59

QUALITY
As implied by the title of this hearing, quality is a6 essantial to HCN as cost: As such, HCN hes

‘Within the last few months, it has become clear to us that the foliowing principles must guide the
extent and type of our Involvement in future community based qualty intiatives:

1 ‘Those who deliver care are the only ones who cin truly manage care. Therefore, purchaser
involvement should be focused at the highest level feasible given the scope af the project.

2. Patent outcomes are Improved by managing the delivery processes that drive the outcomes.

3. Before an endeavor is undertaken, thought mutt be given to the impact it wil have on the
entire industry.

4. Valid date is & prerequisite to improvement.

tn order to promote the use of valid data, HCN encourages the use of strong operational
definitions that are consistently applied and exerises due dliigence in the manner with which
Wt accepts data from provider and othar community sources.

tt is HCN's concem for the consistent epplicatkn of operetional definitions that forces it to

CONCLUSION

‘Athough we recognize our operational structure an! degree of success are not necessarily
replicable throughout the Uniied States, we do view HCI as a prime example that communty based,
employer driven market reform works.

Having already established a community presence by 2onsolidating a fragmented purchaser's set
into a critical mass which negotiates lower prices and encourages quality improvement initiatives,
HCN wall continue to take catalytic type action which impacts the underlying structure of the local
Gelivery and financing of hesith care. When doing 20 we recognize that reactions by providers,
insurers, and managed care organizations in response to or as part of our activities has @ positive
effect in our communtty.

Given the changes currently occuring in Southeastem Wisconsin, It is highly Bkely that HCN's future
activities wil:

- Create other structures which continue tc enhance the working of an organized
market.


25

TESTIMONY OF PAUL FRONSTIN
EMPLOYEE BENEFIT RESEARCH INSTITUTE

Introduction

Mr. Chairman and members of the committee, I am pleased to appear before you
this morning to discuss employer responses to rising health care costs. My name is
Paul Fronstin. I am a research associate at the Employee Benefit Research Institute
(EBRD, a nonprofit, nonpartisan, public policy research organization based in
Washington, DC. EBRI has been committed, since its founding in 1978, to the
accurate statistical analysis of economic security issues. Through our research we
strive to contribute to the formulation of effective and responsible health and
retirement policies. Consistent with our mission, we do not lobby or advocate
specific policy solutions, I would ask that my full statement be placed in the record.
Currently a majority of workers receive health insurance through their
employers.! In addition, over 60 percent of nonelderly Americans participate in an
employment-based health plan. The employment-based health system has been
evolving since World Wat I, with employers being very active in the development

and implementation of cost management strategies.

‘Cost Management Strategies

Employers’ use of cost management strategies in health care has become
more prevalent as a result of the growth in employment-based health insurance,
third party reimbursement, and technological advances. Responding to rising
health care costs, employers have moved to managed care, which can be defined as
any type of intervention in the provision of health care services or reimbursement
of health care providers that is intended to provide health care services in the most
efficient settings. These interventions not only include the movement of
individuals into health maintenance organizations (HMOs) but also include
increased employee contributions for health insurance premiums and increased cost

sharing in traditional fee-for-service health insurance.


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida

BILL THOMAS, California CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, Jr., Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee
AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
JIM McCRERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, lowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas LF, PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts

MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PHILLIP D. MOSELEY, Chief of Staff
JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH
BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada JIM McDERMOTT, Washington
JON CHRISTENSEN, Nebraska GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois JOHN LEWIS, Georgia

AMO HOUGHTON, New York
SAM JOHNSON, Texas

ab


May 12, 1995

Mr. James Wrocklage
Executive Director
Health Care Network

250 Bishops Way Suite 300
‘Brookfield, WI 53005-6222

Dear Jim:

‘We feel that, us a major self funded employer with a lage number of active and retired employees
in the grester Mikwankes area, our participation in the Health Care Network (HCN) has had a
meaningful impact in controlling our health care cost increases. We have participated in ICN
since its inception, We have found that health care costs at locations where employees have ah _
indemnity plan available have generally increased 2: a faster rate than we've experienced in the
‘Milwaukee area.

We feel it is important however, that all employers, both lange and small, have the opportunity to
participate in purchasing initistives of this nature. The cooperative environment in which HCN
developed has proven beneficial for our community as « whole.

Very truly yours,

Joho pene )ba-

R Van Viiet
Corporate Benefits "anger

JEV/sn

stor


79

Surveys consistently indicated high satisfaction with MediCALL.
It was seen as a nurse in the family. We benefited by having
hands-on awareness of employee health care issues. We made some
minor plan changes to improve and address problems and opportu-
nities as they appeared. We put in automated health care data sys-
tems for patient tracking and reporting and, rewarded employees
for discovering and correcting billing errors. We became fully self-
insured and self-administered, got very involved in community and
government reform efforts, but still all of that was not enough.

In 1991, we faced again double-digit health care inflation, and
cost-shifting in the health care community caused further premium
and expense increases. Holding the line had become almost impos-
sible. It seemed that our employees and the plan were the last ones
in America paying retail for health care services. So, in 1991, we
joined the move to managed care.

The selection of our managed care partner was critical. We con-
ducted a nationwide search of HMO and PPO programs along five
criteria.

First was network coverage. With our broad expansion, we need-
ed a program that could cover, we felt, at least 75 percent of our
employees.

We wanted an emphasis on quality that was demonstrated by a
strong commitment to measuring and ensuring the highest quality
of care.

Projected cost savings: We had repriced the plans to make sure
that savings would be there.

Utilization control, a strong retrospective review of network pro-
viders for utilization and billing patterns.

And a program that would be customer driven.

After careful review, we chose CAPP CARE Preferred Network
as our managed care partner. To introduce the plan—and this is,
I think, something that was significant—we employed what we
would liken in the restaurant industry to a soft opening. Essen-
tially, minimum changes were made to the benefit plan in the first
year except to forgive a hospital admission deductible when an em-
ployee chose a CAPP CARE hospital. The emphasis was placed
upon discussing the advantages for employees. This included refer-
rals to providers that had been prescreened for quality, lower out-
of-pocket expenses, and providers who would accept assignment of
benefits with no upfront payment.

Initially, only about 15 percent of our employees chose the net-
work providers. However, that demonstra’ a higher satisfaction
and lower costs than other employees.

Specific employee testimonials were shared with the message
“think what would happen if everybody used CAPP CARE provid-
ers.” Today our network coverage has grown to 90 percent through
aggressive expansion.

rough the end of the first year of the partnership, over $3 mil-
lion had been saved in reductions from billed charges, not to men-
tion savings from improved utilization patterns. For the first time,
there would be no increase in employee premiums. Basically, 4
years later, we are still in a position with no increase in employee
premiums and reduced out-of-pocket expenses, as I mentioned; phy-


15

Despite these encouraging results, the health care cost crisis is
by no means over. A large part of employers’ favorable experience
in 1994 is a one-time savings due to moving employees from a
higher-cost plan to a lower-cost plan. The underlying factors driv-
ing health care costs—the aging population, expensive new tech-
nology, and cost-shifting from government programs and the work-
ing uninsured—have not gone away.

At the same time, managed care has the potential to deliver
long-term savings by emphasizing prevention, more efficient care
and better outcomes. To help achieve that potential, employers will
have to face new challenges with new measures of success. Quality,
access and effectiveness of care—issues employers haven't had to
deal with in the past—will now be of greater concern.

Thank you.

[The prepared statement and attachment follow:]


74

Mr. ENSIGN. I would like to thank the panel.

Before I turn it over to Mr. McCrery, Ms. French, you mentioned
some savings at the University of California by implementing some
of the ideas that you have outlined. You mentioned $65 million,
$624 per year per enrollee. Would you consider that those sav-
ings—if somebody was asking you, would you consider that a cut
in your employee services?

Ms. FRENCH. No, as a matter of fact, 1 wouldn’t. The bulk of that
savings really came from the price of the gross premium, not from
shifting that cost to employees.

Mr. ENSIGN. The reason I mention that is because you hear a lot
up here on Capitol Hill about our attempt to save Medicare by im-
plementing some of the ideas that you have outlined in your testi-
mony that we will be cutting Medicare, we will be slashing Medi-
care’s budget.

If we are able to save $300 billion over the next 7 years because
we are able to implement some of the changes that you have imple-
mented, would you consider those a cut or a slash in the Medicare

udget?

Ms. FRENCH. I think you have to look at the costs to the member
versus the cost of the program as a whole; and when you compare
those two things in our environment, the cost to the member has
not increased very much at all, only about 2 percent in that period
of time. So the cost savings that we are talking about, the 17 per-
cent off the gross premium, has really come out of the plans.

So in answer to your question, no. If your relationship works like
that, I would not consider that a cut in the program.

Mr. ENSIGN. In your opinion, do you think that what you have
implemented at the University of California would be applicable to
the Medicare population?

Ms. FRENCH. | think the Medicare population is a little more dif-
ficult to deal with. It is largely still in a fee-for-service environ-
ment. It is moving slowly into an HMO or managed care environ-
ment. One of the earlier panelists remarked that there is an edu-
cational or a learning curve involved there. I think it can be done.
I have seen it happen in our population, but it takes time.

Mr. ENSIGN. Thank you.

Mr. McCrery.

Mr. McCrery. Ms. French, let me just follow up on that. I
thought I heard you say that you have experienced significant sav-
ings among your Medicare population; is that correct?

Ms. FRENCH. That is correct.

Mr. McCrery. How have you done that?

Ms. FRENCH. We are moving in through Medicare risk programs.

Mr. McCrery. What do you mean by that?

Ms. FRENCH. By that, I mean, if they are in an HMO, that they
will receive all of their care from the HMO. They will no longer be
available to opt out and use Medicare on a fee-for-service basis out-
side the HMO.

Mr. McCrery. Anything else?

Ms. FRENCH. That plus the gradual shift of that entire popu-
lation into HMO’s per se.

Mr. McCrery. How are you shifting that population to the
HMO’s?


82

Mr. ENSIGN [presiding]. I want to thank the panel.

Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Thank you.

I won’t ask the panel what their opinion is of the claim that has
been made that managed care reduces costs primarily and simply
by negotiating hospital discounts.

What is your opinion of that analysis?

Mr. HUSTEAD. P think HMO’s, in particular, use discounts as well
as the management of the care through the primary care provider.

Mrs. JOHNSON of Connecticut. Is there any difference in the mix
now and 5 years ago? In other words, what proportion of the cost.
savings was the result of negotiated agreements with hospitals, 5
years ago versus now?

Mr. Husteap. I am not sure. I do know that hospitals are a
much lower percentage of the total cost now, through all the con-
trol measures, but the hospital discounts you mentioned actually
now go throughout the economy. It is no longer just HMO’s; it is
all insurance plans, all employers are negotiating hospital dis-
counts.

Mr. Treat. If I might add, discounts are just one factor in reduc-
ing costs. The philosophy of managed care is providing the right
care, and as I mentioned earlier, there is a push to measure the
quality being provided by vendors in terms of patient satisfaction
surveys, outcomes measurements and so forth; and that knowledge
and experience will just increase over time. But, again, discounts
are just a small part of the overall.

irs. JOHNSON of Connecticut. Would you enlarge on how those
other things actually affect the cost structure?

Mr. TREAT. If we can determine through outcomes measurement
processes that care is better provided a certain way, the logical out-
come of that is that you will not be providing unnecessary care
and, that way, costs are reduced.

Mr. FRONSTIN. I would have to agree, it is a combination of dis-
counts and decreased utilization. Not only have HMO’s been nego-
tiating for discounts, but other types of health plans have also been
negotiating for discounts as well as just employers provide their
own care to their own population of workers.

Mrs. JOHNSON of Connecticut. I am interested in your comments
because it appears to me, from having watched the system evolve
at fairly close range, that hospital discounts were more important
to soft savings initially and now it is more the system’s ability to
determine what is appropriate care, get prevention in there early,
and things like that that have to do with quality and appropriate-
ness and elimination of excess care.

Mr. TREAT. You are absolutely correct.

Mrs. JOHNSON of Connecticut. The more information you can give
us about that in the future, the better off.

I did want to ask you, Mr. Treat, about this chart that you gave
us. I don’t understand why point-of-service plans are doing as poor-
ly as you report they are doing, when for small employers they
clearly are dramatically lower cost.

Mr. TREAT. One of the things I didn’t mention earlier is that in
1993, 46 percent of the employers offering point-of-service plans
were in the West region where costs were actually already very low


108

‘Qrisinal Vienettes (41)
‘Managed Mental Health Care
(Revised 12/18/93)

‘The following vignettes are summaries of managed care (MC) cases, Decisions about who can be in treatment,
‘bow long treatment can continue, what type of treatment patients can have, and who can provide it, are being made by the
‘MC companies. While they state they are basing decisions on “medical necessity,” the cotpanies cannot be free of a need
to themselves be profitable. Unformnately, the cases below are not atypical.

‘Ten year-old "Susie" was involved in a tragic and frightening sccident, She and ane parent escaped, but the other parent
‘and her sibling died. “Susie" became mute, and began drawing pictures of alittle girl with a noose around ber neck,
‘The surviving parent brought "Susie" to their HMO. *Susie* began therapy, but her pictures became increasingly darker
(a symbolic indication of deepening depression and increasing suicidal risk). After the ninth session, the parent found
“Susie” about to make a suicide attempt. This was reported to the therapist (who had not yet earned a master's degree)
arth 10 selon. Tis HMO therapist oacade ramen with he 10 ssion stag that "Susie" ahold be"
finished. "Susie" was still mute and suicidal. Fortunately, the parent had some money available to pay for therapy
-without insurance coverage. The parent asked a friend for a referral outside the HMO and found a psychiatrist who
offered a reduced fee. “Susie” was soen three times/week for 18 months, It took 12 months before "Susie" began to
speak again.

2," "Masy," a depressed woman with several physical problems related to her emotional disorder, was denied therapy after 8
visits, even though her policy allowed up to 20 visits. The therapist (licensed) strongly recommended further treatment,
"but the eves (ot eased) refs autoriation saying tht be had ben nici not Lp approve any oupaet
‘treatment beyond 8 sessions regardless of the diagnosis or provider recommendation. "Mary* was too depressed to
appeal. Within a month, she was hospitalized for severe gastric distress and required surgery. The therapist believes
this was caused by inadequately treated depression.

3. "Jane," a depressed and suicidal woman, bad finally lef het physically abusive husband. She called her MC company
for permission to begin therapy and for a referral, The request was refused. The reason given was that "domestic
violence is a social problem, not a psychological problem."

4, "Sean," an adolescent boy, asked tobe in therapy. His mother called the MC company for permission for bim to begin
therapy and for a referml, *Scan* stated he would not be comfortable seeing a male therapist. No list of network
therapists is published, s the mother could not find an appropriate referral herself. The company agent refused to offer
‘the name of a female therapist, though there were many inthe network in that area. Despite many protests by the
‘mother, the agent gave only names of male therapists, stating: “Listen, if you're sic, it doesn’ matter who you see
‘And if you don't take the names I gave you, I can't help you anymore.”

‘5, "Rosa," a young mother with 3 young children, cuts her wrists. Her HMO approved only 8 sessions. The
believes her symptom is due to feelings of anger at the responsibilities of motherhood. As the oldest of 9 children
‘herself, “Rosa” had been over-burdened with responsibility asa child, for her own mother was unable to care for the
children. Without appropriate treatment, "Rosa* will not likely understand the reasons for her distress. She will ikely
‘continue to cut ber wrists, possibly escalating to serious cuts, ‘The potential] for child abuse is also present should "Rosa
begin directing her anger outward instead of toward herself,

6, “Henry,” a middle-aged man with a childhood history of being severely humiliated, requested treatment due to
interpersonal prob difficulty

bul "Henny
of having to divulge information to the company was too humiliating for him.
(over)


39

Mr. FRONSTIN. It may be more effective to—the nonelderly are
moving into managed care, and they are used to the system; and
as they move into Medicare, they are more likely to accept the
managed care than the current Medicare population.

Mr. HouGuTon. Thank you.

Mr. ENSIGN. Mr. McCrery has another question.

Mr. McCrery. Thank you, Mr. Chairman.

There is nobody on any of the panels today from companies that
have gone to a MSA-type structure or plan, but there are a lot of
people who contend that we are never going to get the growth rate
in health care costs down unless we get the individual more in-
volved in the costs, the true costs of providing health care, and
managing his own costs, managing his own health care. They see
MSA’s as a way to do that though I am not talking about the Medi-
care population right now; I am talking the non-Medicare popu-
lation.

In your studies, have you looked at any of the companies that
have gone to these type plans? Some of them have gone to them—
even though they are not tax favored, they have gone to them any-
way, and the experience—as we have been told, has been signifi-
cant savings.

Have you looked at any of those and could you comment on
those, and if you agree with those experts who say we have got to
get the individual involved in the cost, whether it is enough just
to have a managed care plan where you have got a gatekeeper and
that kind of system.

Mr. HusteabD. I have chaired the American Academy of Actuaries
work group on MSA’s. We recently completed our work, and in-
volved actuaries from all aspects of—those who work with MSA’s
and those who don’t.

We see that they are cautiously optimistic on what MSA’s might
do. Where an individual is in a typical fee-for-service plan and
there are no controls in place, there can be savings achieved. How-
ever, we have to question if you take an employee from an HMO
or a managed program and put them on their own in a high-de-
ductible plan we are not sure they can each achieve the savings
that are there now.

In our study we asked these companies that have reported sig-
nificant savings to open their books to us and tell us how they have
done. We have heard a lot of headlines and a lot of numbers being
thrown around, but the ones that did respond to us had very little
and very inconclusive data; and the larger ones that have talked
a lot about it just have refused to respond. We tried to get their
data, so we could really study it, and it was not forthcoming.

So we are cautiously optimistic. If it does happen, if MSA’s are
enabled and they are successful, they will achieve that success very
slowly. I would guess if you enacted MSA’s this year, maybe by the
year 2000, 5 percent of the people in the country would have MSA’s
and high-deductible plans.

Mr. McCrery. Does either of the other two gentlemen want to
comment?

Mr. TREAT. I agree with those comments. I am concerned that—
where the threshold might be, where you create a perverse incen-
tive for someone looking at cash and a buildup of an MSA versus


DEPARTMENT OF HUMAN RESOURCES

3 sac A ALL
* Milwaukee County =>
* ganas a EGERG
GARY J, DOBBERT + DIRECTOR ae
JOHN H. GIVENS, fil + DEPUTY DIRECTOR JERTRA RAMOS
~ Eoptoymers 8 Sevtng
Free
‘YA FACSIMILE - 724.2976 Somers
=
Exrpiayenent Meteors
‘May 12, 1995 us vomene
‘Mr, Jim Wrocklage
‘Executive Director
HUN Health Care Network of Wisconsin
250 Bishops Way, Suite 300
Brookfield, WI $300$-6222
‘Dear Jim:

Milwaukee County government, as a board mamber of Yeakh Care Network of Wisconsin and « large
employer with a self insured indemnity medical plan, is happy to provide confirmation of the benefits
realized through the “Necwork's" successes in controftins health care costs,

Through direct provider discounts (hospitals, physicisrs aod othor ancillary modical cere providers),
“Centers of Excellence" services, guarentesd "package' res, etc., Milwankee County has achieved
substantia medical cost savings. There have been favors le responses from our employees who now just
pay their co-insurance without fear of baing billed for en outs above, “usual, cusmmary and reasonable
fee shots, Alen, withthe growth of fw Newer. providers fave ban more wing tcoopente wth
payers in quality of care and cost containment efforts.

Such successes by the Network in acting as a catalyst in slinuinating unnecessary cost and in suppressing
the amount of medical cost increases ultimamely benefit te uocpeyers af Milwaukee County who pay for
the salaries and benefits of our public employees.

We support your efforts on our bebalf through your testimony to the House Ways and Mess
‘Subcommittee on Health.


35

drop by 1.1 percent. And it is the management of the employers in
shifting employees into lower-cost plans that has resulted in the
drop in costs.

Mr. Husteap. I think there is a mix of things going on with
health care. It is always difficult to tell. Clearly, the insurance
companies and the HMO’s are all pretty fat and happy these days.
Blue Cross, I think, for instance, increased their reserve position
by 75 percent last year. The HMO’s have built to the point where
they have rates that are more than adequate for their coverage;
that is the way they are able to hold costs down.

At the same time, there is a shifting going on. The key question
for the future is, having shifted into a PPO or an HMO or a point-
of-service plan, will those operations then be able to have trends
that are below average, or will they all just go back up to the same
average trend?

We all hope that they will be able to not only control costs when
they go to that new organization, but keep costs down, but we real-
ly don’t know yet.

Mr. McCrery. It appears to me, looking at your charts—some of
your charts, Mr. Treat, that a significant number of large employ-
ers, particularly, have carved out their drug programs. Is it pos-
sible that much of the savings that we are seeing comes from shift-
ing, so to speak, their prescription drug benefits to a mail order
program?

Mr. TREAT. In the total cost that we are measuring, that includes
carved-out programs so that even though they are supplied by an-
other vendor in a different approach, the cost is included.

Mr. McCrery. Yes. My question is getting back somewhat to
Mrs. Johnson’s question about deep discounts.

Mr. TreaT. Typically, the plans in a noncarved-out approach—
prescription drugs, et cetera—would be included as subject to a de-
ductible and subject to a coinsurance whereas in a carved-out ap-
proach, typically retail, which is a low copay, $5, $6, $10, $12, if
there is a mail order program in place, typically you are getting 90-
day supplies with a single copay, so in fact the benefits under a
carved-out approach typically are better benefits than they were
under the copay—I mean, under the deductible/coinsurance. ar-
rangement.

Mr. McCrery. Isn’t it true that the reason there are better bene-
fits for the employee is because of deep discounts the employer gets
through a mail order or similar arrangement——

Mr. TREAT. But the deep discount is supported by efficiencies in
providing the services.

Mr. McCrery. While that may be true, let me get back to my
original question.

You said that there has been a per employee decrease in cost and
that is due to better management. My question originally was, how
much of that decrease might be due to shifting to a mail order drug
program? How big a factor is that in the overall cost for employers?

r. TREAT. That is a question I don’t know, and perhaps when
the full survey data is available, we could see. I don’t know at this
int.
PoMtr. HusteEaD. We find that there is not a lot to be saved in mail
order; it is an efficient way of providing the service, but it is not


67

GE Afecical Systoms

you are aware, General Electric has been @ participating employer in HCN since its

It is clear to us thal our participation in HCN over the past seven and a half
years has had a meaningful impact on controlling our health care costs In Milwaukee
while providing access to quality providers desiable to our employees,


104

‘improvement.
helped lif *Steven's* mood and eliminated almost all panic attacks. However, “Steven” then began manifesting

increasing manic symptomatology, including spending sprees. Restarting Lithium, which had been helpful in the past,
‘ow led to an organic brain syndrome, ‘To be hospitalized under his MC plan, "Steven" would have had to enter the MC

‘an involuntary
‘month of manic symptoms, influding spcading sprees. The cost to “Steven” was great in terms of financial,
‘interpersonal and emotional effects before the manic symptoms remitted with outpatient treatment.

8, "Barbara" was in individual and group therapy before a MC company took over her insurance, She had been sexually
* abused by her grandfather in many horrifying ways between the ages of S and 12. She was also abused by a neighbor at
age 12. Marital sex was accompanied by terrifying flashbacks of the abuse. The therapist was told by a reviewer to
“hury it along." Unfortunately, the symptoms bad worsened becuse "Barbara" was given a new assignment at work
‘which required her to work with men about the same age as ber grandfather. Also, she had recently undergone her first
gynecological exam, which left her psychologically disorganized for several weeks. The reviewer, a psychiatrist, asked
if "Barbara" was suicidal. When the therapist said she was not, the reviewer disallowed further group treatment, stating
she was just “following company policy." Group treatment, in addition to individual treatment, is often extremely
{important for sexual abuse survivors.

9. “Linda” was in treatment for about 1 1/2 years before a MC company took over. "Linda” was unable to tolerate
anti-anxiety medication, but did respond to psychotherapy. ‘Toward the end of the second year, "Linda" witnessed her
22 yard ugh beng hit by ny, envng bra. quaiplec, “Linde” sypnms increased drat. She

Was likely manifesting signs of Post Traumatic Stress ‘The therapist called the reviewer for permission to
continue treatment. The therapist was told: *Well, doctor, sor lene ll you omening We are going to cut you off - be
‘Prepared - its coming down the pike soon!"

