will ask is her supervisor," he says. "When supervisors know what's going on, they can deal with those questions—or at least let us know where there's a problem, rather than let the uncertainty fester."

The benefits staff worked with many individuals to help resolve problems finding providers. "There were some heart-wrenching stories, of course," Schmitt says—employees whose chronically ill children would be required to change physicians, for example. "We worked through each of them one by one."

The intensive communication broke down once. Emeritus faculty, a small but important group, were left out of a key mailing. "We stubbed our toe on that," Schmitt says. "You have to look at how every group on campus is going to be affected. It's hard to overestimate how strongly people feel about their health care plans."

In the end, 80 percent of employees and retirees used a new Web-based enrollment system. Fewer had to change physicians than Schmitt had expected. HealthNet proved responsive in dealing with special cases.

What advice does Schmitt have for other campuses that might want to consider changing insurers? Start early. Lay down clear objectives. Make sure you're dealing with vendors whose services and attitude fit the culture of your campus. Include all stakeholder groups in the process—and communicate, communicate, communicate.

Caltech was able to get lower-than-projected costs with minimal disruption. But for future changes, Schmitt says, "It's probably worth having a lot of conversations about how much people are willing to change versus how much they're willing to pay. You might find people are willing to pay more for stability."

One Last Twist

In the bidding for 2004, Caltech asked insurers to offer a cap for their cost increases in 2005. HealthNet's cap was a fairly high 13.5 percent. Two things happened in the first half of this year. Although members of HealthNet's HMO plan were quite satisfied, employees (especially faculty) were unhappy with HealthNet's PPO, which imposed far more restrictions than had Blue Cross, the previous PPO provider. And Blue Cross mounted an aggressive effort to win back Caltech's business.

Blue Cross came back with a bid for 2005 that was only about 5 percent higher than Caltech's 2004 costs. So next January, Caltech is heading back to Blue Cross. "The lesson is clear: Make sure legacy carriers know that you're serious about leaving them if they don't remain competitive" and cut their best possible deal, Schmitt says.

Even so, Schmitt doesn't think Caltech's health care cost challenge is gone. "In this field, everything changes," he says. "It's a very different marketplace than it was three years ago, and it will be different again three years from now. It's a never-ending job to stay on top of it."

Author Bio Mike McNamee is a Washington, D.C., writer.