How one company regularly tracks health-care costs and figures out how to reduce them
Perhaps no bill gets a CEO's blood boiling more than the monthly health-insurance invoice, and small, growing companies are arguably the ones hit hardest by those spiraling costs. Case in point: Springfield Remanufacturing Corp. (SRC), an engine rebuilder based in Springfield, Mo. Since its founding, in 1983, the company has grown and profited from applying the principles of participative management, and its 640 employees have become accustomed to sharing significantly in the profits. So in 1988, when a 48% increase in health-insurance premiums and a threefold increase in pharmaceutical insurance premiums had to be covered by draining $60,000 from the bonus pool, everyone at SRC took notice. Says CEO Jack Stack, "That's when we decided to attack our health-insurance premium with a manufacturing mentality.
"When we price a product, we first take it apart and analyze it," Stack says. "You need to know the cost of the labor and overhead for each component. From that, it's possible to track costs over time and fix the price variances. You can apply the same method to health insurance."
To find exactly what was causing the price variance of its health insurance in 1988, SRC conducted a detailed analysis of claims filed with the insurance company. "At first all we saw was a clump of claims," says Gary Brown, the SRC benefits administrator. "But after a few months we sorted them into 19 major categories." Armed with that information, SRC developed preventive programs that eliminate or reduce health-insurance claims at their source. Each program targets a specific troublesome claim area, and many are tied to goal-based incentives. Also, SRC had an opportunity to reduce costs by customizing its insurance offerings to its employees' needs. Since SRC is big enough to self-insure -- simply paying a third-party administrator a 15% fee to process its claims -- the company can get more from its health-care dollar by fine-tuning the mix of what it will and won't cover.
"Most companies simply shift the cost increases to employees, but we went beyond that," Brown explains. "All of us are so financially involved in this company that the money was coming out of our own pockets one way or another. That was a powerful incentive for everyone to participate in the programs to drive down costs."
To combat the pharmaceutical rate increase, for instance, SRC did what any manufacturer would do to a supplier that tripled its costs in a year. The company began soliciting outside bids for its prescription business. "We had been spending $60,000 a year, and one grocery-store chain came in with a very competitive bid that cut our costs by $30,000. As part of the deal, it agreed to provide us with data about who was buying what, so we could predict our purchases of maintenance drugs and buy more generics and in greater volume," says Stack. Later he applied the same principle of volume-purchasing power to strike a deal with a local hospital.
Overall, Stack was able to wheel deals with his employees, a third-party administrator, a pharmacy chain, and a local hospital, to pare down the cost of health insurance while improving the health care of SRC employees over the long term. Since 1987 SRC has held its per-employee premium rate steady at $2,500 -- a full 30% below the 1991 national average of $3,605 -- while maintaining health care comparable with that of other area businesses.
On the following pages is a description of the monthly itemized health-care bill that Gary Brown tailored to guide SRC's health-care cost-containment efforts. Brown and Stack explain how they use the form to track costs and spot variances.
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Offering Wellness Incentives
"One year," says Brown, "we had a physician come to SRC and conduct a no-frills 'health-risk' physical for interested employees that measures weight, cholesterol, and blood pressure. Employees who met all three of the time-based goals they set with the doctor were eligible for a drawing for a color TV. There was also a $10 reward for each goal met. It did the trick. Employees lost an average of eight pounds each, the average cholesterol reading dropped 19 points, and no one's blood pressure has increased. We think this program gave us a tenfold payback on our investment of $3,900, but it's difficult to quantify the effects of such long-term health-care investments."
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Categorizing the Claims
When Brown first asked his third-party administrator for a breakout of all claims by diagnosis, he discovered that 22% of the total annual costs were maternity related. What's more, two-thirds of the childbirth claims were due to "complications." "One premature baby is an automatic $150,000 hit to the bottom line," he says. "We have a very young work force, and many employees are starting to have their first children. We wanted to provide a program that would help reduce the costs and the anxieties associated with that experience." Now mothers-to-be attend company-sponsored prenatal programs covering nutrition, substance abuse, and other basics. Since SRC instituted the program, not only has the company not had to pay for another preemie, but the associated cost of disability leaves has also been eliminated, more than covering the cost of the program.
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Joining Forces to Negotiate Bids
"For a while I was a member of the Ozark Business and Medicine Coalition," says Stack. "We were supposed to solve problems, but we weren't getting anywhere in terms of cost containment. I realized if businesspeople were going to get any action on this issue, we'd have to form our own coalition, and we did -- 45 companies with the purchasing power of 60,000 people. We knew that was a lot of clout, so we asked the three local hospitals to bid on our business. One offered us a 30% reduction if we reached certain volume levels. Since we now pay about $500,000 per year in hospital bills -- about half our total premium -- we can really drive the cost down with this type of program."