10, *Allison” had been sexually abused by two of her brothers for several years during childbood. She was raped as an
‘adolescent,

said: "Listen, we are not interested in providing optimal treatment. We are interested only in providing that which is
absolutely medically necessary.*

11. "Bill" is usually in conisol of his anger, but when he loses his temper, he threatens his pregnant wife with a loaded gun
‘lis therapist was encouraged to complete the work in 8-12 sessions. Although the reviewer agreed this was a
“Jongc-term® case, he stated that i is not the company's policy to provide long-term treatment.

12, ean a he late 0, poe pan in os bras hough be fund no lump on self-examination, Het HMO
doctor also found no lump. “Jennifer,” suspecting a problem, asked for mammography. The docior, who also acted as
“gatekeeper,” stated that the HMO does not pay for mammography for women under $0 unless there is a physical
finding upon examination. With this refusal, “Jennifer had a mammogram outside her HMO at her own expense. The


45

Fifteen of the seventeen companies participating in this year's negotiations provide a financial
incentive for employees to select the least cost plan offered to them. This approach encourages
employees to act as partners in selecting health plans which offer the best value for the money.

NO COST SHIFTING: WHERE DO PRICE REDUCTIONS COME FROM?

A key part of the negotiations was an agreement by all HMOs that any cost reductions given 10
PBGH companies would not result in increases to other employers or populations. While itis
difficult to monitor whether or not this in fact occurs, we do know anecdotally that other
companies in California last year experienced a downward trend,

In this year’s negotiations we are asking each managed care plan to describe how they are
supporting cost reductions through efficiencies in medical management and administration,
California has more than five hundred hospitals which are only half full, and more than 80,000
physicians, one per approximately 400 people (the average primary care doctor has roughly
2,000 patients). Seventy percent of the physicians are specialists. More than 30 HMOs are
licensed by the California Department of Corporations, and there is tremendous overlap in
managed care provider networks. As purchasers, we do not want to sustain the cost of this
unnecessary capacity. We will continue to put pressure on health plans and providers to
restructure, to eliminate excess capacity, to adjust physician mix to better meet the needs of
enrollees, and to teengineer processes of delivering care. Not only will significant cost savings
be achieved through these efforts, quality of care will be improved and consumers will be better
off.

EMPLOYER COMMITMENT TO QUALITY
PBGH employers are very concerned that heaith care payments are not reduced to the point that
quality of care is compromised. For the past several years, PBGH members have worked
collaboratively with health plan medical directors and representatives of hospitals and medical
groups to gauge the quality of health care. Key accomplishments include two published
consumer report cards (see Attachment C) on: (a) employee survey results measuring
satisfaction with health plan coverage, service quality, and costs, and satisfaction with physician
and hospital care, and whether or not prevention/health promotion services were received; (2)
chart review data to determine the delivery of population-based preventive services, such as
prenatal care, cholesterol tests, and pap smears. Where available, national measures, such as
those published by the National Committee on Quality Assurance (NCQA) are followed.

PBGH works with researchers at the University of California at Berkeley, San Francisco, and
Santa Barbara, as well as RAND, the New England Medical Center, and the Health Outcomes
Institute, and the Federal and state governments, to assure that all studies are of the highest
research caliber.

Asa strong demonstration of their commitment to advance health plan and provider performance
measures and data collection, PBGH employers established a Quality Improvement Fund totaling
over $1 million, Monies are also being used to research consumer perspectives on report cards
and disseminate decision support tools for them. A key criterion for Fund projects is that they
benefit all Californians, not only the employed insured population,

STRATEGIC ALLIANCES/FUTURE GOALS

St. Louis and Denver business coalitions are replicating the PBGH mode) in 1995. Strategic
alliances are also being formed with regional employers in Seattle and Portland. ‘The successes
of PBGH can be transferred readily to other communities, especially those where purchasers,
in both the public and private sectors, are eager to increase enrollment in managed health care
plans.

Jn addition to expanding its large employer membership, future plans for PBGH in California
include transferring the successes in group health to workers’ compensation and disability,
integrating data across all benefits, and exploring the inclusion of medium/small businesses in
the Alliance.


87

Employees are another key to controlling our costs. We have
done extensive communication and education programs to develop
our employees into wise medical care consumers. After having de-
livered these programs to employees, we are focusing on incentives
that motivate them to be good consumers. We do this through pay-
ing them one-half the savings they find in hospital billing errors
and by reporting fraud. We are currently looking at paying the em-
ployees a retrospective dividend of $100 as a way of saying thanks
for actively working to control medical expenses.

Evidence that our employees are wise consumers is shown by the
average number of outpatient visits but significantly lower inpa-
tient admissions and lengths of stay than expected. This is what
we call the worried well syndrome. Our plan members go to the
doctor often but generally for mild problems or early-stage symp-
toms. We have encouraged employee usage of outpatient care be-
cause it reduces our costs through early treatment intervention and
greater protection against the higher cost claims of hospitalization.
This appears to be effective, shown by the low hospital usage.

In 1990, our inpatient psychiatric admissions were twice the ex-
pected rate as was the length of stay. Mental health was our sec-
ond most expensive category of care. The benefits department met
with our employee assistance program to provide us with a plan
that would bring these costs under control. We communicated these
changes to employees. The plan changes increased accessibility of
outpatient mental health, increased the number of covered visits by
placing a liberal cap on charges per member per year, and nego-
tiated rates with providers and encouraged members to seek help
whenever needed. We also put very restrictive coverage for inpa-
tient care and limited it to 14 days in most cases. This change fell
in line with our philosophy and that of the AMA that 75 percent
of all diseases are stress related and that if focus is placed on deal-
ing with this stress at an early stage, morbidity would be signifi-
cantly reduced, thus reducing the higher cost claims.

Employees have viewed this as a positive step and have taken
advantage of this coverage. Since making this change, the plan has
saved over $250,000 per year.

In 1994, an employee survey showed a 94 percent satisfaction
rating on their health and welfare benefits. This satisfaction rating
has remained consistent since 1992. This level of satisfaction has
not always been the case. Implementing managed care in 1990 was
not without its travails and anguish. Employees were upset with
the loss of total freedom of choice they had with indemnity, were
confused about the regulations of managed care and wanted grand-
father clauses for their care. In some cases, we did grandfather
mental health and maternity indemnity coverage for one year. Our
communication program continued through these trying times, and
by 1992, most of the angst had passed and employee satisfaction
quickly soared.

Is it okay to continue or do you want me to stop?

Mr. ENSIGN. That is fine. The rest of your written statement will
be included in the record.

[The prepared statement and attachments follow:]


8

The last issue I would like to touch on is the growth in Medicare
and private-sector expenditures. There are available to us all
charts and graphs prepared by a host of private consulting firms.
Some show private health expenditure increasing at a slower rate
than Medicare; others show private-sector spending above Medi-
care. None of the numbers are the same. Perhaps the most accu-
rate numbers I have seen are from the Health Care Financing Ad-
ministration’s [HCFA] 1995 analysis of the National Health Ex-
penditures Account. While total Medicare spending is projected to
increase faster than private-sector expenditures, when they are ad-
justed for enrollment growth in Medicare, Medicare and private

ealth insurance expenditures are anticipated to grow at almost
exactly the same rate, 7.9 percent for Medicare and 7.6 for private
health insurance.

I offer these thoughts to emphasize that there are lessons to be
shared both ways between the private sector and Medicare. This
hearing | think will be more fruitful if we keep that in mind.

Thank you, Mr. Chairman.

Chairman Tuomas. I thank the gentleman from California for
his usual really constructive comments; and he is absolutely cor-
rect, no other program—certainly not those in the private sector—
are going broke like Medicare, according to the trustees report.

I ask for the first panel, please—Mr. Hustead, Mr. Treat, and
Mr. Fronstin.

Chairman Tuomas. I thank the panel. I would tell any of the
panel that if they have a written statement, it will be made a part
of the record, without objection, and you may proceed for 5 minutes
to inform the subcommittee in any way you see fit.

We will start with Mr. Hustead and move across the panel.

STATEMENT OF EDWIN C. HUSTEAD, SENIOR VICE
PRESIDENT, HAY/HUGGINS CO., INC.

Mr. HustTeaD. Thank you, Mr. Chairman. My name is Edwin C.
Hustead, senior vice president with the Hay/Huggins Co., Inc.,
former chief actu: of the Office of Personnel Management, cur-
rently chair of the American Academy of Actuaries Work Group on
medical savings accounts [MSAs].

I would caution, as many of us will and as we have heard al-
ready, that solutions that work in the private sector may not nec-
essarily be transferable both to Medicare and vice-versa. However,
they all deal with the same basic problem and that is, when the
patient, the buyer, is facing the physician, the seller, there is no
economic buyer involved in that transaction. And each system in
its own way is dealing with this basic problem which, in effect, cre-
ates a monopoly.

Since 1990, as you have noted, employers have moved rapidly to
adopt a series of steps to involve a third party at the point of trans-
action. Our charts show that both the dlassic health maintenance
organization and the more recent additions of preferred provider
organizations and point-of-service plans have grown very rapidly
until, together, they now all outweigh the number of traditional
fee-for-service plans.

_ The result is hard to measure. There is much background noise
in what is happening in the health sector, particularly in pre-


EXPERIENCE IN CONTROLLING COSTS AND
IMPROVING QUALITY IN EMPLOYER-BASED
PLANS

TUESDAY, MAY 16, 1995

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, DC.
The subcommittee met, pursuant to call, at 10:09 a.m., in room
1100, Longworth House Office Building, Hon. Bill Thomas (chair-
man of the subcommittee) presiding.
[The press releases announcing the hearings follow:]

aM


42

another area of activity; we are also considering initiatives in the
small employer market.

In conalusion, the challenge ahead for us is to improve the qual-
ity of care while pressuring plans and providers to reduce ineffi-
ciency, to wring out excess capacity, to quickly disseminate and
adopt best practices, and to reduce the prevalence of inappropriate
and/or unnecessary care, which is both expensive and harmful to
the health of our employees. We firmly believe it is possible both
to reduce costs and to improve quality, and that improved quality
of care is the primary avenue to effective cost control.

Thank you.

[The prepared statement and attachment follow:]


3

HEN Employer Premium

{PPO Pian)
PremiumTM

immed Fut Ave. %
Dale Singie Eemy Family Chance
Janz $63 $135 $267 1%
denG3 $75 $183 SHE 18.1% 13%
saves $74 3101 3912 -1.8% AK
Jan-06 861 $178 $HM2 88K 15%

HCN Medical Intoree Veta

‘Number ot Numberof Ave. Sze
‘Date Emoqvess bmoboyeen «of Grup

JuG2 238 1858 086
Jon 03 248 1.636 eat
Jan94 227 4.251 saz
JuB5 233 1,005 on

“In addition lo the premium savings, the PPO Pish has a bener benett, dus to a tower coinauurow uel to the
insured ff network providers are used.

“Premiums shown are for a Single Male Employee, age 36, 8 Sing to Mato Employes witl: one uiviki, and «Mele
Employee, Age 30 with 2 spouse and wo children, as of the date shawn. Tho rates chown are for Nihwavdews, Zip
‘622. Tha plares shown have u deductbie of $500 and a Stop Loss level of 95,000 Tha PPO plan hase coinewrance
Of 20% in-network und BO% out-oF-nemwork. The CMO pian hes # coinsurance of 80%. Matemity coversyc ie
included.

eke i
‘Tike: Paneativa Director, |


82

care issues. Plan design changes were made to address problems and opportunities as they
appeared. Automated systems were created for patient tracking and reporting. Employees
were rewarded for discovering and correcting billing errors. GMRI built heroes of those
employees who by example conveyed the image of smart health care consumers. Eligibility and
enrollment procedures were tightened. GMR! became fully self-insured and self-administered.
Community and government reform efforts took on increased priority.

But it still wasn't enough! The cost shifting in the health care community caused further
premium and expense increases, our previously stable insurance costs returned to double-digit
inflation. Holding the line had become almost impossible. It seemed that our employees, and
the plan, were the last ones in America paying “retail” for health care services. So, in 1991,
GMRI joined the rush to managed care.

Our Move to Managed Care

| will tell you that our decision to venture into managed care was not an easy one. We initially
had concems about the impact it would have on our employees, the quality of their health care,
and the logistics of a plan which could reach the majority of our 200 or more market areas.
Philosophically, we favored outcomes management and quality improvement initiatives over
discounted fees as long-term solutions. But like most companies in 1991, the promise of
significant cost savings was a driving consideration.

The selection of our managed care partner was critical. We conducted a nationwide search of
HMO and PPO programs along 5 criteria:
* Network Coverage -- Our target was to cover at least 75% of our covered employees
with a commitment to meet expansion needs
* Emphasis on Quality — Strong commitment to measuring and ensuring the highest
quality of care through provider selection and contracting
* Projected cost savings -- A large sample of historic claims were ‘repriced” to estimate
our potential savings under discount contracts
* Utilization control - Strong retrospective review of network providers for utilization and
billing patterns
* Customer Driven -- Open and enthusiastic response to the development of new
programs and features.

After careful review, GMRI chose the CAPP CARE Preferred Network as our managed care
partner. To introduce the pian, GMRI employed a soft-opening approach. Essentially, minimal
changes were made to the benefit plan except to forgive a hospital admission deductible when
an employee chose a CAPP CARE hospital. The emphasis was placed upon discussing the
advantages for employees. These included:

‘¢ Referral to Providers screened for quality,

‘* Lower out-of-pocket expenses. and

‘+ Providers who accept assignment of benefits with no up-front payment,

Initially, only 15% of the employees chose network providers. However, those that did enjoyed
far higher satisfaction and lower costs than other employees. Specific employee testimonials
were shared with the message "think what would happen if everyone used CAPP CARE
providers!” After six months, an employee satisfaction survey found that those employees who
used the network were over 90% satisfied- higher than those in non-network areas. CAPP
CARE pursued an aggressive network development campaign to bring network providers to
those areas where it didn't exist. GMRI prioritized the expansion plan.

As a result, more and more employees began benefiting from the availability of preferred
providers. By the end of the first year of the partnership, over $3,000,000 had been saved from
reductions from billed charges, with additional savings from improved utilization pattems. For
the first time in many years, there would be no increase in employee premiums. Encouraged
by these positive results, GMRI made plan changes to place stronger incentives for employees
to choose CAPP CARE providers. Penalties were raised for out-of-network hospitals.
Physicians were paid at the CAPP CARE preferred rate thereby allowing the employee to retain
their choice of physician with the requirement that, if they charged more than the PPO rate, the
‘employee would pay the difference. Videos featured employee testimonials on how easy it was
to use CAPP CARE providers and how much employees and the company could save by doing
80. Employees were counseled in how to recruit their physician into the network, assuming
successful completion of the stringent credentialing requirements imposed by CAPP CARE.


EXPERIENCE IN CONTROLLING COSTS AND
IMPROVING QUALITY IN EMPLOYER-BASED PLANS

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MAY 16, 1995

Serial 104-18

Printed for the use of the Committee on Ways and Means

eo

‘U.S. GOVERNMENT PRINTING OFFICE
92-605 WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-052023-1



108

‘There are no checks and balances, since Managed Care answers only to
insurance companies and business profits, not professional guilds, licensing

boards, oc agencies and codes of ethics, Managed Care has total, arbitrary
control and can dismiss without cause, No laws govern their operations,

Professions and agencies, competing for survival, are victims of their own.

powerlessness under the abuse and fascistic rule of managed care, Powerlesmess
corrupts values and ethics, Therapists and administrators mindlessly identify

with the aggressor and comply with demands. All Mental Health professionals are

confounded in their thinking under this oppression, Managed Care is
incompatible with Mental Health, Mental Health professionals are afraid of
Josing their livithoods if they don't “ride the wave." Victims are treating
victims, unwittingly participating in a pernicious mutation of Mental Health
practice.




109

VIOLENCE AGRWST MENTAL HEATH
managed Care's msn i 4 daciease vkieonin, of Manin Wonath Tascrac oes.
seat oq, micromanacing —Harapists & ceuble-lasking peeats. finy adeonp
perce ne conan otis § att ty col ome
wet Eapace ob Ret seme as Hace! bulkrert Ute, to gain pote weenhrot over
aie viens

i
4

HER

A Adapla Grom POuER AND COnOL WHEEL developed by Dowstie Abuse Tniovestion Picject,
Duluth, MN {See Sxanple fellas


Related EBRI Publications

“The Future of Employment-Based Health Benefits.” EBRI Issue Brief no. 161 (Employee Benefit
Research Institute, May 1995),

Sarah Snider, and Paul Fronstin. “Sources of Health Insurance and Characteristics of the Uninsured:
Analysis of the 1994 Current Population Survey,” EBRI Special Report SR-28/lssue Brief no.158
(Employee Benefit Research Institute, February 1995).

Paul Fronstin. “The Effectiveness of Health Care Cost Management Strategies: A Review of the
Evidence." EBRI Issue Brief no. 154 (Employee Benefit Research Institute, October 1994).

Paul Yakoboski, et al. “Employment-Based Health Benefits: Analysis of the April 1993 Current
Population Survey.” EBRI Issue Brief no. 152 (Employee Benefit Research Institute, August 199).

“The Changing Health Care Delivery System: An EBRI/ERF Policy Forum.” EBRI Issue Brief no. 148
(Employee Benefit Research Institute, April 1994).

William Custer. "Health Care Reform: Examining the Alternatives.” EBRI Issue Brief no. 147
(Employee Benefit Research Institute, March 1994).


89

In the EPO network- 98.4% of members utilized network providers for office visits
99.1% of members utilized network hospitals for inpatient care

Inthe PPO network- 75% of members utilized network providers for office visits
87% of members utilized network hospitals for inpatient care

STK views managed care as a four-legged platform. The legs are comprised of the
employer, employees, providers and a third party administrator and the platform itself is
quality medical care. We feel that each leg must communicate with the other legs in order
to be successful. For this reason, the benefits department meets regularly with the
employees through focus groups to understand their needs and satisfaction with the
programs. We meet frequently with Aetna, our third party administrator, as well as with
our highly utilized hospitals and provider groups. In these meetings we discuss concerns,
exchange data on utilization and costs and develop strategies to address issues. By doing
this we feel that each party understands clearly where the other “legs of the platform” are
focused. As an example of this, we noted in 1991-92 that our largest medical expense
was in pregnancy and childbirth. We met with two of the local hospitals to ask how they
could help us control expenses and assure us a high quality of care for our members in this
area. Their response was to enhance their facilities into birthing centers, provide an
educational program for pre- and post-natal care and they participated in successful
negotiations with us to provide package rates for their services. We believe this occurred
because we developed an open dialogue and were able to create a partnership with them
in responding to our needs.

Another advantage of managed care is the ability to provide cost control measures while
assuring that quality of care is being delivered. As an example, the chronic passive motion
machine is somewhat new technology that orthopedists use frequently on their patients
after knee and hip surgery. Studies have shown that there is no advantage to using this
machine over standard physical therapy and has no effect on improving outcomes; for this
reason we provide only very limited coverage. Another example is autologous bone
marrow transplant for end stage metastatic breast cancer. We have an employee who
requested this therapy, which was controversial at the time. Aetna worked with us in
evaluating this last effort treatment for efficacy. Though very expensive ($250,000) and
risky, it appeared to be a plausible treatment and, in an attempt to save this woman’s life,
treatment was approved. She underwent the treatment four years ago and is currently still
employed as an engineer at STK. Other advantages to network care are the ability to
perform case management on high cost, complicated claims and utilizing centers of
excellence that can control costs while delivering the highest quality of care for specific
cases.


84

prescription (if necessary), file notes to the medical record and even bill the payer — all
electronically. We view such initiatives as the inevitable future of managed care.

in Summary

We are now convinced that by actively and continuously managing an employee health care
plan, you can accomplish the seemingly contrary goals of lower costs, improved quality, and
increased satisfaction. For General Mills Restaurants, managed care is more than selecting a
network of providers. It's the blending the highly personal touch of our own MediCALL program
with CAPP CARE's leading edge practice guidelines and health information systems. It means
coordinating the broad spectrum of health care from initial eligibility through claims
administration and large case management to workers’ compensation and COBRA. Perhaps
ultimately, it is about giving employees the information and support they need, at precisely the
moment they need it, to make good health care choices — within a managed framework of
quality plans and providers.


12

If the hypothesis is correct then we may finally have broken the back of the underwriting cycle.
One very troublesome feature of that cycle is that it has resulted in artificial effects on the
national health care debate. The alarming peak of the cycle leads to widespread calls for health
care reform, The reform proposals take several years to develop and, by the time they are ready
for consideration, the low part of the cycle causes us to relax and wait for the next cycle to
consider large-scale reform.

Quality

Most of the employers we work with are very sensitive to the quality of health care provided to
their employees. They work with the HMOs, PPOs and other organizations to assure themselves
that the controls being used do not result in a deterioration in the quality of health care provided
to their employees. This assessment is done through a number of feed back mechanisms such
as employee surveys.

Outcomes measurement, a relatively new tool, shows promise of quantifying the quality of
health care, These systems measure the quality of treatment from a number of perspectives
including the most critical one of the success in curing the patient. Employers and insurers are
working with providers to develop effective outcomes measures.

A ctitical part of many employer packages is the choice offered to the employee. We find that,
when offered as a choice, well managed HMOs and similar organizations, will attract 4
significant and growing portion of the employee group. By maintaining a traditional FFS choice,
oF an out-of-network benefit, employees can always use unmanaged care if they become
unsatisfied with managed care.

As risk is shared to smaller units through carve-outs there is a danger that quality will be lost.
For example, if a separate organization is in charge of all mental care then there is a danger that
the critical co-ordination of mental and physical treatment will not be effective. This could easily
result in a deterioration of care.

Future

Health care cost increases have been very difficult to predict. Even when the underwriting cycle
was predictable, it was difficult to be optimistic when rate increases were very high. Conversely,
it is difficult to be pessimistic when, as is the case today, rate increases are low.

Our best guess at this point is that rates for 1995 will average about 5 to 10 percent higher than
in 1994, This is lower than during the underwriting peaks but is still significantly higher than
general inflation. Even at these relatively low trends, health care will continue to grow as 8
percent of our economy.

‘The trend toward tightly controlled health care plans, that is now becoming the norm in the
market, appears to have significantly lowered health care costs. The critical question now is
whether the cost controls put into place will reduce future health care cost increases to near the
rate of general inflation. If so, then major health care reform may not be needed. If not, then
health care will continue to consume a greater share of the economy and major reform will be
needed.

Again, thank you for the opportunity to address the Subcommittee on Health. I will be happy
to address any questions on these important topics.


54

‘TESTIMONY BY MICHELE E. FRENCH, FOR THE UNIVERSITY OF CALIFORNIA
MAY 16, 1995 MEETING OF THE SUBCOMMITTEE ON HEALTH OF THE
HOUSE WAYS AND MEANS COMMITTEE

Mr. Chairman, members ofthe Subcommittee on Heath ofthe Commitice on Ways and Means, 1 would like to
thank you for the opportunity to testify before you on cost-comrol and quality improvement in employer medical
plans

My name is Michele French and I am the Director of Health and Welfare Benefits for employees of the University
of California system.

‘The University of California isthe second largest employer in California, with nine campuses, five teaching
bospitls and three research laboratories plus various agricultural and remote esearch locations

Of the 96,200 working 20 hours or more and eligible for “career* benefits; almost 99% are enrolled in a
medical plan.

4,900 parttime employees are eligible (or “catstrophic” medical coverage and almost 70% are enrolled,
“The remainder have declined University coverage because they have coverage elsewhere. (The University
automatically enrolls these employees in the catastrophic plan unless dhey sign a form waiving coverage.)

33,000 retirees receive the “career” medical benefits.

40-45,000 student employees bave access to medical coverage via student services programs at each
campus,

Medical coverage is provided to nearly all employees through a choice among 6 HMOs, a pointof-service plan, a
preferred-provider indemnity-style plan or a catastrophic plan. The University comributes towards these plans for
ceuployees, their spouses and their dependent children, Retirees have access tothe same medical plans and are
cligible forthe same maximum contribution amount as is available to employees. We require Medicare enrollment
for retirees and their spouses when they become eligible and pay the “Part B" as part of the maximum University
‘contribution

Historically, this contribution was based on the weighted average cost ofthe four largest plans, These were the
‘most popular, not the most cost-effective plans so the averaging method included some of the most expensive
programs. Given this contribution strategy, many of the medical plan carriers did not need to compete on the basis
of price, they only needed to keep their cost below the maximum available University contribution

Since they were not competing on price, HMOs, in particular, competed on the basis of stight variations in benefits
~ such a8 zero copayments for office visits or low prescription drug cosis. There also were subtle variations in
‘coverage that might encourage those with more expensive conditions to select other plans; for example, higher
copayments for infertility services.

