The Examined Health-Insurance Bill
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.* * *
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."
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.
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."
Tracking the Key Ratio
Subtracting the insurance-company adjustment (a discount that takes into account SRC's track record) from the Total Authorized Charges gives you what SRC actually paid out. That, expressed as a percentage of Total Charges Considered, gives you the key ratio. Most of the time it hovers between 60% and 65%. If employees are paying more than 40% between their $200 deductibles and their 30% copayments, then Brown looks at the total reductions -- items not covered by SRC insurance for which the employee must pay out-of-pocket. "I want to find out if there are things our policy should be covering but isn't," says Brown. "I want to make sure we are driving down costs and not simply shifting them to employees."
Educating the Employees
"Hospital emergency centers seem to be taking the place of family doctors," says Stack. "The emergency wards are open after working hours and on weekends, and we found that many of our employees were using them for convenience. Problem is, a visit to the emergency room costs $100, compared with a doctor's visit of $40. Employees were willing to pay a premium for the convenience, too. Their share of the bill was $30, compared with $12 for a doctor's visit. To get employees interested in using doctors more often, we published a list of family doctors and explained the cost differential in our monthly newsletter."
Challenging Your Bills
"I can delve into this line [Miscellaneous hospital charges] and find out how much we are paying for every box of tissues," says Brown. He has gone so far as to find out that the gloves the hospital charges $2.47 a pair for can be bought for 18¢ a pair from the hospital's supplier. "I do that research to make a point. When hospital administrators tell me they raise their costs only to cover inflation, I have proof that's not the case. That makes them take me seriously when I dispute unnecessary charges. It also helps impress upon employees the need to double-check hospital bills. We also give employees a small bonus if they find overcharges."
Deciding Where to Spend Insurance Dollars
"Since we started tracking, dental-coverage costs have migrated to the front of the pack," says Brown. "We found that only 40% of companies offer dental. So the first thing a new hire does is go get the family's teeth fixed. We don't want to cut the dental benefit, but we are asking, 'Can we afford cosmetic things like braces, or should we emphasize preventive maintenance? Currently, there's a product that coats children's teeth to prevent cavities. It costs about $32 per tooth, but it may be worth covering it, since cavities are more expensive than that."
Saying No to Brand-Name Drugs
In 1989 SRC asked the grocery-store chain that provides its employees with pharmaceutical drugs to break out the quantities and costs for each purchase made. The summary also compares brands with generic alternatives. From those bills, it's easy for Brown to spot "maintenance" drugs, like blood-pressure pills, that can be purchased more cheaply. To encourage the use of generic drugs wherever appropriate, SRC increased the name-brand deductible from $5 to $6 per prescription, and decreased the generic deductible from $3 to $2. Since then, generic-drug usage has doubled to 37%. "This could translate into a 35% reduction in costs," says Brown.
According to Brown, the trend is for psychiatric care to increase, especially for children between the ages of 8 and 18. To get a jump on the trend, SRC has been sponsoring seminars for kids of SRC employees. Thus far it has sponsored seminars on substance abuse, nutrition, and athletics -- an appealing and healthful alternative to drugs. "There are no results to measure in such a program," explains Brown. "Instead, we measure its popularity."
Devising Low-Cost, Effective Programs
"When we encountered our first case of substance abuse," Stack recalls, "we sent the patient to recover at a treatment center 'in the peace and serenity of the Ozarks.' It wound up costing us $30,000. That was too much. In 1988 we worked out a deal with the local council of churches to put together a no-frills substance-abuse program for $2,000 per person. So far 15 people have gone through it. Employees get two chances. After that, they are fired. Because we've grown from 450 employees to 650 employees in a span of five years, it's difficult to measure straight reductions. But I think if we hadn't developed the program with the churches, substance-abuse problems would have cost us $450,000."