In 1993, the University was faced with the third year of budget cuts and the necessity 10 develop more economies in
the area of benefits, While we wanted to reverse or, at least, slow the cott trend of our medical plans, we also
‘wanted to maintain quality, a full memu of choices and stability in the programs. To this end, we adopted 2
“managed competition” strategy by:

+ setting the maximum contribution atthe level ofthe most cost-efficient plan;

: increases;
+ putting the carriers at risk for meeting agreed-upon performance standards,
‘implementing Medicare “risk* plans for retirees enrolled in HMOs.

‘The University's medical plan costs have declined by $63.$ million, or $624 per employee/retiree since 1993,
despite the inctease of almost 4,600 primary lives in the same period. Most of the reduction comes from the effects
of setting the contribution atthe lowest cost plan, thereby forcing ‘market competition” among HMOs. Rather than
passing the costs 10 members, these plas redoced their gross premiums, some by a8 much ar 10% in a tingle year
‘The total decrease in the medical plan premiums since 1993 was almost 17%. The second largest single source of
savings was implementation of the Medicare risk plans in 1995 for two of our largest HMOs, in addition to the two
plans already converted to rsk-style benefits. This saved $4 million dollars, reducing the 1995 retiree cont by
approximately 5%.

‘The University's 1995 average cost per employee is $2,847, compared to the 1993 national average of $3,358.
‘This has been achieved without any major reduction in coverage. And the premiums paid by employees are
generally modest. For HMO coverage, the employee coat ranges from $0 to $45 per month for 2 family plan. The
‘cost for # family enrolled in the poiat-of-service program is not quite $11 per mouth.

We believe we have achieved sustainable cost-fficiencies without compromising the quality of benefits or care for
cour plan members,


96

to a lot of employers, and that has been their experience; you get
few significant savings, but it really does heighten awareness.

Mr. REIKER. In terms of fraud and hospital billing errors, it has
been very insignificant. I think we provide the incentives for em-
ployees to actively participate as health care consumers, and I
think that has been much more successful and has greater cost
savings.

Mr. SPENCE. We have put in some very sophisticated billing er-
rors or billing problem checks, clinical logic in our claims system
volume, and intensity management in our PPO system, so we pick
up a lot there and refuse them, which are much more sophisticated
than employees; and employees are more of a public relations

ung.

Me ENSIGN. The reason I brought that up is because you hear
that there is so much fraud in Medicare, that there are gross
abuses. That is controversial. Some people think it is a very small
percentage and the amount of saving that we could get with these
incentives to seniors; I think I would tend to more with you
that it will be more of a show that they actually have something
to save the government and themselves money as far as the buy-
in to some of these new techniques that will save us a lot more
money.

I thank you both for your testimony. It was excellent.

(Whereupon, at 12:15 p.m., the hearing was adjourned.]

(Submissions for the record follow:]


75

Ms. FRENCH. That has been driven primarily by the price. The
traditional indemnity program has become extremely expensive as
it compresses into higher utilizers and a smaller population, so
gradually people are moving out of that program into the managed
care programs.

Mr. McCrery. Explain to me how if your retiree population is el-
igible for Medicare, how have their prices increased?

Ms. FRENCH. Excuse me?

Mr. McCrery. How have their prices increased if they are in
Medicare?

Ms. FRENCH. The population that is in Medicare can be priced
one of two ways. It can remain in a fee-for-service environment,
which is more expensive even though they are less expensive as a
group than the employees—if you compare the retirees who are in
the fee-for-service programs to retirees in the HMO’s, straight line,
the ones in the HMO’s or the managed care products are running
at a lesser cost.

Mr. McCrery. Yes, but when your folks retire, you say that you
help pay their part B premiums?

Ms. FRENCH. Yes, we do.

Mr. McCrenry. Is that all you do? Are they in the Medicare sys-
tem?

Ms. FRENCH. They are in the Medicare system.

Mr. McCrery. And the only assistance you provide them is help-
ing with their part B premium?

Ms. FRENCH. No, that is not the case. They still maintain the op-
portunity to stay in a university-sponsored health plan in addition
to Medicare.

Mr. McCrery. OK. And you control the prices on the university
plan?

Ms. FRENCH. That is right. I don’t control Medicare.

Mr. McCrery. Correct. So for those employees who choose to
stay in the university plan, it is their choice to go into an HMO?

Ms. FRENCH. Yes. They have the full range of choices that we
offer to employees. In that sense, they are treated no differently.

Mr. McCrery. To your employees you only offer them, fully paid,
the low-cost plan?

Ms. FRENCH. That is correct.

Mr. McCreEry. Which is an HMO, I presume.

Ms. FRENCH. It is an HMO. However, the level of cost of that
HMO for an employee is still above what it costs to provide a Medi-
care risk program; let’s give you an example.

We pay about $140 a month for a single party plan. That is
available to a retiree as well. If that retiree is in a Medicare risk
plan, the cost for the risk plan is probably around $40 a month,
so we can also pick up the cost of their Medicare B and still be
within that budget allowance.

Mr. McCrery. So can you translate that or can you think about
it for a second and give us some guidance as to how to change the
Medicare Program at the Federal level to exact some of the same
type of efficiencies?

is. FRENCH. I think the difficulty i is in the approach to the deliv-
ry of service. The Medicare P: rogram has been traditionally em-
bedded i in fee-for-service with self-referral and very little manage-


36

a major impact in the total cost. I think the management and the
carving-out is what does the step.

Again, as with the other changes, the big question will be having
moved to that and having achieved as much as you can through
management and discounts, will you be able to keep the trend
down or not.

Mr. McCrery. OK. Thank you.

Mr. ENSIGN. Mr. Treat, I think it was you who mentioned the
POS plan, the point-of-service plans growing in cost more percent-
age-wise, compared to the other plans. Is that because more people
in the East are now going to that?

Mr. TREAT. That is correct.

Mr. ENSIGN. Are there any studies just in the West? Are the
plans not growing as fast, percentage-wise, where they already
have the plans?

Mr. TREAT. There is not as significant a growth pattern in the
West because that was all—it was already saturated to a greater
extent with point-of-service plans. In the East there were relatively
few point-of-service programs in 1993 and prior to that, and the
growth has been substantial in 1994. So you are starting from a
much lower base in the Northeast. Obviously, you have had a sig-
nificant increase and that has diluted the effect of the lower cost
on the West Coast. What you look at, it looks like an increase in
point-of-service costs. In fact, it is a geographical shift.

Mr. ENSIGN. You also indicate in your testimony that health
costs per employee actually fell about 9.7 percent in the Northeast
from 1993 to 1994. Is that part of what is going on, the Northeast
is going to point-of-service as some of these other plans were?

Mr. TREAT. Absolutely. There has been a significant shift from
indemnity plans to managed care plans in the Northeast. Unions
have accepted or embraced managed care plans more readily.

Mr. EnsiGN. OK. When we are talking about HMO’s and we are
talking about some of the cost savings attributed, you hear some
physicians say that this is because they are denying services be-
cause they are gatekeepers.

HMO’s—in their defense, say that they are not denying, they are
encouraging people to go for appropriate services, not inappropriate
services, and their studies show that their quality of results—in
the long run, they actually end up with better quality of results.

What is your opinion on whether HMO’s are actually denying
valuable services to patients or whether they are, through better
management techniques and practice guidelines, actually directing
patients to more appropriate treatments?

Mr. HusteaD. I think I would come down on the latter, that
clearly where there is no management involved, there is a lot of
overuse of health care. Not only in HMO’s, but other organizations
have shown how much can be saved by taking a quality approach
to what happens, looking to the gatekeeper. I think the evidence
is that there is very little movement out of HMO’s by those that
join HMO’s, plus the fact in the point-of-service plans that three-
fourths of the care is selected in the networks suggests that the pa-
tients certainly are satisfied with the quality of care.


48

- ATTACHMENT B -
1996 Performance Standards

7)
Bi

NEGOTIATING ALLIANCE ALLIANCE

2 rerhmnay en Sra 4S

Customer Service
Me res which have penaltes atta¢

Claim tumaround time 15 days & 30 days

ID card tumaround

EOC and member material distribution

Average speed to answer by live voice

Telephone abandonment rate

‘Time to respond to written correspondence

Member notification of PCP disenrollment & group notification of medical group change

Measures which are reported only (no penalties are
Claim financial accuracy

Claim transaction accuracy

Ciaim pending

Initial call resolution rate

Identification of member services calls

New member contact

Identification of written correspondence

res which have Iu
Pian satisfaction

Plan dissatisfaction
Satisfaction with physician
C-section rate
Mammography rate

Pap smear rate

Childhood immunization rate
Prenatal care rate

Diabetic retinal exam rate
Cholesterol screening rate
‘Wellness program communications

Me i ic
PCP tumover rate

‘Open PCP/member ratio

PCP / specialist ratio

Formulary compliance rate

Genenc substitution rate

Provision of Data
Additional HEDIS measures
Encounter data capture
‘Third party management
Smoking cessation


53

we wanted to keep the quality of the program, so we adopted a
managed competition strategy.

We set the maximum contribution at the level of the most cost-
efficient plan. We standardized the HMO copayments. We added a
point-of-service program. We set caps on the increases for 1995 and
1996.

We have also put the carriers at risk for a percentage of their
premium for performance guarantees; and we have implemented
Medicare risk plans for our retirees who are enrolled in HMO’s.

In that 2-year period, our costs have declined by $63.5 million,
or about $624 per employee or retiree. Most of that reduction is
from the cost competition among the HMO’s. Rather than passing
those costs on to their members, they chose to reduce their pre-
miums; some of them dropped premiums as much as 10 percent in
a single year.

In a 2-year period, our total decrease in medical plan costs is
about 17 percent. The second largest savings is in implementation
of Medicare risk plans. We dropped our retiree cost about 5 percent
by implementing that for the two largest plans.

In 1995, our average cost per employee is $2,847. That compares
to the 1993 national average of $3,358. We have done this without
any major reductions in coverage, and the premiums paid by the
employees are modest. An HMO member will pay anywhere from
zero to $45 a month for family coverage, and our point-of-service
family plan is $11 a month charge. So we think we have achieved
some sustainable cost efficiencies without compromising either the
benefits or the quality of care that we provide to our members.

Thank you.

Mr. ENSIGN. Thank you.

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78

{Recess.]

Mr. Ewnsicn. I would like to call the panel forward: Jon R. Reiker,
vice president for benefits, General Mills Restaurants, Inc., Or-
lando, FL; James P. pence, senior manager, Corporate Insurance
Benefits and Medical/Wellness Services, Storage Technology Corp.,
from Louisville, CO.

Mr. Reiker.

STATEMENT OF JON R. REIKER, VICE PRESIDENT FOR BENE-
FITS, GENERAL MILLS RESTAURANTS, INC., ORLANDO, FL

Mr. REIKER. Thank you. My name is Jon Reiker. ] am vice presi-
dent of benefits for General Mills Restaurants. I appreciate the op-
portunity to testify today regarding our company’s demonstrated
successes in using managed care programs, and principles to con-
trol health care costs and quality in our company and the commu-
nities in which we operate.

With more than 126,000 employees, General Mills is one of the
25 largest private-sector employers in the United States. Our res-
taurant operations—Red Lobster, the Olive Garden, and China
Coast—employ over 115,000 workers in 49 States and in Canada.

Unlike many U.S. corporations, our employment has grown
sharply. We have added 20,000 new jobs in the past 2 years and
more than 60,000 new jobs since 1988. It has been critical to our
continued growth that we find a way to offer high-quality, competi-
tive benefit programs which are affordable to both the company
and to our employees. The collective changes which I will cover in
this testimony have resulted in a reduction in cost per participant
of over 50 percent since the introduction of managed care in 1992.

These savings have been accomplished without any increase in
employees’ premiums or any cutback in benefits, and with a signifi-
cant reduction in employees’ out-of-pocket costs.

I think to fully understand the programs and the process of in-
stalling those, I need to give a little background. I can tell you, that
our decision to venture into managed care was not an easy one. We
felt strongly that health care should be bought on the basis of qual-
ity and not discounts and that long-term solutions would have to
be based on outcomes.

We initially had concerns about the impact that managed care
would have on our employees, the quality of their health care, and
the logistics of a plan that could reach the majority of our 200-plus
markets in which we operate. But like most companies in 1991, the
promise of significant cost savings was a driving consideration.

Since 1986, we have been actively involved in an extensive and
relatively successful war on the cost of health care benefits for both
the employee and the company. Under the banner of “Teaming Up
to Tackle Health Care Costs,” General Mills Restaurants initiated
steps based on a theme of shared responsibility and shared sav-
ings. The group health plan was simplified so participants could
better understand how to use it. We introduced MediCALL, a pro-
gram of company-employed registered nurses who serve as patient
advocates, assisting employees through their health care encoun-
ters by providing health care education, arranging second opinions,
and counseling on how to maximize the use of the benefit plans.


88

TESTIMONY OF JAMES P. SPENCE
STORAGE TECHNOLOGY CORPORATION

Storage Technology Corporation (STK) is a high tech firm that manufactures computer
data storage. STK employs 11,000 worldwide, 9,000 domestically and 6,500 at corporate
headquarters in Louisville, Colorado.

We are self-insured and introduced our managed care program in 1990, primarily to
attempt to curb the rapid rise in our medical costs. Since 1990 we have offered two
managed care programs to employees. We also offer a traditional indemnity plan only
where managed care networks do not exist . The first program is a preferred provider
organization (PPO). This program offers a network of providers that have agreed to
negotiated rates for services. Employees have the option of going in network or out of
the network but with higher deductibles, higher out of pocket maximums and a
significantly reduced reimbursement level. The second program is an exclusive provider
program (EPO), this is similar in structure to an HMO. The EPO utilizes primary care
providers as “gatekeepers”. Employees must first see their gatekeeper and receive a
referral prior to seeing a specialist. Employees expenses are covered at 100% with no
deductible. There is no coverage for care provided outside of the EPO network. The
indemnity plan is a traditional plan with 80/20 coverage. Employee premiums are the
same for the EPO product and the premier PPO plan. Premiums have only increased 5%
since 1990. Prior to introduction of our managed care plans our total medical costs rose
11% in 1988, and 46% in 1989. With implementation of our managed care program, 1990
saw a 5% decrease in total medical costs. Between 1990 and 1994 our total medical costs
have averaged a decrease of 2% per year. During this time our population has remained
relatively constant (see chart #1). On the other hand, our indemnity plan has increased
11% a year since 1991. As we continue to manage our costs, we are convinced that
managed care is a long term solution for the present as well as the future. We also believe
that managed care is effective in controlling our medical costs without sacrificing quality
of care.

Why have we been successfil in controlling the meteoric rise in medical costs? I believe
the reasons are three-fold:

1. Managed Care- Managed care has clearly been the most important factor in bringing
our costs under control. We offer a preferred provider organization (PPO) and an
exclusive provider organization (EPO) which is similar in coverage to an HMO. We have
65% of our employees enrolled in the PPO which is less restrictive but at a higher cost,
35% in the EPO and less than 1% in the indemnity plan. The EPO, which has tighter
managed controls, has kept the annual benefits paid per employee at an average of $2,600
while the PPO benefits paid per employee is averaging $2,900 (see chart #2 and #4).
Although less expensive, we have not made great efforts to drive employees into the EPO
plan. This is due to employee surveys showing us that employees like some flexibility in
choosing providers, have made efforts to receive their care in network, and have been
excellent consumers in controlling their health care costs.


43

TESTIMONY OF PAUL FEARER
PACIFIC BUSINESS GROUP ON HEALTH NEGOTIATING ALLIANCE

Mr. Chairman and members of the Subcommittee, I commend you for conducting this hearing
‘on employer health care initiatives. 1 am delighted to have the opportunity to speak with you
today.

My name is Paui Fearer and 1 am the Senior Vice President of Human Resources at Union
Bank. My responsibilities include oversight of the benefit plans offered to the Bank's 8,000
employees and 1,500 retirees. Prior to joining Union Bank in 1990, I worked at Stanford
University in human resources for fourteen years.

Tam here today representing the Pacific Business Group on Health (PBGH) and its subsidiary.
the PBGH Negotiating Alliance, of which I serve as Chairman. 1 joined the coalition shortly
after its inception, and participated in its growth from a loose organization of like-minded
businesses to a major force shaping California's health care market.

WHY A LARGE EMPLOYER COALITION?

As the Subcommittee is well aware, over the past two decades rising health care costs have made
this benefit one of the most important cost centers of any business. As an example, Union
Bank's total health care costs are approximately $30 million, From the mid-1980s through the
early 1990s our medical inflation was sometimes in excess of 20 percent. Although the Bank
derived some short term benefit reductions from the pace of annual health care inflation —-
primarily through redesigning benefits and increasing employees’ share of the costs -- we
ultimately recognized that more fundamental reform was needed. Such reforms could only be
accomplished through the combined efforts of a number of employers. The Pacific Business
Group on Health is the preeminent large business coalition in California, and one of the
country’s most active employer coalitions. ‘The nonprofit coalition was founded in late 1989 by
two executives from Wells Fargo and Bank of America to improve the quality of health care and
moderate rising costs.

PBGH (formerly the Bay Area Business Group on Health) expanded its membership from ten
to nearly thirty member companies -- and continues to grow rapidly. Today, the coalition
represents 2.5 million employees, dependents, and retirees, and $3 billion in annual health care
expenditures. Membership in the group is open to both private and public sector purchasers if
they have at least 2,000 California benefits-eligible employees and are not in the health care
business (see Attachment A). Public sector members include the California Public Employees"
Retirement System (CalPERS), the University of California, and the Federal Reserve. Most
member companies have a workforce dispersed throughout California; many employ workers
in multiple states, and some are international. On average, two-thirds of PBGH's California
employees and dependents are enrolled in health maintenance organizations (HMO). Our annual
employee surveys reveal that HMOs rank highest in terms of overall satisfaction.

‘The remaining one-third of California employees is enrolied in a point-of-service (POS) health
plan, or in some cases such as Union Bank, a preferred provider organization (PPO). Very few
employees are enrolled in traditional indemnity insurance health plans.

THE NEGOTIATING ALLIANCE; MOVING TOWARDS VALUE-BASED
PURCHASING

Initially, PBGH primarily concentrated on standardizing health data collection and benefits across
member companies. Recently, however, the organization has taken a significantly mote active
role by negotiating with health plans on behalf of interested members. In 1994 eleven of (at that
time) nineteen members participated in an Alliance to negotiate premiums, benefits, and
performance measures with managed care plans through a process of competitive bidding. The
members of the Negotiating Alliance represented 300,000 actives and early retirees and $400
million in premium with HMOs. Participants in the Negotiating Alliance are bound to an agreed
upon model plan design and the negotiated rates and performance measures. However, plan
contracts are held by the individual employers. In this sense, each employer decides
independently whether to renew, add, terminate, of freeze enrollment in a given health plan.


113

We have a cooperative relationship with our providers,not an adversarial

‘one, so that, together we can provide better mental health care for less money.
A CLINICIANS RESPONSE TO MANAGED CARE

A. Lexperience Managed Care as fascistic, abusive and damaging to
clinicians, and incompatible with mental health and Mental Health practice. Tt
has the seeds of catastrophic portent. Hitler's ideas were originally appealing

to the German people who wanted to preserve their culture and cut costs, He
meant well.

B, I feel that I have been overpowered, intimidated and bullied by some of
my professional collegues working for Managed Care who have identified with the
aggressor and abandoned their humanity, compassion, and their profession.

. IE 1 accept this without confronting the double messages, without
ejecting the role of sacrificial foil, without refusal to embody the conflicts
as a scapegoat, I will abandon myself and will dis-integrate. Then I will be
impaired and will not be able to function as an authentic person or a therapist.

D. Ihave survived by compartmentalizing the therapy, keeping it separate
from seeking authorization for payment of it, The anxiety comes up in the
lattec, when all hangs on my ability to be clear, succinct, and compelling. My
energy is being dissipated in defense mechanisms in order to do
that—repression, suppression, denial, dissociation, depersonalization,
identification with the aggressor, reaction formation, rationalization. This is
what traumatized victims do in order to survive. I have to do this to help
people?

E, Working with Managed Care, therefore, compromises the mental health,
perfocmance, and job satisfaction of the clinician providing the therapy. If I
admit that I am stressed, I expose myself as weak, unfit, and will be
blacklisted, Practice groups don't want to be associated with losers, so this
condemns clinician-victims to silence and isolation—which is the problem we
treat in our clients.

Staff training in brief treatment to better meet the demands of Managed

Care so we will be winners ( and be chosen to remain on provider panels)
perpetuates the myth that the problem is in the

clinicians rather than in the system, and that it can be solved by contralling

the clinicians and forcing compliance with the rules made by profiteers serving


CONTENTS

Press releases announcing the hearing ...
WITNESSES

Employee Benefit Research Institute, Paul Fronstin
Foster Higgins & Co., Inc., Dennis J. Treat
General Mills Restaurants, Jon R. Reiker
Hay/Huggins Co., Inc., Edwin C. Hustead
Health Care Network of Wisconsin, Jim R.
Pacific Business Group on Health Negotiating Alliance,
Storage Technology Corp., James P. Spence
University of California, Michele E. French

SUBMISSIONS FOR THE RECORD

Coalition of Mental Health Professionals and Consumers, Inc., Karen Shore,
statement and attachments
Consortium for Psychotherapy, Judith Storms Kraft, statement and attach-
ments ....

(uD

oT
107


106

upon request. The intention is to provide true discounts for those with limited incomes. The
Board's recommended fee ranges would protect wealthier patients from being over-charged.
High-priced clinicians would have to be able to justify their fees to patients. Caps on fees and
the mandatory use of sliding scale foes could be instituted if-a voluntary sliding scale
adequately control
hare for costs was graduated according to income (e.g.,.citizens earning $30,000
might only pay 5% of hospital bills up to a catastrophic limit appropri
those earning $300,000 might pay 60% of all bills up to an affordable catastrophic limit.
‘Under this system: ) the insurer's liability is limited by the fixed reimbursement, b)
patients and providers, due to a co-payment scaled to the patient's income, become cost- and
utilization-conscious, c) patients could “comparison shop" and have freedom of choice, and d)
practitioners would be guaranteed at least a minimum payment for each procedure (the fixed
reimbursement), yet would retain some independence to compete in a truly free market based
upon training, talent, reputation in the community, and fees.

8. Regional Boards could regulate purchases of expensive machinery; perform outcome studies;
focus on fraud and incompetence, rather than micromanagement; and settle disputes between
patients, providers, and insurers.

9. Government support for building hospital-based and free-standing primary care centers would

reduce emergency room visits and encourage primary care ust

10. Outpatient psychotherapy would cover individual, group, and marital/couple/family
treatment, as allowing children, adults, or families to remain in distress is harmful and costly to
‘our country. Coverage for 40-60 sessions/year is recommended, as: a) 85% of patients use
fess than 26 sessions, even with liberal benefits and no UR (utilization review), b) liberal

jent benefits reduce inpatient costs and, thus, overall mental health costs, and c)

/enting the 16% of patients who need long-term psychotherapy from receiving it may
ease society's costs and harm patients and their families. UR can be used to provide
additional sessions beyond the annual limit for those who demonstrate strong psychological
and/or medical need’ AND financial need. UR would not intrude on session content or personal
information. Inpatient treatment would require UR, but at reasonable intervals. Medication
management would be given the same status as any medical visit. Partial hospitalization,
half-way houses, and group homes would be supported to reduce inpatient costs and the costs
to society of inadequately treated mental health needs. There would be no limit to inpatient
care for the seriously mentally Ill (schizophrenia, bipolar disorder, major depression, severe
borderline personality disorder, etc.), but appropriate UR would be utilized. Patient education
would be developed to explain mental health problems, different forms of treatment and
Psychotherapy, and the educational requirements of different types of clinicians.

11. UR, or at least denials of benefits, would be done by licensed, practicing professionals who
are independent of the insurer, and who have training comparable to that of the treating
clinician, UR would focus only on those procedures known to be over-utilized.

12. Incentives in the form of partial premium rebates could be used to encourage patients to
refrain from submitting smaller claims.

13. Claims procedures would be simplified and stendardized, and claims could be submitted
either by patients or providers.


RRY BLA

ne 200

May 12, 1995
‘Mg, James Wrocklage
HCN

250 Bishops Wey, Suite 300
Brookfield, WI 53005-6222

RE: HCN PPO Savings

Dear Jim,

‘Northwestern Mutual Life Insurance Company bas participated in HCN's network since its
inception in 1989 and participated as a founding employer orgenization. rae faely voli inthe
savings potential available to us and to our employees ¢: 8 participating member

‘The benefit of pusticipating in HCN ts twofold. First, at an employer, our total claims cost is less
as a result of being able to take advantage of discounted negotiated fees with providers. Second,
on employees she i the vgs by reclving = Meher benef and brving » lower out-of-pocket
cost on services received from HCN participating provil

‘As you can see on the enclosed exhibits:

. Over the S-year period of time from 1990 to 1994, we recognized an average suvings af 8%
fur hospital expenses.

+ This translates to an average savings of $330.82 per employee per year or $132.33 per
cyvered member per year.

+ As employees have become more aware of the bene'its of the HCN PPO and as HCN has
expanded its network, our savings have continued tn grow and remain strong.

T would like to add two last important pomts:

1. The savings sbown on the exhibits are "NET" savinys after subtracting out our cost to
participate in HCN.

2. The exhibits only reflect savings realized on hospita: expenses. They do NOT include savings
as a result of fees that have been negotizted for office visits, eb and x-ray work, medical
supplies, exc. Therefore, our true savings are ever: greater than shown on the exhibits.

Ifyou have any questions on the information enclosed, siease call me.

Lomo


52

Mr. ENSIGN. Ms. French.

STATEMENT OF MICHELE E. FRENCH, DIRECTOR, HEALTH
AND WELFARE BENEFITS, OFFICE OF THE PRESIDENT, UNI-
VERSITY OF CALIFORNIA, OAKLAND, CA

Ms. FRENCH. Thank you, Mr. Chairman, members of the commit-
tee. I appreciate the opportunity to talk to you today.

I am going to tell you a little bit about the University of Califor-
nia, give a snapshot of where we were in 1993 and then tell you
what we have done to reduce costs since then.

The University of California is the second largest employer in
California. We have nine campuses, five teaching hospitals, and
three research laboratories, and in addition, we have widespread
agricultural and remote research locations.

We have about 96,000 employees who work 20 or more hours per
week and are eligible for career benefits; 99 percent of that group
is enrolled in some kind of a medical plan.

We have another 4,900 that are part-time employees, that we
cover for catastrophic medical care. We automatically enroll them
unless they decline coverage, and we have about 70 percent of
them in our health plan.

We have another 33,000 retirees who receive career medical ben-
efits. That is a growing group, both in terms of size and cost, over
time. There are also 40,000 to 45,000 student employees who have
access to coverage through student services programs at each cam-
pus.

I am going to talk about the employee population. We provide
medical coverage to nearly all of our employees through a choice
of various plans. We have six HMO’s, a point-of-service plan, and
a preferred provider indemnity plan in addition to the catastrophic
coverage. We contribute to those plans for the employees plus their
family members. And retirees have access to the same coverages
with the same contribution available to them.

We require Medicare enrollment as retirees and spouses age into
the program, and we contribute to the cost of their part B pre-
mium.

Historically, the university’s contribution was based on the aver-
age of the four largest health plans. Those were not necessarily the
most cost-effective plans; they were the most popular plans, so we
had had a couple of very special expensive programs in that mix.
This meant that our—that several oF our plans really did not have
to compete on the basis of price. They only had to stay slightly
below the maximum available university contribution.

Since we have about 75 percent of our population in HMO’s, that
became a fairly costly strategy. Since they weren’t competing on
the basis of price, HMO’s, in particular, competed on the basis of
slight variations in coverage, things like zero copays for office visits
or low prescription drug costs. They also used subtle variations in
coverages to direct more expensive-type patients to other plans—
things like higher copays on infertility services.

In 1993, we were looking at the third year of budget cuts, so we
needed to develop some more economies in the area of benefits.
While we wanted to offset our cost trend and, hopefully, reverse it,
we also wanted to maintain a range of choices for our members and


101

c) Some MSA plans are combined with MCO’s. Again, this penalizes consumers for
using out-of-network clinicians, which limits their choice of providers, especially for those
with a limited income.

2. Retum control over health care fo the citizen:

a) Phase out employer involvement in health care. It no longer works. For employees,
premium money actually belongs to the employee, for itis taken from his/her wages.
Retum this money to the employee so that employed citizens can purchase, own, and
control their own health care plans. Under Medicare, and for citizens with limited incomes,
beneficiaries should be expected to pay a portion of their premiums, based on their
incomes, with goverment paying the balance.

b) ic rights yers have lost under m: ct
privacy, and decision-making). Employees lost these rights because we now expect
employers to pay for insurance, and because employers needed to cut costs once the
patient became separated from the consequences of their decisions under the
fee-for-service system. Citizens have been separated from the fact that it is their money to
begin with, and the greater the separation, the less care they take with that money.

c) In order ict their fir ly ible
care to whatever extent they can afford to be so.

i) Medicare beneficiaries with adequate incomes would buy their own plans, or at
least pay for a portion of their premiums. Government would pay that portion of the
premium which is unaffordable for the Medicare beneficiary or other citizens.

il) Benefit design must create incentives for patients to be cost- and
utiization-conscious, without restricting access to care and other freedoms.
4d) Individual mandates might be considered. Car insurance is required of all who

drive, not just of all who have accidents. Why can't health insurance be required of all who
live, not just those who get sick? While we might wish to protect the freedom of the citizen
NOT to be insured, all citizens must then pay for emergency care and follow-up treatment
when an uninsured individual requires treatment he/she cannot afford out-of-pocket.

3 Protect quality care and consumet freedoms by encourasina citizens fo buy and own thelt
ins. Allow a 100: Il cit health care
plans.

All citizens deserve the tax break now given to employers, especially those who are
self-employed or unemployed, which may include a large number of Medicare
beneficiaries. Also, itis important for a govemment to encourage people to take care of
themselves, so they will be less dependent upon the government for services. The more
health insurance coverage one owns, the less dependent one will be on the government
for care.

4. Guarantee portability of health care plans.
5. Prohibit “pre-existing condition” barriers to treatment.
uarantee all citizens i 's access to “Point-of-Service” opti
Unfettered access to specialists is crucial for those who are il
juarantee the ri f itizens, includin.
with providers of their choice.

In the case that a health plan denies reimbursement for a particular service, the citizen
must still be allowed to purchase health cara he/she believes is necessary. The MCO
might be making incorrect decisions. Medicare beneficiaries cannot currently purchase
psychotherapy except from Medicare providers. If Medicare comes under managed care,
beneficiaries will also frequently be denied more than a handful of psychotherapy sessions,
as is already happening to the general population. Most MCO’s are only allowing "crisis"
care, and are prohibiting true forms of psychotherapy. We cannot make it illegal for
Medicare beneficiaries, or anyone else, to obtain genuine psychotherapy.

8. Allow the States to requlate the managed cate industry,
a) With a true “free market" system, in which the citizen has the ability to make his/her
‘own health care decisions while being given incentives to be cost-conscious, there will be
less need for regulation than there is under managed care.
'b) Managed care plans frequently short-change the patient, and often prevent
providers from advocating for patients and from delivering the best care | they know how to


Premium and Cost Sharing

Firms have been increasingly requiring workers to contribute to health
insurance premiums and subjecting them to direct out-of-pocket provisions. In
1979, employers fully paid for single coverage health insurance for 73 percent of full-
time workers employed in medium and large private establishments. By 1993, only
37 percent of workers had their individual coverage fully paid for. In 1979,
employers fully paid for family coverage health insurance for 54 percent of full-time
workers employed in medium and large private establishments. By 1993, only 21
percent of workers had their family coverage fully paid for.?

There has also been a simultaneous increase in the cost-sharing provisions of
traditional fee-for-service health insurance (table 1). In 1992, 26 percent of surveyed
employers required a deductible of over $200, up from 11 percent in 1989. In 1992, 65
percent of employers required coinsurance of 20 percent for inpatient care, up from
62 percent in 1989. In 1992, 83 percent of employers required coinsurance of 20
percent for physician visits, up from 77 percent in 1989. In 1992, 26 percent of
employers limited out-of-pocket expenses to between $1,500 and $2,499, an increase
from 21 percent in 1989.

Evidence suggests that increased cost sharing does reduce health care costs
and utilization. The RAND Health Insurance Experiment found that individuals
enrolled in health plans with a 25 percent coinsurance rate had 15 percent lower per
capita costs than individuals in plans with no coinsurance. The RAND study also
found that low-income individuals with lower coinsurance rates experienced health
specific gains for high blood pressure, myopia, and dental problems—three
prevalent chronic conditions that are relatively inexpensive to diagnose and treat. If
individuals choose to forego preventive care and intervention services because of
high cost sharing, they run the risk of necessitating more costly services in the
future. This may have the effect of increasing total health care expenditures and
utilization because individuals may be sicker once they seek treatment for a health
problem.

Utilization Review

Employers have increased their use of utilization review (UR) programs
(table 2). These programs are designed to monitor the progress and appropriateness
of health care services on a case-by-case basis. In 1992, 83 percent of surveyed
employers required prior authorization for certain procedures, nonemergency
hospital admissions, and elective surgery, up from 73 percent in 1989. In 1992, 66


About the survey

The Foster Higgins National Survey of Emplover-spensored Health Plans had 2,097 respon-
dents in 1994. Both printed questionnaires and telephone interviews were used
to collect data.

‘The survey was conducted using a national probability sample of public and pri
vate employers. Results are weighted to reflect the demographics of all employers
in the U.S. with 10 or more employees who offer health insurance. Therefore, the
survey results are valid for more than 550,000 employers and 68 million full-time
and part-time employees.

ORDER FORM

If you would like to order a survey report. please provide the information
requested below. The report will be available in April 1995.

REPORT

Comprehensive analysis of data by Foster Higgins consultants, covering tra-
ditional indemnity plans, managed care plans. flexible benefit plans and
retiree benefits.

@ $50

number of copies
REPORT AND TABLES
Report described above and separate appendix of data tables showing.
results of most questions. Breakouts for employer size categories. geu-
graphical regions, and industry groups are given along with the total
response.

number of copies @ $1,000

Prepayment is requited. You may order reports with an American Express
charge card by calling 212-574-9025. Or mail this formn with a check for
the appropriate amount (payable to Foster Higgins) to:

Lisa Gilleeny

Foster Higgins

125 Broad Street

New York, NY 10004

Send repon to:
NAME

ORGANIZATION

ADDRESS.

CITY/STATE/ZIP

PHONE



105

MANAGED COOPERATION
‘A Medical/Mental Health Care Plan
‘An Idea for the future
(revised 2/14/95)

1, The success of a health care plan will depend on the value system upon which it is based.
Cooperation seeks solutions that enhance and are fair to all parties involved.

2. Managed Cooperation optimally balances patient choice and freedom with responsiblility,
instills provider responsibility to the patient, and engenders cost- and utilization-consciousness in
patients and providers.

3. Managed Cooperation can be written in both single and multiple payer versions.

4, Benefit design would encourage patients and providers to be conscious of costs. When little
or no co-payment is expected at the time of service, patients may not be motivated to question
8 provider's fees or suggested procedures. External controls (gatekeepers, case managers, and

izatio'i reviewers) may then be called upon to do this, reducing p: sontrol over their care.
{tis important, therefore, for patients to be financially responsible for their care at the time of
ice to the extent that out-of-pocket expenses are significant enough to the patient that the

rs about fees and recommendations, but not to the point where

out-of-pocket costs are burdensome and present barrier to treatment for those with limited
Sliding scales for premiums, fees and co-payments, deductibles, and catastrophic
limits are all possibilities under Managed Cooperation.

5. We suggest a gradual phase-out of employer involvement in health care. When employers
buy coverage, they may, understandably, seek to control the care given, limiting the freedom of
citizens to make their own treatment decisions, in privacy, with their chosen clinicians. Since
the money used by employers to buy insurance really comes out of the employees’ income, we
encourage a return of this money to employees in the form of income so that they may buy and
‘own their own policies. This returns control over health care choices and decisions to the
individual citizen. The possibility of an individual mandate might be considered.

6; Managed Cooperation relies upon regional cooperation. Cost-containment procedures as
described below would be carried out by Regional Boards made up of consumer advocates,
professionals, government representatives, and insurers (if a multiple payer plan is used).

7. Annually or every other year; Regional Boards would recommend fee ranges and insurance
reimbursement levels for each procedure and send this information to consumers, clinicians, and
surers (the government if single payer systems are used or to insurance companies if a multiple
payer system is used). Insurers would set dollar amounts for each procedure's reimbursement.
Providers would set fees, preferably on a sliding scale, starting with a fee minimally above the
reimbursement, up to a reasonable “full fee.” The co-payment would be the difference between
the reimbursement and the fee for the patient's income level, and could be legally waived if
necessary. Clinicians would provide current and prospective patients with their fee schedule



34

Mr. CaRDIN. But my concern is that—within a capitated plan is
that managing the risks within that plan, or is that identifying
prior to entering into an agreement, that there are certain risks
that we need to handle? You understand my point? Is it just trying
to e the risk within a plan, or is there identification prior
to the selection of the person or the entering into the contract on
a capitated rate?

Mr. HustTeEaD. I think it is largely cost driven, and I think it
probably doesn’t address what you are searching for as helping the
individual by saying “let’s identify people with these particular con-
ditions and let’s deal most cost effectively with them.”

Mr. CarDIN. What I am raising is that with asthma treatment
the plans, or that an HMO has less asthma cases than the typical
population that is out there. Fine. They are managing their asthma
cases in the most cost-efficient way. We appreciate that.

But is there an effort made to have a representative group with-
in an HMO? Or do we find that they are taking more of the easier
cases and not handling the more difficult cases because there—as
a capitated system, you make money by taking in easier patients.

Mr. TREAT. I think that is an argument of probably 10 years ago,
and I think it is less of an ar; ent today.

Another way that managed care vendors will manage risks with-
in the confines of capitation is through centers of excellence pro-
grams where they perhaps could develop global case rates for cer-
tain types of problems and carve out niches that way, have all of
their cardiac problems done at a particular facility or by a particu-
lar organization.

I Mr. CARDIN. Could I just proceed—just for one more moment, if
might?

I appreciate that and that, in fact, is occurring, but we also have
difficulty in financing the academic health centers, and I haven’t
seen many suggestions coming forward with the HMO’s willing to
help pay the extra costs associated with hospital care on training
costs. It is something that we may want to take a look at.

I appreciate the fact that you use centers of excellence for par-

_ticular needs, but we don’t find any real initiatives coming forward

from the managed care community to deal with whether we are
going to have people trained in order to provide the services in
these centers of excellence.

Thank you, Mr. Chairman.

Mr. ENSIGN. Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman.

Mr. Treat, we have talked a lot about costs being controlled by
various changes in employer actions and going more to managed
care. Is it your opinion that it is really not the underwriting cycle,
so-called underwriting cycle, but changes in management fy em-
ployers that are responsible for controlling these costs?

Mr. TREAT. Yes, sir. If you look at the underlying factors, they
are still there—less so than in prior years, but they are still there.
If you look at the costs for each plan type—indemnity, point-of-
service, et cetera—you will see that there were increases between
1993 and 1994, but the shift in enrollment patterns from the high-
cost indemnity plans to the lower-cost point-of-service and HMO
plans has caused the overall cost of health care, per employee, to


58

TESTIMONY OF JAMES R. WROCKLAGE
HEALTH CARE NETWORK OF WISCONSIN

Mr, Chairman, and members of the Sub-Commitise, my name is Jim Wrockiage and | am chief

begin by thanking you, Mr. Chairman, for caling this hearing today and for inviting me to testify.

| hapa that my tetimony tod vA demenetraty our organization's experience in conmroling soets

‘snd improving quality on behalf of our employer cients in Southeastem Wisconsin. Most

irportenty. | wigh to convey the message that the Value of health care (cost/qually) can best be
‘enhanced through focal community based reform which » market driven.

After almost one year of planning, the Greater Miwaukee Health Care Purchasing Pian,

on its voluntary Board of Directors The organization's: migeion is “lo arrange for, promote, and
ainerwite encourage programs and actviles which are signed to promete the general haath of
the community, promote access to quality care in the most appropriate setting, and contain the
increase in costs of health care” To date, the mission vf this Wisconsin non-stock corporation has

‘On July 1, 1987, HCN began serving 10,000 employes: of eight private employers and two public
employers, HCN now serves 51,900 amployees of 250 setf-funded employers and another 47,100

‘employees of 2,000 insured employers who obtain Insurance through 10 ‘These
two groups of employees and their dependents ‘approximately 247,000 covered lives In the
area and Wisconsin. HCN participating employers

greater Miwaukee matropoitan
continue to include public employers such #s municipalities and echoot districts,
‘Through 1989, HCN served only self-funded employers. However, in the interest of wanting to serve
Whether insured or self-funded, employers ranging in size from 2 to 200 employees currently
represent 50% of our business.

COST CONTR:
As 2 demonstration of controling costs. | can report tiat during the time period

ot

through December 31, 1994, HCN on behalf of ail of its clonts has processed 66, ;

hepa cisims totaling bled charges of $307,000,000 tnd 694,800 oupatientcsime totaling bed
for


112

us, call us back, leave messages, fill out forms to extend authorizations for
treatment, If that doesn't work, maybe the client will get tired of your
cancelling appointments because you haven't received the authorization number
yet, and you won"t be reimbursed for the service without it.

3. We will only accept words we want to hear in minimizing, reductionist,
ehumanized terms. We won't consider anything abstract or having to do with
feelings. We have to be able to quantify and measure so we can feed numbers
into our computers and manipulate them for our statistics so we look like we are
reducing costs for the insurance companies,

4, TE you ask for moce sessions, we will punish you by questioning your
competence, not referring any more cases, and banning you from our panel of

providers. We only want providers who "work well with managed care* (who will
cover up for us, lie, not complain, who are willing to abandon themselves and
their integrity in order to help us reduce usage of mental health services so we
can look effective in reducing costs for insurance companies and still make a
profit,

5. If you dare tell clients what is going on and are up front about how
many sessions they can have without you going out on a limb for them (which will
destroy you), you will be punished because we will withdraw our business from
your organization.

6. If you express anger about the position you are in: double binded,
powerless, oppressed, unable to advocate for clients, we will attack you by
calling your boss to suppress any further outbursts, We will warn him that if
he doesnt comply by scaring you into submission that we will assume all his
employees are like you--wimps, upstarts, incompetents who can't play hardball.
We do not want feedback and we will interpret appropriate assertiveness as
mutinous, You should be ashamed for being angry, and you seem to have a
problem with authority.

7. We are so powerful that we don't have to obey the laws about paying you
for services within 90 days, You just have to wait for us to get through our
red tape, Too bad if that means you have to borrow money to survive. If you
ut your interests ahead of our interests, you don"t look like a loyal team
player. (The important thing is that we cut costs for insurance companies and
make money—not you.) We haven't been obeying the law, and we are getting away
with it, ‘Therefore we are right. We can do anything we want.

8. If you make any mistakes and don't meet our time schedules, you are
Punished by not getting paid for the service. We have the power. You don't.
‘Therefore, we are right and you are wrong,


76

ment of access to care. I am not sure that always gets you the best
quality of care, but I think you are talking about an educational
issue as much as a money issue when you are dealing with Medi-
care members.

It is certainly a lot easier for us to work with the Medicare mem-
bers of our population who have already been in an HMO setting.
They understand the delivery. They understand how the system
will work for them, and they are not frightened, if you will, by the
thought of some utilization management.

Mr. McCrery. Thank you.

Mr. ENSIGN. The last panel—and I appreciate the question.
Maybe we will open it to the rest of the panel on Mr. McCrery’s
question; and that is, some of the ideas that have worked in the
private sector, the basis for this panel discussion today is how do
we incorporate some of those ideas into the Medicare Program.

You mentioned education. How do we convince seniors that this
can work because especially as you age, change becomes less at-
tractive. I think when you are in your teenage years, change is in-
evitable, it is just part of life, and you accept it. But as you age,
you like things the way they are, you don’t like to change, so edu-
cation is certainly more important.

How do we educate, but also which of these programs do you
think that we should bring into Medicare? Should we have a list
of choices similar to what Federal employees have, similar to what
the University of California has, whether that is fee-for-service or
whether that is HMO’s and point-of-service plans and on down the
line?

Does anybody else care to comment?

Mr. Fearer. I agree with Michele French that the primary issue
is the health care delivery system itself, and that we need to find
ways to eliminate excess capacity. Hospitals, for example in Cali-
fornia, are 50 percent full and we are paying for that overhead;
Medicare is paying for that overhead. There is still a significant
problem of inappropriate and unnecessary care and solving this
problem is important to controlling cost.

Preventative care is vital, particularly for the elderly, and early
intervention in disease management is also critical. The best man-
aged care programs are effective at that, but managed care pro-
grams are not all created equal. Some are more effective than oth-
ers.

I also agree that consumer education is important. In fact, I be-
lieve that Medicare has begun a program with contracts in each
State and is now beginning to roll out a pilot program of consumer
education for Medicare eligibles. I don’t know how well that will
work, but I think it has the potential to be helpful.

There also needs to be, in general, a cost-benefit approach to
treatment. It may be that the most expensive treatment has a 99-
percent success rate and another treatment has a 98-percent suc-
cess rate, but only costs half as much. We need to think whether
we can always afford the most expensive method.

I think the real issue is health care delivery, not design of the
plans themselves.

Mr. WROCKLAGE. I was going to comment that J think if you
could create a system where there is a defined contribution for each


28

its annual growth rates for medical expenses from 12.9 percent in 1991 to under 5
percent in 1992 because they moved their workers into POS plan. In 1991, the Pacific
Telesis Group moved their fee-for-service enrollees in POS plans and reduced its
annual growth rate from 12 percent to 5 percent. Surveys of their employees found
that they were generally satisfied with the system once they understood it.

Coalitions and Cooperatives

In 1991, Cincinnati Bell, General Electric Aircraft Engines, Proctor and
Gamble, and the Kroger Company formed a health care coalition to increase
bargaining power for discounts with area hospitals, monitor quality improvements,
and search for other ways to control costs. Annual savings in the Cincinnati area
have been estimated at $75 million for all private and public payers of health care
because of a 5 percent decrease in the average charge per patient and a 10 percent
decrease in the average hospital length of stay.”

Coalitions have also been formed in Denver, CO; Memphis, TN; Cedar
Rapids, IA; Houston, TX; Minneapolis, MN; Kingsport, TN; and many other cities.
The activities of these coalitions have varied greatly, including the selection of
preferred providers on the basis of efficiency, assistance in the purchase of
cardiovascular care, the provision of mental health and substance abuse programs at
reduced rates, the enactment of healthy lifestyle programs for adults and children,
and the provision of small business insurance options. These coalitions are
successful in reducing expenditures on health care because they create a competitive
market with sound economic principles such as volume purchasing and
competitive bidding.

States have responded to growing health care costs not only as government
entities but also as employers. The California Public Employees’ Retirement System
(CalPERS) has had success with its own purchasing cooperative for health care
services. CalPERS experienced premium decreases in both 1994 and 1995 by
negotiating more aggressively with health care providers, asking HMOs to forego
rate increases, and the state introduced a standard benefits package in 1993, requiring
copayments of its employees.


94

1994 EPO AND PPO ACTUALS AS COMPARED TO EXPECTED

- 4 CHART #3
0
356
x0
39
20
20 385
NRE DAYS OF CARE/O0D1N
HOSPITAL
150 (EM ADMISSIONS/1000
38
—*— OUTPATIENT
VISITS/EMPLOYEE/YEAR
100
375
2”
0 —— 37
EXPECTED
BENEFITS PAID PER EMPLOYEE BY PLAN
DOLLARS
x0,
‘3500-
smo INDEMNITY
2m =PPO
z+
mEPO
157
1000}
CHART #4

°

1S 4!
1991-92 INDEMNITY NOT BROKEN OUTEROM PPO



9

miums. As you have noted already, there are charts that show the
private sector is worse than Medicare, and others show better
trends.

One of the reasons for that is the underwriting cycle which I
show in my written testimony and would be glad to discuss. When
you cut through all of that, it does look, certainly in 1994, that

ealth care cost increases in the private sector were around 4 to
5 percent. This year, however, as the HCFA study shows we think
the increases are going to be around 8 to 10 percent.

We think that what happened last year, the 4-percent private
sector versus the 11-percent Medicare, was an anomaly; just as
many times in the past the private-sector growth has apparently
been greater than Medicare, when in fact it fas not.

When these provisions are adopted, when HMOs are put in place
and PPOs ‘and point-of-service plans, the immediate question is,
what happens to the quality of care? The employers we work with,
the employers that are thinking of their employees—and most of
them do—look very carefully at this question and they look at a lot
of ways to get feedback from their employees as to what is happen-
ing, and to get feedback from the health plans themselves.

‘Sne way that they can easily see what is happening is the way
the employees vote with their feet. During the open seasons, if em-
ployees continue to stay in the HMO’s and the PPO’s and the point-
of-service plans, then it is clear that quality is being provided; and
when the individuals do choose a preferred provider organization
or point-of-service plan, we look for 70 percent of the employees to
use the networks that are set up by the employers. If they don’t
use those networks, we begin to question whether those networks
are effective and advise employers to look at the quality of care
that has been delivered.

In closing, let me mention that while it does look hopeful that
cost increases are as low as 8 percent when they have been 15 per-
cent, keep in mind that 8 percent is twice the rate of inflation and
that 8 percent, even though it is below double digits, will cause us
to continue to have health care that consumes a greater part of our
economy.

Thank you very much.

Chairman THomas. Thank you.

{The prepared statement and attachment follows:]


77

Medicare recipient, and then in a given community they saw the
multiple options of the delivery systems, the widest to the most
narrow, and there were quality service and satisfaction measure-
ments, then that individual retiree could make a decision as to
which health plan they want to choose, knowing that if they chose
the more expensive health plan, the difference would become a cost.
to them.

I did not talk about a program that we have—that we are creat-
ing where we are trying to create an employer alliance, a purchas-
ing alliance for health insurance where the employer would define
their contributions and the individual employee would make a
health plan choice much like they are doing in California for the
small employer programs. And again, I think this incorporates the
idea that an employer is paying the cost or a significant portion for
a good plan, but then the employee is actually making the decision
on the health care delivery system they want on their own. And if
they want the more expensive option, I think they must realize
that that is a cost that they have to bear. And if we could give
them good quality and satisfaction and service information, I don’t
think this would be such a difficult decision for people to make.

Mr. EnsIGNn. Mr. Wrocklage, you mentioned that half of your coa-
lition covered lives or employees of small businesses, under 200
employees. How are you able to include these small businesses into
your organization? Has this helped stabilize insurance coverage for
small businesses in your region and has including small businesses
in your coalition improved your purchasing power?

Mr. WROCKLAGE. We have done it because Wisconsin has a very
high penetration of self-funded employers, even down to employers
as small as 50, so a large number of our self-funded employers are
premium from 50 to 200 lives, so they came into the program
under the initial phase which was to serve self-funded employers.

Many small employers don’t want to take that self-funding risk
and so they look to insurance carriers, and what we did was find
a contractual way to provide our network of hospital doctors and
physicians to insurance carriers who wanted to offer it to small em-
ployers. And what we have done is taken almost two different seg-
ments, employers who are self-funded ranging from 50 to 6,000 and
then also another group of employers who are looking for an in-
sured product—and I gave you the numbers in my testimony—and
we almost had—50 percent of our business is for people who need
insurance and are less than 200 in size and work through insur-
ance carriers.

But we are the negotiators for all of those people. We are their
community representative when it comes to sitting et the table to
bargain on quality and cost.

So, in effect, my large employers do believe that their buying
power have been enhanced by the lives that are represented by the
small employer, and the small employers see their buying power
enhanced. And the interesting thing, they get access to the same
doctor-hospital network and the same price per unit, and so there
is not this cost-shifting from one segment of the population to the
other.

Mr. ENSIGN. I would like to thank the panel.

We do have a vote. We will reconvene after the vote. Thank you.


83

Impact to Costs and Quality

‘As seen in the earlier chart, General Mills Restaurants, Inc. has reduced its employee medical
insurance costs by over 50% through managed care initiatives. Improved data meant
information was more readily available to take action correcting problem areas, and led us to
additional opportunities to coordinate and improve each employee's continuum of care.
Preferred provider networks, outsourced utilization review, automated practice guidelines, and
the integration of workers’ compensation and group health insurance have all been
implemented since the partnership began in late 1991

Perhaps most importantly, we are convinced that we are seeing better quality of care provided
to our employees at a more affordable price. MediCALL provided an important comerstone on
which to build. CAPP CARE's full provider referral capability was outsourced to MediCALL.
When an employee contacted MediCALL, they were counseled on the best way to maximize
their benefit plan by using CAPP CARE providers. They were also informed of the financial
impact of going to non-network providers. Employee satisfaction with the benefit plan has
never been higher. Problem calls related to group insurance issues are on the decline. Ciaims
administration has improved -- fewer pended claims, shorter tumaround times. MediCALL is
better able to focus its major case management efforts on more patients than before.

CAPP CARE is well known as a leader in the development and use of practice guidelines. In
keeping with a vision of electronic coordinated care, CAPP CARE and GMRI embarked on a
project fo blend their full practice guidelines and utilization review program with MediCALL's
patient education, counseling and case management program. Nurses now interact with the
physicians prior to services being provided. This proactive approach allows patients to receive
the best quality care as defined by the highest medical standards. Procedures or services
suspected of being unnecessary or questionable would be reviewed with the GMRI and CAPP
CARE medical directors prior to being performed. All records were fully automated and
individualized letters were distributed to the patient, physician and facility provider.

Finally, CAPP CARE provided a proprietary program called VIM (Volume and Intensity
Management). Practice and billing pattems were analyzed for the purpose of ensuring
consistently high-quality, cost-effective care. Savings were realized from reducing the number
of unnecessary C-sections, increasing the number of patients diverted to outpatient services,
and reducing the length of stay for several mental health diagnoses. Equally important was tne
identification of problem areas. Anything showing a loss or poorer performance than prior years
became the focus for corrective action. Benefit plan enhancements or improved procedures
were implemented to address these issues. Innovation requires continuous evaluation and
improvement.

Recent Developments

Another opportunity existed to expand the impact of managed care. Our Workers’
Compensation expenses were as large as those for health care. GMRI saw a clear opportunity
to better integrate the functions of group health, workers’ compensation and disability
insurance. Liberty Mutual has joined with GMRI and CAPP CARE in a unique pilot project to
extend the value of the managed care to workers’ compensation. Liberty Mutual, our workers’
compensation carrier, will provide a registered nurse in the MediCALL. program to assist
restaurant managers in referring injured workers to CAPP CARE preferred providers. The
nurse will work closely with store management to ensure the injured employee receives the
most appropriate high quality treatment. The goal is to manage the medical treatment of the
diagnosed condition until the employee can return to full productivity

CAPP CARE has proven the transportability of these new products - Outsourced UR and
‘Workers Comp Provider Network - by providing them io other high profile customers such as
Adolph Coors, Inc., Flagstar Restaurants and Accordia National.

The Future

Looking to the future, CAPP CARE is in the forefront of the practice guideline initiative. This
year, physicians in the Orlando, Florida (home of GMRI) and Orange County California markets
will serve as beta sites to begin using highly sophisticated, hand-held data managers in the
day-to-day operation of their offices. These devices contain the practice guidelines and allow
the physician to assure total quality of care without the level of outside intervention currently
required. The Physician will be able to diagnose, prescribe treatment, make a referral, write a


** NOTICE ~ CHANGE IN LOCATION **
ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
May 17, 1995
No. HL-11-Revised

Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on Health of the
Committee on Ways and Means, today announced that the Subcommittee hearing on the
potential role for employers, associations, and medical savings accounts in the Medicare
program, which was originally scheduled for Thursday, May 25, 1995, at 10:00 am., in
Room B-318 of the Rayburn House Office Building, will be held instead in the main
Committee hearing room, 1100 Longworth House Office Building.

All other details for the hearing remain the same. (See Health Subcommittee Advisory
No. HL-11, dated May 9, 1995.)

corey


1ll

MANAGED CARE DOES NEITHER
by Judith Storms Kragh, US
fed

[As an LICSW (M.S.W liscensed to practice independantly) with a quarter of a
century of experience as a psychotherapist, I will remember the '90s as the most
ifficult. I isn't that the clients are harder to treat, or that the society
is more violent, or that the resources are more scarce, It is because Managed
Care reigns over professionalism and mental health,

Managed Care emerged as a panacea to beleagured medical insurance companies
struggling to compete with Health Maintenance Organizations by offering more
care options for lower rates. Tt was an umbrella superimposed on existing
professional organizations with ethics and stahdards, and liscensing boards
governing practice. Tt presented as a kind of consumer advocate, assuming that
upwardly spiraling medical costs were from self serving professionals who were
not accountable to their monitoring agencies, and were ripping people off.
Managed Care companies hired professionals to oversee, control, and evaluate the
professionals providing the care. The insurance companies, politicians, and the
public put their faith in them.

In describing mental health benefits, they did not limit services to a
$500/year maximum out-patient cost, but said "as much as needed", "each
episode," "up to 20 visits/year." Tt sounded good to providers recruited to
cooperate in this venture, and it sounded good to the subscribers, No one
clearly established who would determine what “*needed" meant.

Thave been a Managed Care provider for about 5 years. Their mode of
operation is much less benign than their words convey. I have interpreted the
“messages” communicated by their behavior, which contradicts what they say.

‘Their "double messages" to clinicians, and my response to them follows below:

DOUBLE MESSAGES FROM MANAGED CARE TO CLINICIANS

1. Cover up and don't question our duplicity: We have to offer up to 20
seasions of therapy in order to compete with other HMO's, We really only want
to pay for 4-6,

2, We will pretend to defer to your clinical judgement about what the
problem is and how many sessions over what period of time it will take to treat
it for a solution or favorable outcome, We will give you 4-6 sessions in a
shorter time frame than you requested, and ask you to repeat yourself each time
you ask for more time, We hope you'll get tired of the time it takes to call


81

Testimony Of Jon R. Reker
Vice-President, Benefits, General Mills Restaurants, Inc.
Committee on Ways And Means
‘Subcommittee on Health
May 16, 1995

Introduction

Good Moming, Mr. Chairman; members of the subcommittee— my name is Jon Reiker. | am
Vice President of Benefits for General Mills Restaurants. | appreciate the opportunity to testify
regarding our company's demonstrated successes in using managed care programs and
principles to control health care costs and quality in our company and in the communities in
which we operate.

G Mills’ Experi

With more than 126,000 Group Insurance: Medical Cost / Participant
employees, General Mills is
one of the 25 largest
private-sector employers in
the United States. Our
restaurant operations (Red
Lobster, The Olive Garden,
and China Coast) employ
over 115,000 workers in 49
states and Canada. Unlike
many major U.S.
corporations, our
employment has grown
sharply. We have added

‘over 20,000 new jobs in the 1990 1991 1992 1993 1994
past two years and more Fiscal Year
than 60,000 new jobs since
1988. It has been critical to General Mills Restaurants- Anaual Medica! Plan Expense / Participant
our continued growth that we

find a way to offer high

quality, competitive benefit programs which are affordable both to the company and to our
employees. The collective changes which | will cover in this testimony have resulted in a
reduction in cost/per participant of over 50% since the introduction of managed care in 1992.
These savings have been accomplished without any increase in employees’ premiums or any
cutbacks in benefits, and with a significant reduction in employees’ out-of pocket costs.

Background

From 1986 to 1991, GMRI had waged an extensive, and relatively successful, war on the cost
of health care benefits for both the employee and the company. Under the banner of "Teaming
Upto Tackle Health Care Costs," GMRI initiated steps based on a theme of shared
responsibility and shared savings. The group health plan was simplified so that participants
could better understand how to use it. We introduced MediCALL - a program of company
employed registered nurses to serve as patient advocates for our employees and their families.
‘These nurses assisted employees through their health care encounters (hospitalizations,
surgeries, births, etc.) by providing health care education, arranging second opinions, and
counseling on how to maximize the use of the benefit plan. MediCALL has been very favorably
perceived — like “having a nurse in the family." Surveys consistently indicated high
satisfaction. The company benefitted by having a hands-on awareness of employee health



107

TESTIMONY OF JUDITH STORMS KRAFT, LICSW
CONSORTIUM FOR PSYCHOTHERAPY

The industriaization of Mental Health is a revolution like the one in the
19th century when capitalism exploited the masses to increase the gross national
Product and achieve world power. Driven by a need to cut spending on health
care, our system has institutionalized violence against humane
social/peychlatry services, agencies, professionals (who are guardians and

Managed Care companies, competing for contral by reducing utilization of
health insurance benefits (s0 that insurers will be able to offer lower. premiums

“contract. between a patient and the therapist of his choice.“ therapy has changed
from a fiduciary relationship of healing to factory-like piecework on an

__ Bamambly Hine, with interchangeable therepiats perforning efficent,

_ Sos ettecnve, programmed function to produce widgets of minaun, measureable,
anges ‘and positive outcome statistics, ‘Confidentiality is”:
‘compromised because Managed Care authorizes payment for sessions based on
detailed information about the problem, symptoms, peychlatric diagnoses,

| @engtha, weaknesses, and behavioral gosle—which they enter into their
compiter files,” ‘The State mandated $500 Mental Health benefit is virtually
eliminated by making it subject to Managed Care's determination whether therapy
is medically necessary and follows their guidelines of being short-term. some
capitated contracts pay for only $400, so anything beyond that is dependent upon
the therapist or agency absorbing the loss, CHent self-determination is
non-existant because Managed Care's policies override it, stating that Jong term
treatment for changing personality disorders, ingrained behavior patterns, or
non-medical situational problems like abuse will not be authorized, Restoration.

to prior level of functioning, not cure, is the recommended approach,
Professions and agencies, competing for survival, have been bullied into

resigned accomodation. Initial protests were extinguished by threats of

annihilation, Managed Care has monopolized 3rd party payers, If therapists

don't agree, they are not empanelled as providers. If they argue, they are

Gropped. If they are dropped, they generate no income, and go out. of business.
Contracts prohibit criticism of Managed Care, Contracts excuse Managed Care

from liability if a bad outcome results from the treatment they authorize or

fail to authorize; they are “held harmless." Therapists have to sign and

upheld the contracts or they lose providership.


92

What can Medicare learn from this?

We feel we have been successful because we have empowered, motivated and provided
incentives for our employees to be smart consumers of medical care in controlling costs.
Given that the Medicare program has been projected to become insolvent by 2002, an
important factor is to recognize the significance plan participants play in controlling costs.
Any plan redesign needs to include incentives and consumer education to effectively
motivate participants to manage costs.

Preventive services, early detection programs and utilization of these services should help
control costs, particularly in the Medicare age population which has a significant screening
yield rate. °

Our experience has been that the marketplace will quickly adapt to changes in enrollees’
coverage while continuing to meet the needs of plan participants within the greater
accountability of managed care. Enrollees may feel a loss of freedom as the Program is
implemented but will reasonably adjust in short order.

We have experienced little evidence that quality of care is hampered by managed care. In
fact, most studies have shown that quality of care is improved with managed care. There
is some evidence that unnecessary care is limited and controlled while preventive and early
intervention care is greatly enhanced. You will hear the argument that quality of care is
sacrificed due to cost controls. In reality, managed care has had to show accountability
and proof of the effectiveness in delivery of medical care and treatment regimen efficacy.
The outcome of this has been an impressive improvement in assessing and measuring clinic
outcomes. This clearly benefits all “legs” of the “quality medical care platform”. STK
firmly believes managed care will provide us the means to keep our employees and their
families at the top of the platform.

Testimony submitted by:

James P. Spence P.A.-C.

Senior Manager

Corporate Insurance Benefits &
Medical/Wellness Services
Storage Technology Corporation
2270 S. 88th St.

Louisville, Colorado 80028-0030
(303) 673-5314

Fax- (303) 672-4049,


60

- Create competition between clinical care {Jiver systems organized around efficient
and effective delivery — not consolidated provider cartels

. Empower employees 8s consumere/purctiasers of health care.
- Promote personal responsibility.
- Promote user friendy information regarding health care value (cost/qualty).

Given the limited time avallable to prapare for this
documentation of the Value attributed to aur community activts
‘employers and participating insurers who were able to re:ipond within the given time frame.


56
Mr. ENsiGNn. And Mr. Wrocklage, please.

STATEMENT OF JIM WROCKLAGE, CHIEF EXECUTIVE OFFI-
CER, HEALTH CARE NETWORK OF WISCONSIN, BROOKFIELD,
wi

Mr. WROCKLAGE. Thank you, Mr. Chairman, members of the sub-
committee. My name is Jim Wrocklage, and I am chief executive
officer of the Greater Milwaukee Health Care Purchasing Plan,
which does business in Milwaukee and southeastern Wisconsin as
the Health Care Network [HCN] of Wisconsin.

I hope that my testimony today will convey to you our message
that the value of health care, which is a function of both cost and
quality, can best be enhanced through employer-led, community-
based reform which is market driven.

Our organization was created in the fall of 1986 by 10 major em-
ployers, and the mission was to arrange for, promote, and other-
wise encourage programs and activities which are designed to pro-
mote the general health of the community, promote access to qual-
ity care in the most appropriate setting, and contain the increase
in costs of health care.

We originally started on July 1, 1987, serving 10,000 employees
of eight private employers and two public employers. All 10 of
these were self-funded. We represented 10,000 employees. Today
we represent 51,900 employees through 250 self-funded employers
and another 47,100 through another 2,900 employers who buy in-
surance contracts through 10 insurance carriers. In total, we rep-
resent 247,000 covered lives in the greater Milwaukee metropolitan
area.

Through 1989, HCN only served the self-funded employers, but
in the interest of wanting to serve as many employers as possible
in our community, HCN sought out insurers who were interested
in offering the network to their insured clients generally, small to
medium in size. Today, whether insured or self-funded, employers
ranging in size from 2 to 200 employers represent 50 percent of our
business clients.

As a demonstration of controlling costs, for the 7¥2-year period
ending December 31, 1994, HCN had processed $596 million of hos-
pital charges. However, its negotiated contracts permitted reim-
bursement of $438.4 million, so that a difference of $157.6 is the
economic savings derived on behalf of all of our participating pur-
chasers. This equates to a 26.5 per year weighted average savings
for all hospital costs.

As implied by the title of this hearing, quality is as essential to
HCN as cost, and as such, we have undertaken several quality ini-
tiatives of varying scope with providers in our community. These
have varied from doing simply pure data analysis, identifying com-
plication rates which are unexplainable, to serving on joint work
committees of employers and providers in order to reduce adminis-
trative costs and complexity within the health care system.

Within the last few months, it has become clear to us that the
following principles must guide the extent and type of our involve-
ment in future community-based quality initiatives. Those who de-
liver care are the only ones who can truly manage it. Therefore the


KEY DATA FROM
THE 1994 SURVEY RESULTS

18

aus LARGE = SMALL
EMPLOYERS EMPLOYERS EMPLOYERS
‘AVERAGE PER EMPLOYEE COST
‘Total Health Benefit Costs $3,741 $4060 $3,452
MEDICAL PLAN COST
‘Traditional Indemnity Plans $3,830 M9 53,528
Preferred Provider Organizations 3386 3,529 3,140
Polnt-of-Service Plans 3,609 3975 2,884
Health Maintenance Organizations 3.485 3,663 3,230
PERCENT OF EMPLOYERS OFFERING
‘Traditional Indemnity Plans 6% 0% 46%
Preferred Provider Organtzatioas 30 “0 30
Point-of-Service Plans 1s 23 ss
Health Maintenance Organizations 2 3 coy
PERCENT OF EMPLOYEES ENROLLED
‘Traditional Indemnity Plans 37% 3% 2%
Preferred Provider Organizations 25 B 27
Point-of-Service Plans 6 7 B
‘Health Maintenance Organizations 23 Ua ”

* All employers in the US with 10 or more employees

** Large employers: 500 or more employees
s+ Small employers: 10-499 employees

‘A-copy of the complete survey report costs $500. Order now by
calling Lisa Gilleeny at 212-574-9025, or use the order form Inside.

FosterHiggins

National Survey of
Employer-sponsored
Health Plans 1994

EXECUTIVE
SUMMARY

With 2,097 respondents in
1994, the Foster Higgins
National Survey of Employer-
sponsored Health Plans ts the
largest, most comprehensive
annual survey on the topic.
‘This summary, released in
advance of the full report.
focuses on the movement of
‘employees into managed care
plans and on health benefit
costs, in addition to a more
detailed discussion of cost and
‘enrollment trends, the full
report provides a wealth of
plan design information for
‘each of the four major med-
ical plan types (traditional
indemnity plans, preferred
provider plans. point-ol-ser-
vice plans, and health mainte-
hance organizations). It also
reports on:
= Dental benefits
= Prescription drug benefits
‘= Mental health and sub-
stance abuse benefits
f= Retiree health benefits
1 Flexible benefit programs
= Wellness programs
‘The report will be available in
April 1995.



AT

- ATTACHMENT A -
Member Companies

PACIFIC

MEMBER COMPANIES

Atlantic Richfield Company

Automobile Company of Southern California

Bank of America

Bank of the West

Bechtel

California Public Employees’ Retirement
System

Charles Schwab

Chevron Corporation

Federal Reserve Bank of SF

Fireman's Fund Insurance

First Interstate Bank

GTE

Lockheed

Longs Drug Stores

LSI Logic.

McKesson

Mervyn’s

Pacific Telesis

PG&E

Ross Stores

Safeway, Inc.

Southern California Edison
Stanford University
Transamerica

Union Bank

University of California
Varian Associates, Inc.

Wells Fargo Bank


51

Overview of 1993 Health Plan Performance

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‘©Copyright 1995, California Cooperative HEDIS Reporting Initiative 3


80

sicians are paid at the CAPP CARE rate, allowing full choice to
employees, with them just paying the difference.

I have in the written testimony several other examples of ways
that we have worked into the MediCALL program, but in sum-
mary, just let me say that we are convinced by actively managing
an employee health care plan, you can accomplish the seemingly
contrary goals of lower costs, improved quality, and increased satis-
faction.

For General Mills Restaurants, managed care is more than se-
lecting a network of providers, it is the blending of the highly per-
sonal touch of our MediCALL program and CAPP CARE’s leading-
edge practice guidelines and health information systems. It is in-
corporating eligibility and improved data reporting and coordinat-
ing the broad spectrum of care to address managed care opportuni-
ties presented by workers’ compensation and disability. Perhaps
most importantly, it is about giving employees the information and
support they need to make good health care decisions within a
managed framework of quality providers.

you.
Mr. ENSIGN. Thank you, Mr. Reiker.
[The prepared statement follows:]


13
Chairman THomas. Mr. Treat.

STATEMENT OF DENNIS J. TREAT, MANAGING CONSULTANT,
FOSTER HIGGINS & CO., INC.

Mr. TREAT. Good morning, Mr. Chairman, members of the sub-
committee, I am honored to be part of the proceedings this morn-
ing Thank you for inviting me.

am Dennis Treat with Foster Higgins, a benefits consulting
firm that has been doing a survey on employer-sponsored health
care for 9 years. I would like to give you an overview of the 1994
results.

In concert with an unprecedented increase in managed care en-
rollment, U.S. employers successfully drove down overall health
benefits costs last year. This marks the end of two decades of
health benefit cost increases that have consistently outpaced infla-
tion.

Total health benefit costs in 1994 averaged $3,741 per employee,
down 1.1 percent from 1993’s average of $3,781. While aided by rel-
atively low medical cost inflation, the reduction in benefit costs was
a direct result of employer cost management activity, namely:
First, shifting employees from traditional indemnity plans to man-
aged care plans; second, carving out medical plan benefits with
more volatile costs such as prescription drug and mental health/
substance abuse care and offering them through freestanding man-
aged plans; and third, enrolling a ywing number of retirees in
managed care plans, particularly (Os.

Large employers were the most active in 1994; 29 percent of em-
ployers with 500 or more employees reported making significant
changes to their health benefits program in 1993, com cared to only
20 percent of smaller employers, and large employers had the most
success in holding down costs. While the average total health care
cost dropped 1.9 percent among large employers, among small em-
ployers it rose 6.5 percent.

The slowdown in costs was driven by the biggest increase in em-
ployee enrollment in managed care plans in the nine-year history
of our survey. In 1994, 63 percent of all covered employees were
in a PPO, point-of-service, or HMO plan, up from 52 percent in
1993. This represents a 21 percent increase in managed care en-
rollment nationwide.

The fastest growth by far was in point-of-service plans, which in-
clude open-ended HMOs as well as insurance carrier plans. As the
number of employers offering point-of-service plans more than tri-
pled, enrollment jumped from 7 to 15 percent of all covered employ-
ees. Enrollment in traditional closed-panel HMO’s grew moderately
in 1994 from 19 to 23 percent. Among the managed care alter-
natives, only PPO’s failed to capitalize on declining indemnity plan
enrollment. In fact, nationwide PPO enrollment fell from 27 to 25
percent in 1994 despite a slight increase in the number of employ-
ers offering a PPO.

If more evidence was needed to prove that health care markets
around the country vary widely, the survey supplied it. In the
Northeast, where the biggest shift in enrollment into managed care
occurred, rising from 34 percent of covered employees in 1993 to 63


55

ATTACHMENT TO TESTIMONY BY MICHELE E. FRENCH - UNIVERSITY OF CALIFORNIA
MAY 16, 1995 MEETING OF THE SUBCOMMITTEE ON HEALTH OF THE
HOUSE WAYS AND MEANS COMMITTEE

‘The following summarizes the medical plans available to employees and retirees of the University of

California:
PLAN

EEE £OR SERVICE
CORE

High Option

DESCRIPTION

Catastrophic coverage, primarily for part-time employees
$2,000 deductible

20% coinsurance

$1 million maximum lifetime benefit

Major Medical coverage with a preferred provider network (PPO)
$200 deductible

20% coinsurance (10% with PPO)

$2 million maximum lifetime benefit

Triple option with 3 benefit tiers - choice of tier each time
care is received

HMO tier - $5 copays for office visits
‘$0 copays for prenatal/pediatric visits
‘$0 copays for inpatient care

PPO tier - $250 deductible/20% coinsurance

Non-network - $500 deductible/40% coinsurance

$2 million maximum lifetime benefit for PPO plus Non-network
services; no limit on HMO services

Drug card program - $12 copay, mail order service
Meatal Health/chemical dependency from exclusive, specialty
network

‘HEALTH MAINTENANCE ORGANIZATIONS (HMOs)

Benefits standardized across 6 plans

$5 copay - office visits

$5 copay - drugs .

‘$0 copay - hospital inpatient care

‘$0 copay - prenatal, well-baby care; pediatric office visits


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH
FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
May 9, 1995
No. HL-I
qT noun: i

— Private-Sector Lessons to be Sought —

‘Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of the
Committee on Ways and Means, today announced that the Subcommittee will hold a series of
hearings to explore increasing and improving options for Medicare beneficiaries, with a focus
‘on private-sector successes.

The hearing dates and subjects are as follows:

Tuesday, May 16, 1995: Experience in Controlling Costs and Improving
Quality in Employer-Based Plans

Wednesday, May 24, 1995: Medicare HMO Enrollment Growth and
Payment Policies

Thursday, May 25, 1995: The Potential Role for Employers, Associations,
and Medical Savings Accounts in the Medicare

Program

The hearings on May 16 and May 24, will be held in the main Committee hearing
room, 1100 Longworth House Office Building, beginning at 10:00 a.m. The hearing on
May 25 will be held in room B-318 of the Rayburn House Office Building, beginning at
10:00 a.m.

Oral testimony at these hearings will be heard from invited witnesses only. Witnesses
will include health policy experts, representatives from the health care industry, and employer
groups. However, any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee or for inclusion in the printed
record of the hearing.

BACKGROUND:

According to the 1995 report of the Board of Trustees, the outlays of the Medicare
Hospital Insurance (HI) trust fund will exceed income beginning in 1996 and the HI trust
fund is projected to run out of reserves in 2002, using the intermediate set of assumptions.

To keep the HII trust fund in actuarial balance for 25 years would require, in the
absence of spending restraints, an immediate 44 percent increase in the payroll tax rete, As a
result, axes on a person earning $20,000 would be increased by $260 annually and a person
earning $30,000 per year would see their taxes hiked by $390 a year. Those who make
$75,000 a year would pay an additional $975 in taxes every year.

Im the report, the Board of Trustees called for “prompt, effective, and decisive action"
to put the HI trust fund into balance.


72

GENEFT DIFPERENCES IN THE HON AND TRADITKINAL INDEMNITY PRODUCTS:

‘A comperiaan of ourrent HON and Traditional Indemnity bencfis is given below:
$260 Deduatibie ts assumed tor each.

come | Stee Sa

Coinsurance 10% next $2500 Text $2,600
her deductible ‘ahar desuotbie

PhysioleryCinic 810 Copayment $20 Copayment

Office Call 100% thereater 100% ¢ ereafier
includes x-ray. moray and lad
and lab ‘are subectio
Geductole and coins.

Emergency Room | €25 Copayment $28 Copmment
deductible and voins.  dedhuctibie and seins.

NOTES:
HCN copayments do not halp to satisly the deductible and nainsurence.
Emergency room copayments are waived ifthe patient is hesphalized,

‘8O%/20% next $2,500
eit deduotibie

‘Subject to deductible
‘and coinsurance:
including x-ray
‘and lab

‘Subject to deductbie
and coinsurance:


27

percent of employers required health care to be monitored as it was provided and/or
determined the length of a hospital stay and the scope of the treatment prior to
treatment, up from 52 percent in 1989. Second surgical opinions were the onlly type
of UR whose use decreased between 1989 and 1992. Studies have found that UR is
an effective mechanism for controlling health care costs and utilization. One study
found that UR lowered hospital expenditures by 11.9 percent, total medical
expenditures by 8.3 percent, hospital admissions by 12.3 percent, and inpatient days
by 8 percent?

HMOs

The use of HMOs has been one of the most prevalent methods utilized by
employers to control rising health care costs. In 1980, there were 236 HMOs, with 9.1
million enrollees. By 1994, there were 547 HMOs, with 43.4 million enrollees.’
These plans range from staff models where the HMO owns its health care facility
and employs health care providers on a salaried basis, to independent practice
arrangements (IPAs), where groups of physicians practicing independently contract
with an HMO to provide health care services to the HMO enrollees. The recent
movement of individuals into HMOs has not been into the more controlled staff or
group model HMOs but into the IPAs, where patients have a greater choice of
physician. Between 1993 and 1994 there was a 42.6 percent increase in enrollment in
mixed models, followed by a 7.6 percent increase in enrollment in IPAs. Group-
based plans, ie., staff, group, and network models, experienced a decline in
enrollment between 1993 and 1994. New evidence suggests that HMOs reduce use of
health care services by an average of 8 percent, compared with services that similar
patients would be expected to use in a traditional fee-for-service indemnity plan.¢
However, staff and group model HMOs were shown to reduce services by nearly 20
percent, and IPAs reduced use by an average of 0.8 percent.

Preferred Provider Organizations and Point-of-Service Plans

Preferred provider organizations (PPOs) and point-of-service (POS) plans
have also emerged as strong alternatives to fee-for-service plans and HMOs. The
number of individuals enrolled in these arrangements increased significantly
between the mid-1980s and today. Recently, the growth rate of enrollees in these
plans has exceeded the growth rate of enrollees in HMOs because they allow greater
choice of physician. Evidence on the savings from these plans is largely lacking but
does suggest there is a potential for savings. For example, AT&T was able to reduce


70

roughly 35,000 people in this market, which makes the-WPS/HCN product a primary
insurance product in this three county area.
WPS and our customers are very satisfied with the price, product, and medical quality

of the HCN managed care operation. The numbers, whether they be sales, loss ratio,
of premium charged, certainty speak highly of the ICN approach to delivering quality,
affordable health care,

Sincerely,

Corporate Senior Vice President
Market Services


Ailen eediay Company, tan,
Bears
poor
eame
@ Reckavelinsran
‘Allee-Bradiey
May 12, 1995

Dear Jim:

We fos! that, as a major self funded employer with » larga number of active end retired
‘employees in the greater Miwaukee area, our pérticipation in the Health Care Network
as had @ meaningful impact in controlling our |ealth care cost increases. We have
participated in HCN since its inception and have found that health care costs at
locations where employees have an indemnity plan available have generally Increased
ata faster rate than we've experienced in the Mihvaukee area.

We feel it is important however, that all emplovers, both lsrge and small, have the
opportunity to participste in purchasing Initiatives of this nature. ‘The cooperative

environment In which HCN developed has proven beneficial for our community as @
whole and not necessarily @ select few.

neu

Manager-Employee Benefit Pr

Very t


Regional employee enroliment
in plan type

2 a ao a

west
193
a os oo
1996
20% 2% 1%. a
MIDWEST
1993
on 3%
1994
a ee

Use of medical plan carve-outs

any employers—particularly among the trend:

setting Fortune 500 companies—"carved out”
their high-cost prescription drug and mental health
‘ate benefits Irom theie medical plans and provided
them through special managed cate programs. More
than a thied af large employers (500 or more employ-
e¢5) offer a freestanding prescription drug plan (mail
order and/or card plan). Among very large employers
(20,000 or more employees). the percentage offering
prescription drug card plans leapt from 36% 10 66% in
1994. The proportion of these large employers offering
a separate PPO for mental health care rose from 23%
10 44%,

Use of medical plan carve-outs, by
employer size

snescrirmion ‘seranare ro For
Seen" MMMM Steers eaensuesrance
‘oust eens

In the Midwest. managed care enrollment grew
from 51% to 60% in 1994, with costs essentially flat,
‘sing from $4,020 to $4,048. In the West, where man
‘aged care enrollment was already high, the growth in
1994 was more moderate (from 72% 10 80%), and
cost rose 2.0% to $3,693. In the South. there was lit:
tle growth in managed care enrollment (from 57% to
58%), and total costs rose 3.9% 10 $3.389.

st
ere”
Sal onder andor cand plan

Effect of retiree coverage on total
health benefit cost

ecause cost is measured per active employee,
‘employers who provide retiree coverage have sig-
nificantly higher average cost than those who don't
‘Among employers of all sizes who provide retiree cov-
erage. average total cost is $4.21. Among those who
don’t, average cost is $3.238.
In 1994. for the fitst time, employers induced a sig-
nificant number of retirees to join HMOs, particularly
in the West. Among large employers 1500 or more


37

Mr. TREAT. You could also point to the fact that HMO’s are the
ones that initiated the NCQA process to measure quality. They are
interested in making sure they are providing proper care.

Mr. ENSIGN. I would just like to address the IPA’s versus the
HMO’s. And, Dr. Fronstin, I think it was you in your paper that
talked about those, and the difference between saving costs, the
IPA’s obviously don’t save the costs as some of the other plans.
What is the benefit and why do you see more people choosing that?

Mr. FRONSTIN. More people tend to choose the IPA now. They
provide a greater choice of physician, so when people have a better
chance of sticking with their physician, once they join this type of
plan, as opposed to a group or staff model HMO, that is the main
difference.

Mr. ENSIGN. Do you see more companies going to that, offering
that as an option to their employees, or do you see that because
it is not saving or decreasing the costs?

Mr. FRONSTIN. That is the recent trend. Studies have shown that
as IPA physicians treat more and more of the—IPA is just a form
of an HMO—as they treat more and more HMO patients, the cost
savings actually increase, there are some economies of scale. That
seems to be the place where people are going, so I could see that—
employers offering that on a wider basis.

Mr. ENSIGN. OK. Mr. Houghton, you had a question.

Mr. HoucnTon. Yes. Thank you, Mr. Chairman. I am sorry I
wasn’t here earlier, and I may be a little redundant; and if I am,
you have just got to bear with me.

I have a chart here by the CBO which shows the trends in pri-
vate health care insurance, out-of-pocket Medicare costs; and as I
read the chart, with the exception of a couple of blips—one was in
1973 and the other is in 1980—the Medicare costs, Medicare ex-
penditures and the private health insurance were about on a par-
allel until about 1991, then something happened in 1991. So that
is point number one.

Point number two is that I understand that the thrust of this
hearing is to review the approaches that people like yourselves
have taken, and also the lessons which can be garnered from these
approaches in the Federal Government. So without trying to be-
labor something which you have already possibly expressed, for
each of you gentlemen, would you share with me the single most
important lesson that we can learn from what you have done and
apply it to our thinking.

Mr. TREAT. Our survey over the last several years has shown
that a shift from nonmanaged programs to managed programs has
produced a significant decrease in the cost of employer-sponsored
health care. The lesson learned, I guess, is to continue to push and
to make sure that the care provided under a managed environment
is, in fact, quality care. And that push is going along in a parallel
fashion with an emphasis on quality measurement processes being
implemented.

Mr. HouGuTon. I don’t know what the percentages are in the
country, but if I remember the percentages in California, about 20
percent of the people are under managed care programs. That is
pretty high, isn’t it?


57

purchaser involvement should be focused at the highest level fea-
sible, given the scope of the project.

Patient outcomes are improved by managing the delivery proc-
esses that drive the outcomes, and before an endeavor is under-
taken, thought must be given to the impact it will have on the en-
tire community and the industry of health care. Valid data is a pre-
requisite to improvement. In order to promote the use of valid data,
HCN encourages the use of strong operational definitions that are
consistently applied and exercise due diligence in the manner with
which it accepts data from providers and other community sources.

It is our concern for the consistent application of operational defi-
nitions that forces it to approach comparative data for the selection
of providers with great caution. HCN is aware of interpretive dif-
ferences that occur during the coding of medical records. In order
to mitigate the effect of these differences, we prefer to stimulate
quality improvement in our community by studying the data from
each institution over time, rather than to make selection decisions
based on interinstitutional comparisons.

And we have also acknowledged that the gain through these
quality initiatives should be shared in the community, not hoarded.

Although we recognize that our operational structure and degree
of success are not necessarily replicable throughout the United
States, we do view HCN as a prime example that community-
based, employer-driven market reform works. And having estab-
lished a community presence, which we think is the most impor-
tant thing, by consolidating a fragmented purchasers’ set into a
critical mass which negotiates lower prices and encourages quality
improvement initiatives, we will continue to take catalytic-type ac-
tion which impacts the underlying structure of the local delivery
and financing of health care. en doing so, we recognize that re-
actions by providers, insurers, and managed care organizations in
response to our actions or as part of our activities has a positive
effect on our community.

Given the changes currently occurring in our community, it is
highly likely that our activities will continue to create other struc-
tures which enhance the working of an organized market, create
competition between clinical caregiver systems organized around
efficient and effective delivery, not consolidated provider cartels.
We would also empower employees as consumers and purchasers of
health care, promote personal responsibility, and promote user-
friendly information regarding health care value.

Given the limited time available to prepare for this hearing, I
offer the attached letters as documentation of the value attributed
by our board of director, employers, and participating insurers who
were able to respond within the given time frame. | thank you for
the opportunity to testify and I would be glad to answer any ques-
tions you may have.

[The prepared statement and attachments follow:]


23

Chairman THOMAS. Dr. Fronstin.

STATEMENT OF PAUL FRONSTIN, Ph.D., RESEARCH
ASSOCIATE, EMPLOYEE BENEFIT RESEARCH INSTITUTE

Mr. FRonstTin. Mr. Chairman and members of the committee, I
am pleased to appear before you this morning to discuss employer
responses to rising health care costs. My name is Paul Fronstin. I
am _a research associate at the Employee Benefit Research Institute
[EBRI], a nonprofit, nonpartisan, public policy research organiza-
tion based in Washington, DC. EBRI has committed, since its
founding in 1968, to the accurate statistical analysis of economic
security issues. Through our research we strive to contribute to the
formulation of effective and responsible health and retirement poli-
cies. Consistent with our mission, we do not lobby or advocate spe-
cific policy solutions.

Employers’ use of cost management strategies in health care has
become more prevalent as a result of the growth in employment-
based health insurance, third-party reimbursement, and techno-
logical advances. Firms have been increasingly requiring workers
to contribute to health insurance premiums and subjecting them to
direct out-of-pocket provisions.

There has also been a simultaneous increase in the cost-sharing
rovisions of traditional fee-for-service health insurance. There
ave been increases in the use of deductibles, coinsurance and out-

of-pocket maximums. In 1992, 83 percent of employers required co-
insurance of 20 percent for physician visits, up from 77 percent in
1989.

Evidence from the RAND health insurance experiment suggests
that increased cost-sharing does reduce health care costs and utili-
zation. Employers have increased their use of utilization review
programs [UR]. These programs are designed to monitor the
progress and appropriateness of health care services on a case-by-
case basis.

For example, in 1992, 83 percent of surveyed employers required
prior authorization for certain procedures nonemergency hospital
admissions and elective surgery, up from 73 percent in 1989.

Studies have found that UR is an effective mechanism for con-
trolling health care costs and utilization. One study found that UR
lowered hospital expenditures by 11.9 percent, total medical ex-
penditures from 8.3 percent, hospital admissions by 12.3 percent,
and inpatient stays by 8.3 percent.

The use of HMO’s has been one of the most prevalent methods
utilized by employers to control rising health care costs. In 1980,
there were 23 MO’s with 9.1 million enrollees. By 1994, there
were 547 HMO’s with 43.4 million enrollees. These plans range
from staff models where the HMO owns its health care facilities
and employs health care providers on a salaried basis, to independ-
ent practice arrangements where serous of physicians practicing
independently contract with an HMO to provide health care serv-
ices to the HMO enrollees. The recent movement of individuals into
HMO’s has not been into the more controlled staff or group model
HMO’s but into the Independent Practice Association [IPA’s],
where patients have a ter choice of physician. New evidence
suggests that HMO’s reduce use of health care services by an aver-


90

-2, Employees control our costs and are our customers.

Employees are another key to controlling our costs. We have done extensive
communication and education programs to develop our employees into wise medical care
consumers. After having delivered these programs to employees we are now focusing on
incentives that motivate them to be good consumers. We do this through paying them
one-half the savings they find in hospital billing errors and by reporting fraud. We are
currently looking at paying the employees a “retrospective dividend” of $100, as a way of
saying thanks for actively working to control medical expenses.

As evidence that our employees are wise consumers is shown by the average number of
outpatient visits but significantly lower inpatient admissions and lengths of stay than
expected(see chart #3). This is what we call the “worried well” syndrome. Our plan
members go to the doctor often but generally for mild problems or early stage symptoms.
We have encouraged employee usage of outpatient care because it reduces our costs
through early treatment intervention and greater protection against the higher cost claims
of hospitalization. This appears to be an effective strategy as shown by the low hospital
usage.

In 1990 our inpatient psychiatric admissions were twice the expected rate as was the
length of stay. Mental health was our second most expensive category of care. The
benefits department met with our Employee Assistance Program providers to develop a
plan that would bring these costs back under control. We then communicated these plan
changes to employees. The plan changes increased accessibility of outpatient mental
health, increased the number of covered visits by placing a liberal cap on charges per
member per year and negotiated rates with providers and encouraged members to seek
help whenever needed. We also put very restrictive coverage for inpatient care and
limited it to 14 days for most cases. This change fell in line with our philosophy (and that
of the AMA) that 75% of all diseases are stress related and that if focus is placed on
dealing with this stress at an early stage, morbidity would be significantly reduced thus
reducing the higher cost claims. Employees viewed this as a positive step and have taken
advantage of this coverage. Since making this change the plan has saved over $250,000
per year.

A. 1994 employee survey showed a 94% satisfaction rating of their health and welfare
benefits. This satisfaction rating has remained consistent since 1992. This level of
satisfaction has not always been the case. Implementing managed care in 1990 was not
without its travails and anguish. Employees were upset with the loss of total freedom of
choice they had with indemnity, were confused about the regulations of managed care and
wanted grandfather clauses for their care. In some cases, we did grandfather mental health
and maternity indemnity coverage for one year. Our communication program continued
through these trying times and by 1992 most of the angst had passed and employee
satisfaction quickly soared.


44

“The Negotiating Alliance proved to be a great success for its members. In 1995--the first year
in which bargained premiums took effect-- PBGH negotiations achieved actual reductions from
1994 HMO premiums approaching 10 percent, or savings of $37 million. In addition, caps on
rates were established for 1996 and 1997. From a Congressional budgetary point of view,
savings were even higher -- expected increases in premium were eliminated and actual decreases
jin real costs were obtained. Under the Alliance, Union Bank saved more than $1.5 million off
of our roughly $15 million in 1994 HMO expenditures. Several companies experienced double
digit decreases.

In addition to negotiating on price, an equally important component of the Alliance process
focused on establishing measures and targets for evaluating health care quality. Each HMO
agreed to place a portion of their premium “at risk” for performance across two dozen uniformly
defined measures for customer service, quality, and the provision of data (see Attachment B).
Targets demonstrating improvement for each measure and the amount of money at risk across
the standards were negotiated with each plan.

Success in 1995 brought six additional large companies into the Negotiating Alliance for the plan
year starting January 1996 - a toval of seventeen large employers. Last year's efforis have
expanded to add POS performance measures (e.g., timeliness of out-of-area claims payments)
to the negotiated package. More important, PBGH is negotiating HMO rates and benefits for
40.000 Medicare-eligible retirees. (Early retirees are included with actives.) PBGH companies
are eager to offer their retirees continuity of care with HMO plans through Medicare risk
arrangements. Many of these plans provide more generous benefits than fee-for-service plans
at no cost to the retiree.

CREATING A CLEAR BENEFIT AND RISK PACKAGE
PBGH is interested in creating competition on a level playing field. Many health plans
historically competed on the basis of their ability to attract healthier enrollees through subtle
differences in benefit design. For example, we discovered one health plan that did not cover
insulin - an obvious disadvantage for diabetics. Similarly, if each plan was able to define
customer service and quality in a slightly different fashion, purchasers could neither (a) fairly
compare them nor (b) know whether such differences biased performance results. PBGH
addressed these important issues by standardizing the content of our benefits and creating
consistent definitions to evaluate plan performance. Most important, consumer confusion related
to the overwhelming array of benefit design differences and incomprehensible performance data
was eliminated. Further administrative efficiencies were created through a single RFP on behalf
of all Alliance participants,

Under the managed competition model, another critical component is to appropriately adjust
health plan payments to reflect differences in risk. In other words, a health plan with a
relatively high risk population should receive more monies to deliver services than a health plan
that has a relatively low risk population that requires fewer services. PBGH employers have
expended considerable effort studying these differences. We have a three-year grant from the
Robert Wood Johnson Foundation to advance and test tools for risk adjustment purposes.

In 1993, when employer health premiums were examined in an uncompetitive marketplace, we
saw large differences in prices for the same health plan across employers. These price
differences were evident after we adjusted for any employer risk and benefit design differences.

Surprisingly, the biggest companies did not have the best prices and the "low risk” companies
with young single populations did not have the best prices. Differences in benefit design and or
risk accounted for only twenty-five percent of the significant price differentials! Seventy-five
percent was unexplained. These findings encouraged the large employers to join forces and
Tequest one price for all on a standard benefit plan. Although for now we have postponed
implementation of any risk adjustment mechanism, we will continue to evaluate the need for one
as pricing becomes less arbitrary. We would never want health plans 10 compete on the basis
of selecting healthier people than their competitors.

The last feature to creating competition in the health care market involves explicitly linking the
amount of employer contribution to the least cost -- eventually the "best value” -- health plan.


85

Mr. ENSIGN. Mr. Spence.

STATEMENT OF JAMES P. SPENCE, SENIOR MANAGER, COR-
PORATE INSURANCE BENEFITS AND MEDICAL/WELLNESS
SERVICES, STORAGE TECHNOLOGY CORP., LOUISVILLE, CO

Mr. SPENCE. My name is Jim Spence. I am senior manager for
corporate insurance benefits and medical/wellness services for Stor-
age Technology Corp. I also want to mention I am a graduate of
Johns Hopkins Medical School, as a physician’s assistant, so I have
15 years of medical experience as well as seeing both sides of the
coin from the benefits perspective.

Storage Technology is a high-tech firm that manufactures com-
puter data storage. We employ 11,000 worldwide, 9,000 domesti-
cally, and 6,500 at corporate headquarters in Louisville, CO.

We are self-insured and introduced our managed care program in
1990, primarily to attempt to curb the rapid rise in our medical
costs. Since 1990, we have offered two managed care programs to
employees. We have also offered a traditional indemnity plan only
where managed care networks do not exist.

The first program is a preferred provider organization, or PPO.
This program offers a network of providers that have agreed to ne-
gotiated rates for services. Employees have the option of going in
network or out of network, but with higher deductibles, higher out-
of- pocket maximums, and a significantly reduced reimbursement
level.

The second program is an exclusive provider program [EPO’s].
This is similar in structure to an HMO with funding slightly dif-
ferent. EPO utilizes primary care providers as gatekeepers. Em-
ployees must first see their gatekeeper and receive a referral prior
to seeing a specialist. Employees’ expenses are covered 100 percent
in this plan with no deductible. There is no coverage for care pro-
vided outside of the EPO network. And our indemnity plan is a tra-
ditional plan with 80/20 coverage.

Employee premiums are the same for the EPO product as they
are for the premier PPO product. Premiums have only increased 5-
percent since 1990.

Prior to introduction of our managed care plans, our total medi-
cal costs rose 11 percent in 1988 and 46 percent in 1989. With im-
plementation of our managed care program, 1990 saw a 5-percent
decrease in total medical costs. Between 1990 and 1994, our total
medical costs have averaged a decrease of 2 percent per year. Dur-
ing this time, our population has remained relatively constant.

On the other hand, our indemnity plan has increased 11 percent
a year since 1991.

‘As we continue to manage our costs, we are convinced that man-
aged care is a long-term solution for the present as well as the fu-
ture. We also believe that managed care is effective in controlling
our medical costs without sacrificing quality of care.

Why have we been successful in controlling the meteoric rise in
medical costs? I believe the reasons are threefold.

One, managed care: Managed care has clearly been the most im-
portant factor in bringing our costs under control. We have offered
the PPO plan, as well as the EPO plan, and 65 percent of our em-
ployees have enrolled in the PPO plan, which is less restrictive but


62

Baciger Meter,inc,

4845 W. Brown Deer Road, P.O. Box 23080
Mitvesuiene, WI BS@23-0080 (414) 385-0400

May 12, 1985

James Wrockiage .

Health Care Natwork ct Greater Mitwaukee
‘Suhe 300

250 Bishops Wey

Brookfield, WI 3005-6222

Dear Jim:

As a member and participant of Health Care Network (HCN) since its incaption,
Badger Meter, Inc. cannot over emphasize the positive Impact HCN has had in
helping contro! our employee health care costs in Milwaukee.

‘The average cost per employee in the Milwaukee HCN pian has Increased less than
twenty five percent (25%) since 1968 through 189<, Few companies can make this
claim in an environment which saw double dlait inflation for each or most years In
that seven year period. The value of those health are doliars spent during this
period has also been enhanced.

Educating employees and making them more conesious purchasers of qualtty heath
cara through the HCN provider network has contrit uted greatly in controlling our
costs. With 47§ employees based in Milwaukee, these cost controls have, In pari,
contribuled to Badger Meter's continued financial strength and maintained its market
position as a leading manufacturer of flow measurement products worldwide.

As the health care delivery system has and contini as to change, HCN nas been
‘able, through Its flextbllity and foresight, to change and help provide for cost
effective quality care for cur employees, HCN has added value to health care in
Milwaukee,

Sineereiy,

Eon BE

Ronald H. Dix
V.P. + AdmJ/Human Resources


86

at a higher cost both to the company as well as the employee; 35
percent in an EPO; and less than 1 percent in the indemnity plan.
The EPO, which has tighter management controls, has kept the an-
nual benefits paid per employee at an average of $2,600, while the
PPO benefits paid per employee is averaging $2,900.

Although less expensive, we have not made great efforts to drive
employees into the EPO plan. This is due to employee surveys
showing that employees like some flexibility and have made efforts
to receive their care in network and have been excellent consumers
in controlling their health care costs.

STK, Storage Technology, views managed care as a four-legged
platform. The legs are comprised of the employer, employees, pro-
viders, and a third-party administrator. And the platform itself is
quality medical care. We feel that each leg must communicate with
the other legs in order to be successful.

For this reason, the benefits department meets regularly with
the employees through focus groups to understand their needs and
satisfactions with the program. We meet frequently with Aetna,
our third-party administrator, as well as with our highly utilized
hospitals and provider groups. In these meetings, we discuss con-
cerns, exchange data on utilization and costs, and develop strate-
gies to address issues. By doing this, we feel that each party under-
stands clearly where the other legs of the platform are focused.

As an example of this, we noted in 1991 that our largest medical
expense was in pregnancy and childbirth. We met with two of the
local hospitals to ask how they would help us control costs and as-
sure us a high quality of care for our members in this area. Their
response was to enhance their facilities in birthing centers, provide
an educational program for pre- and postnatal care, and they par-
ticipated in successful negotiations with us to provide package
rates for their services. We believe this occurred because we devel-
oped an open dialog and were able to create a partnership with
them in responding to our needs.

Another advantage of managed care is the ability to provide cost
control measures while assuring that quality care is being deliv-
ered. As an example, the chronic passive motion machine is some-
what new technology that orthopedists use frequently on their pa-
tients after knee and hip surgery. Studies have shown that there
is no advantage to using this machine over standard physical ther-
apy and has no effect on improving outcomes. For this reason, we
provide only very limited coverage.

Another example is autologous bone marrow transplant for end-
stage metastatic breast cancer. We have an employee who re-
quested this therapy, which was controversial at the time. Aetna
worked with us in evaluating this last-effort treatment for efficacy.
Though very experimental and risky, in an attempt to save this
woman’s life, treatment was approved. She underwent the treat-
ment 4 years ago and is currently still employed as an engineer at
Storage Technology.

Other advantages to network care are the ability to perform case
management on high-cost, complicated claims and utilizing centers
of excellence that can control costs while delivering the highest
quality of care.


31

Tablet

tage of Employers With Cost-Sharing,
by Level of Cost Sharing and Year
for Traditional Indemnity Plans, 1989-1992

Individual Deductible
‘Amount

1989 1990 1991 192
$100 or less 40% 38% 3% 29%
$150 6 15 5 3
$200 cy 2 B 2B
‘Over $200 n 18 B %6
Coinsurance Rate for

Inpatient Care 1989 1990 1991 1992
0% 23% 5% 7% 25%
10 7 5 4 4
15 2 2 2 2
20 a 6 6 6
B a 2 1 1
Coinsurance Rate for

Physician Visits 1989 1990 1991 192
0% 8% 6% 6% 5%
10 6 5 4 4
5 2 2 2 2
20 7 wu 82 8
B a 2 1 1
Employee

Out-of-Pocket

Maximums 1989 1990 191 1992
<$1,000 35% 37% 30% 28%
$1,000-$1,499 38 7 39 38
$1,500-$2,499 a 20 ory 6
$2,500-$4,999 4 5 6 6
$5,000+ 2 2 2 2

Source: A. Foster Higgins & Co,, Inc., Health Care Benefits Survey, Report 1: Indemnity Plans: Cost,
Design and Funding (Princeton, NJ: A. Foster Higgins & Co,, Inc., 1990-1993).

Data not available.

Table 2
Percentage of Surveyed Employers with Utilization Review Programs
for Traditional Indemnity Plans,

1989-1992
‘Type of Program 1989 1990 1991 1992
recertification of Elective Admissions 73% 81% 81% 83%
Concurrent Review 52 6 6 6
Catastrophic Case Management 55 6 o @
‘Outpatient Utilization Review 9 2 w 2
Second Surgical Opinion 9 cs 2 n
Mandat ” 5 9 45
‘Voluntai wv 3 3 6
None of These 9 7 8 7

Source: A. Foster Higgins & Co,, Inc, Health Care Benefits Survey (Princeton, NJ:
€o, Inc., 1990-1993).
For specific procedures.

For all procedures.

. Foster Higgins &


7

based health plans are relevant and possibly applicable to the Med-
icare program.

The hearings wouldn’t be complete unless we heard from the
Prgsgcutors who are now trying to put the rest of the Prudential

ife Insurance executives in jail for shoddy sales practices, and un-
less we examined all of the malpractice suits filed for denial of ben-
efits to people which caused death or serious illness when zealous
bean counters for insurance companies deny benefits in their inter-
pretation of managed care.

I feel it is necessary to raise these words of caution before we
hear from our witnesses today, particularly in light of the tone of
the announcement for the hearing.

Your announcement described Medicare in the following manner:

Medicare insurance coverage remains largely as it was originally enacted in 1965:
traditional fee-for-service indemnity insurance with beneficiary cost-sharing require-
ments to control utilization. However, private health insurance has evolved substan-
tially since that time.

There is some confusion, I think, over Medicare’s commitment to
health security for America’s seniors, which does remain largely as
it was originally in 1965, versus Medicare's means of paying for
that security. Today over 99 percent of seniors have health insur-
ance coverage. That is a commitment we made in 1965. And it is
as necessary and valued a commitment today, as it was when we
enacted it in 1965.

As to the operations of the Medicare Program over the past 20
years, Medicare has actually led the way in innovations in adminis-
tration, cost containment, quality of care, and beneficiary choice.
The fact is that no employer in the country, no witness today, pro-
vides the range of health insurance options to the range of Ameri-
cans in the variety of locations as does the Medicare Program.

The diagnosis related group [DRG]-based hospital prospective
payment system led the way in reforming the way hospitals get
paid. Similarly, Medicare’s resource-based relative value scale pay-
ment system has changed forever the way in which doctors are
compensated. Both payment mechanisms are in widespread use
across the country and across systems, both public and private. In
our own State of California, Blue Cross and Blue Shield both use
these methods of reimbursing hospitals and physicians.

Medicare has not only been concerned with costs but with the
quality of patient care received. Medicare led the way in developing
utilization review through its professional review organizations, re-
view which is now the underpinning of most managed care in the

rivate sector. Moreover, as I know the Chairman is aware, the

‘ederal Government’s involvement in outcomes research and the
development of practice guidelines is serving to improve quality of
care for Medicare and non-Medicare patients alike. As reported in
lost month’s issue of the Journal of Transplantation.

Heart transplant patients at Medicare-approved hospitals have a 20 percent lower
risk of death within 30 days of the procedure. Better outcomes persist for 5 years.

While I disagree with your characterization of Medicare today, I
do agree that if the proposals put forth in the recent Republican
budget are enacted, like abolishing the Agency for Health Care Pol-
icy and Research and slashing Medicare funding, the clock on Med-
icare could be turned right back to 1965.


46

CONCLUSION
Chairman Thomas, I am honored to be here today. Thank you for the opportunity to present
the unique market driven approach to health care reform that we have undertaken in California.
PBGH’s track record of success demonstrates that private and public sector purchasers can
leverage their dollars and volume to bring more rationality to our health care system. This
approach is certainly not the entire solution for our problems; however, it can make a
significant contribution toward a better health care system.


6

Chairman THOMAS. The subcommittee will come to order, and I
want to welcome you to our continuing series of hearings on Medi-
care and health reform in general. This is the 13th hearing the
subcommittee has conducted this year, and this committee and this
Congress have already moved aggressively to enact real health care
reform for the American people.

As you know, the Congress has passed and the President has
signed a law permanently increasing the health insurance tax de-
duction for the self-employed prospectively at 30 percent. And this
House has passed long-term care insurance improvements and ex-
tension of the Medicare Select program, reforms in the malpractice
area to prevent lawsuit abuse in the medical field. They are all
over on the Senate side, and we were anxiously awaiting some ac-
tion from the Senate.

Today's hearing will focus on experience in controlling costs and
improving the quality of employer-provided health coverage as we
begin to consider options for preserving Medicare. In the 21st cen-
tury, it is to the private sector we should look for lessons that have
been learned and changes that we might be able to make in our
delivery system. Although Medicare remains predominantly a
1960s-style fee-for-service health insurance plan, private health
coverage has evolved substantially since that same time period.

Employers, especially in the past 5 years, have moved more rap-
idly from traditional insurance into sponsoring more options for
their employees, such as health maintenance organizations, pre-
ferred provider organizations [PPO’s] and other coordinated care
arrangements. Some 56 million Americans were enrolled in health
maintenance organizations [HMO’s] last year—that is up from 36
million in 1990—and 65 percent of people with employer ased cov-
erage were enrolled in 1994 in some form of a coordinated care pro-
gram.

Employers are also joining forces with each other in many mar-
ket areas, using their buyer power and new-found knowledge to
force dramatic changes in the health care delivery system to lower
costs and improve quality. We will hear from witnesses today about
these arrangements.

I believe employers in private health plans have turned a corner
in terms of cost control in recent years. In the last Congress, Stuart
Albert and I carried on a conversation about the fact that both of
us believed that these changes are relatively fundamental and per-
manent, notwithstanding the relatively few years that these
changes have been in effect.

In 1995, on average, HMO’s are expected to reduce their per-per-
son premiums by 1.2 percent. In 1994, private health spendin;
grew at about 4.4 percent, compared to Medicare spending growtl
of over 11 percent.

As we consider solutions for Medicare, I believe we should take
the time to focus on successful private-sector efforts so that we
might learn from their experience as we seek changes in the Medi-
care program. I look forward to hearing from our witnesses.
sth recognize the gentleman from California, Ranking Member Mr.

rk,

Mr. Stark. Mr. Chairman, thank you. I am pleased you have
scheduled today’s hearings to see what experiences with employer-


40

receiving proper care and problems developing later on for care not
received. So your premise that the individual needs to be involved
in his or her own care is absolutely correct, but should not be the
only individual involved in his or her own care; and I think at some
point you reach a Point where you create some danger.

Mr. FRONSTIN. | think it really depends on how individuals view
the MSA, if they view it as an extension of their insurance plan,
or if they view it as just savings that they could roll over from year
to year or cash out at the end of the year.

If they choose to view it as saving and forgo interventive serv-
ices, it may create additional problems down the line where, by the
time they seek care, they are sicker than they would have been
otherwise.

Mr. McCrery. Do you have any evidence that people will forgo
health care for savings?

Mr. Fronstin. I couldn’t understand you.

Mr. McCrery. Do you have any evidence or do you think people
might forgo health care?

Mr. FRONSTIN. People might. It depends on how they view their
MSA. If they view it as insurance, they would just

Mr. McCrery. You are not aware of any data that supports that?

Mr. FRONSTIN. No. No.

Mr. McCrery. Thank you.

Mr. ENSIGN. I would like to thank the panel for your excellent
testimony.

We call the next panel up. We have Paul Fearer, senior vice
president of human resources at Union Bank, on behalf of the Pa-
cific Business Group on Health Negotiating Alliance, San Fran-
cisco; Michele French, director of health and welfare benefits, Of-
fice of the President, University of California, Oakland; and James
R. Wrocklage, chief executive officer, Health Care Network of Wis-
consin, Brookfield, WI.

Each one of you will have 5 minutes. Proceed as you see fit. The
amber light will go on when there is 1 minute left.

Mr. ENsiGNn. Mr. Fearer.

STATEMENT OF PAUL FEARER, SENIOR VICE PRESIDENT OF
HUMAN RESOURCES, UNION BANK, ON BEHALF OF PACIFIC
BUSINESS GROUP ON HEALTH NEGOTIATING ALLIANCE,
SAN FRANCISCO, CA

Mr. FEARER. I am here today representing the Pacific Business
Group on Health Negotiating Alliance [PBGH], which is a coalition
of 30 employers that are headquartered in California and rep-
resents nearly 3 million employees, dependents and retirees. PBG)
has as its reason for being, improvement in the quality and effi-
ciency of health care delivery.

Talso 0 personally serve in a human resources management capac-
ity at Union Bank and, among other things, oversee the bank’s
benefits programs for its 8,000 employees ‘and 1,500 retirees.

By way of background, my own employer, Union Bank and other
members of the Pacific Business Group on Health experienced ex-
plosive growth in health care costs in the mid- and late-1980s; at
that time, most of us used a variety of techniques to manage these
costs.


Overview

ecient an unprecedented inctease in man:
aged care enrollment, U.S, employers successtully
drove down their overall health benefit cast last year.
This marks the end of two decades of heaith benefit
cost increases that have consistently outpaced infla-
tion. Total health benefit cost in 1994 averaged 83.741
per employee, down 1.1% from 1993 average of
$3,781

While aided by relatively low medical cost inflation,
the reduction in benefit cost was a direct result of
employer cost management activity:

1 Shifting employees (rom traditional indemnity
plans to managed care plans
‘@ Carving out medical plan benefits with more
volatile cost. such as prescription drug and men-
tal health/substance abuse care. and offering
them through freestanding “managed” plans
= Enrolling a growing number of retirees in man-
aged care plans. particularly HMOs
Large employers were the most active in 1994—
29% of employers with 500 or more employees report-
ed making “signiticant” changes to their health benefit
program in 1993. compared 10 only 20% of smaller
‘employers. And large employers had the most success
in holding down cost. While the average total health
care cost dropped 1.9% among large emplovers.
among small employers it rose 6.5%.

Increase in total health benefit cost
per employee, 1986-1994

PERCENT INCREASE IN COST

19

Enrollment in managed
care surges

the slowdown in cost was driven by the biggest
Increase in employee enrollment in managed care
plans in the nine-year history of the survey. In 1994.
63% of all covered employees were in a PPO, point-of-
service plan. or HMO. up {rom 52% in 1993. This rep
resents a 21% increase in managed care enrollment
nationwide
The lastest growth by far was in point-of-service
plans (which include “open-ended” HMOs as well as
insurance carrier plans). As the number of empioyers
offering POS plans more than tripled. enrollment
jumped from 7% to 15% of all covered employees.
Enroliment in “traditional” closed-panel HMOs grew
moderately in 1994. from 19% to 23%. Among the
managed cate alternatives, only PPOs failed to capital-
tze on declining indemnity plan enroiiment. In fact.
nationwide PPO enrollment fell from 27% to 25% in
1994, despite a slight increase in the number of
employers offering a PPO.

National employee enrollment

in plan type

PERCENTAGE OF ACTIVE COVERED FULL-TIME AND
PART-TIME EMPLOYEES IN EACH TYPE OF PLAN

oo a or cor |
1993

eT 1

om

Regional differences in cost

{ more evidence was needed to prove that health

cate markets around the country vary widely. the
survey supplied it. In the Northeast. where the biggest
shift in enrollment into managed care occurred—rising
from 34% of covered employees in 1993 to 63% in
1994 employers experienced a dramatic 9.7%
decline in total health care benefit cost, from $4,267 to
53.851


14

percent in 1994, employers experienced a dramatic 9.7 percent de-
cline in total health care benefit costs from $4,267 to $3,851.

In the Midwest, managed care enrollment grew from 51 to 60

ercent in 1994 with costs essentially flat, rising from $4,020 to
34048. In the West, where managed care enrollment was already
high, the growth in 1994 was more moderate, from 72 to 80 per-
cent, and costs rose 2 percent to $3,693. In the South, there was
little growth in managed care enrollment, from 57 percent to 58
percent, and total costs rose 3.9 percent to $3,389.

Because cost is measured per active employee, the employers
who provide retiree coverage have Significantly higher average
costs than those who don’t. Among employers of all sizes who pro-
vide retiree coverage, average total cost is $4,221; among those who
don’t, average cost is $3,238.

In 1994. for the first time, employers induced a significant num-
ber of retirees to join HMO’s, particularly in the West. Among large
employers, defined as 500 or more employees, 17 percent offer an
HMO under a Medicare risk contract, up from 7 percent in 1993.
In the West, 36 percent of large employers offer a Medicare risk
contract HMO to their employees. Retirees traditionally have been
very reluctant to leave their own doctors and join HMO’s. Employ-
ers who move this high-cost population into low-cost plans will im-
prove their health care liability over the long term.

While total health benefit plan costs per employee decreased, the
average cost of the four types of medical plans rose at various
rates. With significant shifts in enrollment from indemnity plans
into managed care plans—and even among the three types of man-
aged care plans—and growing use of prescription drug and mental
health carve-outs, the relationship between the medical plan costs
and the all-inclusive total health costs has become more complex.
In addition, changing plan selection by retirees also affects medical
plan costs. Significant retiree enrollment in HMO’s will raise HMO
costs but may lower the actual cost of providing retiree medical
benefits.

For instance, in HMO’s, costs rose 6.4 percent from $3,276 per
employee in 1993 to $3,485 in 1994. Some of this cost increase is
the result of growing retiree enrollment in HMO plans which raises
the per-employee HMO cost but lowers the total cost of providing
health benefits to retirees.

The survey results also show that many employers are beginning
the process of measuring the performance of their health care ven-
dors: cost-effectiveness and quality of care, including medical out-
comes, access to providers, and patient satisfaction. With this infor-
mation, employers can determine which plans offer the best value,
and make their buying decisions accordingly. Fifty percent of large
employers offering HMO’s tried to evaluate the quality of their
plans in 1994, up sharply from 38 percent in 1993. In the West,
where managed care first took hold, 68 percent of large employers
measured HMO quality last year.

While employee satisfaction surveys are the most common type
of quality evaluation, employers are also seeking data on provider
outcomes. Thirty-seven percent of large employers sought outcomes
data from their point-of-service plans, 29 percent from their PPO’s,
and one-fourth from their HMO’s.


‘The Board of Trustees also expressed "great concern” about spending growth from the
‘Supplementary Medical Insurance trust fund. As noted by the Board of Trustees in the 1995
report:

“In spite of evidence of somewhat slower growth rates in the recent past,
overall, the past growth rates have been rapid, and the future growth rates are
Projected to increase above those of the recent past. Growth rates have been so
rapid that outlays of the program have increased 53 percent in the aggregate
and 40 percent per enrollee in the last 5 years.”

Medicare insurance coverage remains largely as it was originally enacted in 1965:
traditional fee-for-service indemnity insurance with beneficiary cost-sharing requirements to
control utilization,

However, private health insurance has evolved substantially since that time. More and
more privately insured Americans are enrolled in managed-care plans, such as Health
Maintenance Organizations (HMOs) and Preferred Provider Organizations. According to the
Group Health Association of America (GHA), some 56 million Americans were enrolled in
HMOs in 1994, up from 36 million in 1990, and 65 percent of people with employer-based
health insurance plans were enrolled in some form of managed-care arrangement, according to
the KPMG Peat Marwick Health Benefits in 1994 (October 1994),

Moreover, managed-care organizations have recently been successful in slowing the
rate of growth of premiums. In 1995, on average, HMOs are expected to reduce their per
person premiums by 1.2 percent, according to GHAA.

Some private employers have also begun to offer their employees Medical Savings
‘Accounts. Such accounts allow employees and their dependents to control their health care
dollars. providing strong incentives for cost conscious spending.

Medicare beneficiaries can enrol! in HMOs under the risk contracting program and
‘other managed-care arrangements, but, due to certain features of the program, managed-care
remains a relatively small part of Medicare. with only 8 percent of the beneficiaries enrolled
in managed-care plans as of December 1994. Medicare beneficiaries are also not currently
able to enroll in any kind of Medical Savings Account.

FOCUS OF THE HEARINGS:

The hearings will focus on successful private-sector approaches at controlling costs and
improving quality and an exploration of how such approaches can be made more available to
increase choices for Medicare beneficiaries.

The hearing on Tuesday, May 16, 195, on “Experience in Controlling Costs and
Improving Quality in Employer-Based Plans” will review the approaches employers have
taken to improve the cost-effectiveness and quality of their coverage for their employees, the
issues and problems encountered as these approaches were implemented, the effectiveness of
these approaches, and lessons the Federal Government can lear from these private-sector
‘experiences.

‘The hearing on Wednesday, May 24, 1995, on "Medicare HMO Enroliment Growth
and Payment Policies” will investigate the reasons for increasing beneficiary enrollment in
Medicare risk contracting HMOs, and current and alternative HMO payment methods.

‘The hearing on Thursday, May 25, 1995, on “The Potential Role for Employers,
Associations, and Medical Savings Accounts in the Medicare Program" will explore issues
involved in enabling employers and associations to offer Medicare coverage to former
employees and members, respectively, and the potential role Medical Savings Accounts could
play in the Medicare program.

(MORE)


110

POWER ANO CONTROL WHEEL

“This diagram, developed by the Domestic Abuse Intervention Project in Duluth, Minnesota, ">,
ingicates the different forms of abuse that batterers use to gain power and control their

victims.

USING COERCION
AND THREATS [INTIMIDATION
‘Maung anaior caryng cut inens Maung ner atu 2y using
ta ee somemng to hurt her J looks. acuors, gestures
‘inventenng to leave het of smasning thogs + aestoy0g
‘er arcoerty » s0usn9

weaoors.

ECONOMIC
ABUSE

MINIMIZING,
DENYING
‘AND "BLAMING


69

WEs.

May 12, 1995

‘Mz. James Wrocklage

Health Care Network of Wisconsin (HCN)
250 Bishops Way, Suite 300
Brookfield, WI 53005-6222

Dear Fm:

L welcome the opportuniry to summarize the very targible benefits of the partnership
that WPS and HCN have had over the past three years. This parmership, using the
HCN provider network, has provided our customers with a successful private sector,
market driven, approach 1o controlling medica} cost., utilization, ané outcomes.

The availability of Health Care Network of Wiscontin (HCN) provides our small
employer clients (2-100 cmployees) access to 2 broed network of providers that offers
quality health care services on a cost effective basis The availability of this network to
the small business insured market has allowed our small employers to share in the
purchasing power generated by this larger employer coalition and creates opportunity
for the small employers to benefit directly from corrolled costs. The savings are
reflected in the premium and medical trend differential as shown in the following
paragraph. As can be seen, using the HCN networs has provided substantial savings to
our insured small business clients over the years, aid bas dope so much sooner than
otherwise would have been possible.

Compared to our standard, non-managed indemnity product, the HCN PPO and Point
of Service (POS) provides a legitimate 12% savings on the physician component, 36%
savings for in-network bospital stays, and 20% savings for in-network outpatient. Over
the three year period these discounts translate into 2 medical rend differential of 6%
for the HCN network products compared to our injesmity product, We expect this
differential t9 widen in the future. Taking the aritumetic to the final level, ie., what
does this mean to the customer paying the premiurn bill, the HCN managed care
products provide a 8-14% lower premium comparal to our indemnity products for
similar or better benefits.

‘The final proof of the HCN offering is the sales aad retention levels for the WPS/HCN
products in the three county metro-Milwatikee marketplace. Currently, WPS insures


24

age of 8 percent, compared with services that similar patients
would be expected do use in a traditional fee-for-service indemnity
plan. However, staff and group model HMO’s were shown to reduce
services by nearly 20 percent, and IPA’s reduce use by an average
of. $8 8p rcent.

rred provider organizations and point-of-service plans have
alee emerg as strong alternatives to fee-for-service plans and
HMO’s. The number of individuals enrolled in these arrangements
increased significantly between the mid-1980’s and today. Evidence
on the savings from these plans is largely lacking, but does suggest
there is a potential for savings. For example, AT&T was able to re-
duce its annual growth rates for medic: enses from 12.9 per-
cent in 1991 to under 5-percent in 1992, partly because they moved
their workers into a point-of-service plan. Other factors contribut-
ing to reduction include managed care, hospital discounts, and an
increase in employee coinsurance when out-of-pocket network pro-
viders are utilized.

In 1991, Cincinnati Bell, General Electric Aircraft Engines, Proc-
tor & Gamble, and the Kroger Co. formed a health care coalition
to increase bargaining power for discounts with area hospitals,
monitor quality improvements, and search for other ways to control
costs. Annual savings in the Cincinnati area have been estimated
at $75 million for all private and public payers of health care be-
cause of a 5-percent decrease in the average charge per patient and
a 10-percent decrease in the average hospital length of stay.

Coalitions have also been formed in many other cities. These coa-
litions are successful in reducing expenditures on health care be-
cause they create a competitive Market with sound economic prin-
ciples such as volume purchasing and competitive bidding.

‘hank you for the opportunity to testify this morning.

[The prepared statement and attachment follow:]


10

TESTIMONY OF EDWIN C. HUSTEAD
HAY/HUGGINS CO., INC.

‘Thank you for the opportunity to address the Subcommittee on Health of the Committee on Ways
and Means on the issues of controlling cost while preserving quality in employer-based plans.
T am & Senior Vice President with the Hay/Huggins division of the Hay Group. We are an
international benefits and compensation consulting firm. I am a Fellow of the Society of
Actuaries and a Member of the American Academy of Actuaries.

The central problem in the rising cost of health care has been the absence of an economic buyer.
When confronted with a need for health care, « patient is usually not in a position to bargain for
the best rates or search for the most efficient provider. This problem is exacerbated, in the
United States, by the fact that a large share of most health care bills is paid for by a third party.
The result is predictable - patients will “buy* much more health care than they need and at higher
rates than could be negotiated. In effect, the health care system simulates a monopoly that sets
the price and use of its product.

Cost Controls

Insurers and employers have used two strategies to attack this problem. The first is to lessen
unnecessary utilization of care through the management of the treatment. The second is to
negotiate price discounts with the providers of care.

Health Maintenance Organizations (HMOs) apply both utilization and discounts. Other
arrangements that deal with one or both of these aspects of health care have grown rapidly in
recent years. These include Preferred Provider Organizations (PPOs) and Point of Service Plans
(POS).

The PPOs deals only with the discount aspect of cost control. Patients are encouraged to select
a physician or hospital from a network of providers who have agreed to provide services at a
discount, The incentive to the patient is that the plan will pay a larger share of the bill for these
providers.

The POS plan also asks the employee to select a provider at the time that services are needed.
Unlike the PPO, however, if the employee selects the in-network POS plan then that plan
manages the provision of care, as in an HMO, and provides discounts.

The following chart shows the percentage of employer health insurance plans by the type primary
plan. The chart, and other data in my testimony, is from the Hay/Huggins Benefits Report
(HHBR). This is a comprehensive report on the benefits practices of over 1,000 medium to large
employers in the United States. Fee-for-service (FFS) plans are the traditional method of
providing care. In the last four years, FFS plans have dropped from a majority of primary plans
(69 percent) to a minority (42 percent). ‘The fastest growing primary plan is the PPO but the
POS and the traditional HMO plans have also increased substantially. We expect these trends
to continue until very few primary plans are traditional FFS plans.

Design of Primary Medical Pian



Conclusion

The health care delivery and financing system is evolving rapidly. There
have been changes in the way health care is financed, the types of treatments
available, the sites of care, and the physician-patient relationship. These changes
have resulted primarily from reactions to health care cost inflation, and employers’
experiences in managing health care costs have varied with the methods chosen.
‘We can expect to observe a continued increase in cost-sharing responsibilities of
workers, the monitoring of care, the movement of workers and their dependents
into managed care arrangements, especially those that offer greater choice of
physician, such as IPAs, PPOs, and POS plans, and the formation of employer
coalitions to negotiate for volume discounts for health care services.

Thank you for the opportunity to testify this morning. I'll be glad to answer

any questions you may have.

1 tn 1993, 54.2 percent of workers aged 18-64 received health insurance coverage from their employer.
See Sarah Snider and Paul Fronstin, "Sources of Health Insurance and Characteristics of the Uninsured:
‘Analysis of the March 1994 Current Population Survey,” EBRI Special Report SR-28/Issue Brief no. 158
(Employee Benefit Research Institute, February 1995).

2 US. Department of Labor, Bureau of Labor Statistics, Employee Benefits in Medium and Large Firms,
1979-1989 (Washington, DC: U.S. Government Printing Office, selected years); Employee Benefits in
‘Medium and Large Private Establishments, 1991 and 1993 (Washington, DC: U.S. Government Printing
Office, 1993 and 1995).

3 Paul J. Feldstein, Thomas M. Wickizer, and John R.C. Wheeler, “Private Cost Containment: The
Effects of Utilization Review Programs on Health Care Use and Expenditures,” New England Journal of
Medicine (May 1988); 1310-1314,

4 Nancy Kraus, Michelle Porter, and Patricia Ball, Managed Care: A Decade in Review 1980-1990,
(Excelsior, MN: The lnterStudy Edge, 1991).

5 The InterStudy Competitive Edge, 5.1 (Minneapolis, MN: Interstudy, 1995).

U.S. Congressional Budget Office, “The Effects of Managed Care and Managed Competition,” CBO
Memorandum, February 1995.

Danae A. Manus, Robert J. Strub, and Thomas R. Werner, “The Cincinnati Initiative,” Managed Care
Quarterly (Winter 1994): 20-26.


98

2. Pat is ions,
) The MCO may pre-determine that all or most patients are to receive brief
hospitalizations and brief, crisis-focused psychotherapy, regardless of patients need. This
is based on decisions about money, not treatment and consumer need.

b) The MCO often requires reports from the treating clinician and then takes over
treatment decisions. The patient and his/her clinician may be powerless to decide the
course of treatment. The sense of powerlessness and the prevention of access to proper
treatment may increase a patient's symptoms, especially depression and anxiety.
Hospitalization ot intensive psychotherapy for a particular patient may be declared “not
medically necessary,” even though the standards of practice in the professions would
Clearly show the need for treatment.

‘c) What is “medically necessary” varies from one MCO to another, as it generally has
more to do with costs than with care.

d) Many MCO's will only authorize three or four psychotherapy sessions at a time,
leaving the beneficiary and provider unable to know how long their work will be able to
continue. Anxiety often rises before each “approval” and session time is often spent on
discussing the MCO, rather than on the problem for which the patient sought treatment.

e) Some MCO's deny funds for psychotherapy if the patient refuses medication. This
is because medication may produce a fast relief of symptoms, even though it may actually
fall to correct the actual problem. This then allows the MCO to discharge the patient
without investing much money. In general, there is concem that too many of our elderly
are already over-medicated. Often, they are considered too old to make changes and not
good candidates for psychotherapy, which is not necessarily true, This puts the elderly at
increased risk of over-medication. Further, there is a bias among some physicians and
scientists toward medication and away from “talk therapies," but this may reflect litte more
than an honest bias and the difficulty of forcing “talk therapy" into the molds of empirical
science. Patients may have a strong need to talk out their problems, yet their voices do not
count under managed care.

3. Consumers lose the right to privacy under managed care.

Because reports must be submitted to the MCO by the provider in order for the MCO to
determine whether or not continuing care is "necessary," information that should not leave
the treatment room must be given to the MCO, which may store it in their data banks.
Psychotherapy patients often require privacy over information involving personal problems.
Many consumers are not at all comfortable allowing such information to be divulged, but
may have to sacrifice reimbursement if they withhold this information, Under Medicare,
psychotherapy providers are not permitted to treat beneficiaries outside the plan. Thus,
those requiring privacy or those with paranoid conditions may be forced to forego needed
treatment due to inappropriate cost-containment techniques that may be suited to
“industry,” but not to human services.

4. MCO's may be grossly under-treating consumers of mental health care due to
cost: taint it is ide treatment for Medicare
ries ide of licare, wt mnt be id what the
ym le obtair nee services.

a) Many MCO's provide a grossly inadequate model of “short-term therapy,”
"solution-oriented therapy." “crisis intervention," or "stabilization," or they may state that
they only treat the “acute phase" of a problem, refusing to pay for proper treatment for
"chronic" or “ongoing” problems. This is a standard that would never be tolerated in
medical care, and should not be tolerated in mental health care. Examples of MCO
literature stating these limits can be provided to the

b) Many patients need time to build trust in the clinician and to tell their story. Patience
‘and understanding from the clinician are as necessary as advice. The clinician needs to
‘spend enough time with the patient in order to know if the problem goes deeper than the
surface “presenting problem.” These things are too often impossible under managed care.

‘¢) MCO's are misusing research data by not speaking to the limits of the research in
order to support their bias toward short-term treatment.

¢) Even though the literature in many MCO plans may state that beneficiaries may
have “up to 20 sessions" in a year, often times the companies’ reviewers are told never to
allow more than a few sessions (see vignettes), or providers are wamed that if they
average more than a few sessions per patient, they will be ejected from the panel or
refused further referrals. Thus, the provider may be too afraid to give the consumer the
treatment that is needed.



91

3. In-house services are another facet that have helped to keep our costs under control.
Headquarters has an on-site wellness facility that contains a 50,000 sq. ft. fitness facility, a
fully staffed medical clinic and a day-care center for 80 children. The fitness facility has a
utilization of over 7,500 participants a month. We track these utilizers and in the future
pian to correlate medical costs of utilizers versus non-users. The medical clinic offers
acute care, treatment of workers compensation injuries, emergency care, physical therapy,
EAP, dental hygiene, lab and xray, as well as preventive services. The clinic provides
substantial savings to the medical plan of over $1,000,000 per year. There is no charge to
employees who use the clinic.

STK firmly believes that prevention and early intervention have played a significant role in
controlling our medical expenses. The wellness, benefits and medical staff have developed
incentives for employees to follow preventive health guidelines. As an example, our
‘WellFlex program consists of a health risk assessment, a medical screening, a medical
exam that is age appropriate, and wellness counseling. Employees can sign up for this
program during the yearly benefit plan enrollment. If they agree to participate in this
program, not smoke and wear their seat belts, STK will pay them $152/year. We have a
93% participation rate in this program. Through the health screen we have detected
numerous silent disease processes in participants and referred them for further care. From
this program we have also determined that 30% of our population have elevated lipid
levels that put them at risk for cardiovascular disease. We have developed wellness
programs to help employees address concerns such as this in hopes of preventing future
problems that are preventable now. Again, we believe that patient education, early
intervention and prevention are some of the keys to controlling patient morbidity and
controlling costs.

Another wellness success story is our stop smoking program. In 1989 approximately 35%
of our employees smoked. The present and future costs to the plan by increased utilization
from this population were substantial, though not measured. The wellness and medical
departments implemented free stop smoking programs to employees and spouses. This
included distributing stop smoking patches through the medical clinic, three different types
of stop smoking classes through the wellness department and ongoing group support of
ex-smokers. Today only 11% of our population are smokers.


i

A recent innovation has been the application of capitation and earve-out arrangements by groups
of health care providers. Capitation is the basis for HMO pricing but the new use is to capitate
groups within the plan. Under these arrangements, a group of providers agrees to offer all of
their services for a pre-determined fixed rate (the capitation). The insurer can then pass on the
risk for that part of the care. Many plans carve out all of their psychiatric claims to a separate
organization. And, capitation is now being applied to other parts of the delivery system such
as nursing and drugs. Through sharing of risks, these arrangements should result in additional
control of cost.

Results

‘An encouraging, but puzzling, trend in 1994 was the very low increase in health insurance rates.
Some credit must go to the accumulative impact of the cost control measures. However, the true
impact of these measures is masked by a phenomenon known as the underwriting cycle. The
following chart of rate increases in the private sector since 1983 clearly shows that cycle in
operation.

f

The underwriting cycle begins when actuaries set rates that are higher than needed to cover
current costs. Rates must be set two to three years in the future and, given the volatility and
growth in health care costs, actuaries tend to be very conservative about these trends. They may
also need to cover past losses.

‘When experience shows that the rates are too high rate increases can be reduced to below the
actual cost trend. Further, the excessive rates build large reserves that can be drawn on to keep
fates at an artificially low level. These factors lead to unusually low trends for several years.
The rates are kept down by market forces.

The cycle begins again when the excess reserves are expended and costs appear to be increasing
again. Actuaries again set trends higher than needed and the reserves that might have been
available to offset these increases have been spent.

Prior patterns suggest that 1994 should have begun the movement upward and that we should be
faced with unusually large increases in 1995 and 1996. In fact, preliminary indications are that
rate increases in 1995, while higher than in 1994, may not reach the double digit level that
occurred in most years from 1980 through 1994,

‘There has been speculation that one of the reasons for the low rate of increase in 1994 was a
restraint on cost increases by insurers and providers to show that health care reform was not
needed. However, in the cases that we have examined, we find that the low cost increases
resulted from a build-up in reserves because of overstated premiums before 1994.

Our hypothesis is that the extensive cost control measures introduced by most large plans in the
last few years have resulted in a slowing down of the underlying trend of health care cost
increases. The result is that insurers still hold much of the large reserves that they built in the
early 1990s and increases continue to be moderate.


Coalition of Mental Health Professionals and Consumers, Inc.
P. 0. Box 438, Commack, NY 11725 Phone/Fax: 516-424-5232

Testimony
Karen Shore, Ph.D., Executive Director
1966 Ashley Place, Westbury, NY 11590
516-997-3390

A) Introduction:

Tam submitting testimony on behalf of the Coalition's approximately 1250 members,
The Coalition is a national, grass-roots organization, made up of clinicians from all mental
health disciplines and consumers of mental health care, their family members, and their
advocates. The Coalition is working with approximately 24 regional “affiliated groups" that
have no legal tie to the Coalition, though some have taken out memberships. Thus, | am not
officially testifying for these groups, but do want the Subcommittee to know that several of
these groups are state or regional Coalitions (MA, NY, NJ, PA, DE, MD, NC, GA, TN, IL, OH,
CO, CA, WA, MO) that have been inspired by our Coalition or that formed prior to our forming
(November, 1992), have similar goals, and are attempting to work together. Each of these
groups may have dozens, hundreds, or thousands of members.

am testifying because of plans to increase the number of Medicare beneficiaries to be
enrolled in HMO's and other forms of managed care, The Coalition formed specifically
because of the deciine in quality of mental health treatment brought by managed care
organizations (MCO's). MCO's also have a strong impact on the ability of professionals to
deliver proper care. The problems of managed care have the most impact on beneficiaries
who need treatment, as opposad to those who are generally healthy. Thus, a
percentage of the Medicare population covered by MCO's than of the general MCO population
will experience these problems, as our elderly generally require more treatment than does the
general population.

In this testimony, | will outline the problems we have seen in delivery of services under
MCO's in the private sactor and will offer recommendations. We cannot assume that Medicare
beneficiaries will receive better care under MCO's than those in the private sector.

B) Problems with Mani f sumers and Providers:

1. Citiz i right to freel clinici

'@) MCO's increasingly limit their provider list to providers who demonstrate
willingness to perform short-term treatment, whether or not it is truly appropriate, and on
their willingness to do so without complaint. Thus, the pool of providers available to the
consumer may exclude those who would perform or advocate for quality care.

) Primary care providers often must act as gatekeepers and may limit access to
psychiatrists and to psychotherapists. Often, there are financial penalties if primary care
providers make "too many” referrals. Corporate profits are often more important than the
consumer and treatment. Primary care physicians are asked to do “counseling,” but do not
have the training to do real psychotherapy.

¢) MCO panel limitations often cause the consumer to travel a great distance for their
care, which could be especially burdensome for the elderly, and may prevent needed care.

d) Consumers may have to change clinicians often as plans drop providers and merge
with other MCO's, or as the consumer changes health plan. Continuity of care and the
building of trust in the clinician are impeded. Continuity of care and trust may be
particularly important for the elderly, who often are more in need of ongoing treatment than
the general population.

@) Clinicians are impeded in their abilty to make the best referral possible due to panel
restrictions preventing them from referring “out-of-network.”

) Generally, psychiatrists and other doctoral-evel clinicians, and even master's level
clinicians, may be prevented from performing psychotherapy by MCO's, as MCO's often
search for the "cheapest" clinicians. One MCO reportedly has begun using bachelors level
counselors rather than professionally trained master’s and doctoral level professionals.
‘When beneficiaries cannot receive reimbursement for treatment by clinicians with
advanced training, quality of care is compromised.

‘9) Patients hospitalized in a non-network hospital in an emergency may be forcibly
transferred to a network hospital before they are well, impeding recovery and possibly
increasing symptoms.

h) Even if the MCO offers out-of-network benefits (Point-of-Service Option), consumers
with limited incomes may be unable to access out-of-network providers, as they are
financially penalized for doing so. This may affect the elderly in large proportions due to
the large percentage on limited incomes.



102

provide. It is imperative that the federal goverment allow the States to regulate this
industry. ERISA laws were not intended for health care. They were intended for pension
plans. If employer involvement were phased out, employers would not object to state
regulation of health insurance plans.

9. flexibility to experiment with a vari .
‘a) Encourage the States and regions to develop insurance plans that involve "freedom
with responsibility." MSA's attempt to do this.

b) There are many ideas yet to be devised and written down (9.9., see "Managed
Cooperation,” item F, below). Please do not lock Americans into any particular form of
system, as this will prevent better ideas from being formulated and implemented.

D) Summary:

‘There are many problems that have already occurred in the private sector under
managed care. These problems generally involve the loss of consumer freedoms to make
their own treatment decisions, in private, with their chosen clinician. In mental health, the
industry has changed the "standards of care” to substandard care.

In general, we urge Congress to institute some insurance reform and to allow the
States to regulate the managed care industry. We urge Congress to increase choice of
plan for Medicare beneficiaries and others, and to pass legislation that enables the
development and implementation of programs that offer altematives to managed care and
managed competition, especially those that re-institute a true free market for the actual
consumers of care. We support plans which retain consumer freedom while containing
costs by providing incentives for consumers to be cost- and utilization-conscious, thus
expecting some financial responsibilty from the consumer, according to the financial
means of the consumer.

E) Vignettes from Managed Mental Health Care - see pages 7 & 8.

F) “Managed Cooperation:” A Medical/Mental Health Care Pian - see pages 9 & 10.

‘These pages contain ideas ("Managed Cooperation") designed by the Coalition. Many
of these ideas could be helpful in designing systems of cost-containment that put the
consumer of care back in charge of his/her own treatment.



Se" BRIGGS & STRATTON CORPORATION

May 12, 1985

Mr. James Wrocklage

Health Care Network of Wisconsin
250 N. Bishops Way

Brookfield, WI 53005-6222

Dear Jim:

“For the largest group of Milwaukee activa employees under ite self-ineured
plan, Briggs & Stratton's current cost per employee per month is virtually the
same" as it was 3 years ago, when the pia1 was changed to incentivize use of
the HCN network, As there have been no sther significant plan changes during
that period, Briggs & Stratton attributes its participation In HCN, and the
collective purchasing power of its employer base, as being the principal reason
for the leveling of that cost.

"less than @ 1% increase

Sincerely,

BRIGGS & STRATTON CORPORATION

R. OG. Re ids
Manager, Group Insurance & Employee Benet ts

RCR:bkd
ce: filo


71

wv,

17174 }106.00 228.00
16118, 200

sanniedll
afl
Pots $47) il

BEER


16

TESTIMONY OF DENNIS J. TREAT
FOSTER HIGGINS & CO.
In concert with an unprecedented increase in managed care enrollment, U.S.
employers successfully drove down their overall health benefit cost last year. This
marks the end of two decades of health benefit cost increases that have consistently
outpaced inflation. Total health benefit cost in 1994 averaged $3,741 per employee,
down 1.1% from 1993's average of $3,781.

While aided by relatively low medical cost inflation, the reduction in benefit cost was
a direct result of employer cost management activity:

= Shifting employees from traditional indemnity plans to managed care plans

TM Carving out medical plan benefits with more volatile cost, such as prescription drug
and mental health/substance abuse care, and offering them through freestanding
"managed" plans

© Enrolling a growing number of retirees in managed care plans, particularly HMOs

Large employers were the most active in 1994 — 29% of employers with 500 or more
employees reported making “significant” changes to their health benefit program in
1993, compared to only 20% of smaller employers. And large employers had the
most success in holding down cost. While the average total health care cost dropped
1.9% among large employers, among small employers it rose 6.5%.

‘The slowdown in cost was driven by the biggest increase in employee enrollment in
managed care plans in the nine-year history of the survey. In 1994, 63% of all
covered employees were in a PPO, point-of-service plan, or HMO, up from 52% in
1993. This represents a 21% increase in managed care enrollment nationwide.

The fastest growth by far was in point-of-service plans (which include “open-ended”
HMOs as well as insurance carrier plans). As the number of employers offering POS
plans more than tripled, enrollment jumped from 7% to 15% of all covered
employees. Enrollment in “traditional” closed-panel HMOs grew moderately in 1994,
from 19% to 23%. Among the managed care alternatives, only PPOs failed to
capitalize on declining indemnity plan enrollment. In fact, nationwide PPO enrollment
fell from 27% to 25% in 1994, despite a slight increase in the number of employers
offering a PPO.

If more evidence was needed to prove that health care markets around the country
vary widely, the survey supplied it. In the Northeast, where the biggest shift in
enrollment in managed care occurred — rising from 34% of covered employees in
1993 to 63% in 1994 — employers experienced a dramatic 9.7% decline in total
health care benefit cost, from $4,267 to $3,851.

In the Midwest, managed care enrollment grew from 51% to 60% in 1994, with costs
essentially flat, rising from $4,020 to $4,048, In the West, where managed care
enrollment was already high, the growth in 1994 was more moderate (from 72% to
80%), and cost rose 2.0% to $3,693. In the South, there was little growth in
managed care enrollment (from 57% to 58%), and total costs rose 3.9% to $3,389.

Because cost is measured per active employee, employers who provide retiree
coverage have significantly higher average cost than those who don't. Among
employers of all sizes who provide retiree coverage, average total cost is $4,221.


99

) A recent Harvard study (James Hegarty, MD, at McLean Hospital, Boston, as
reported in Newsday, "Study: Managed-Care Squeezes Hospital Stay,” 5/24/95) showed
that there has been a dramatic increase in re-hospitalizations of psychiatric patients under
managed care due to premature discharges. The average length of stay (LOS) at McLean
in 1989 was 45 days. By 1994, due to managed care, the average LOS was 15 days,

‘There was a concomitant increase in the number of people readmitted within a month, from
0% in 1989 to 21% in 1994, and an increase in patients who were minimally improved or
‘worse at discharge than at admission, from 4% to 18%.

) The industry is ignoring 100 years of development in the field of psychotherapy and
is creating standards for treatment that are substandard.

rovider from st ar ling negative about the manac care company to the patient or
a Is nm ventir jiders from ‘ing the is ot
feceiving proper care.

‘Consumers are prevented from accessing professionals who follow their ethics and
refuse to sign such agreements, as these providers will not be included on the MCO's:
panel. Also, this can mean that if a panel provider believes that the MCO’s
recommendations would be harmful to the patient, the provider may not tell this to the
beneficiary. The consumer should have the right to know his/her provider's opinions of
treatment decisions made by the MCO, especially if the provider believes that the MCO's
decision is not in the patient's best interests. Also, these clauses prevent managed care
abuses from reaching the press and legislators,

6. Patients may find thi nef i
should be spent on getting well.
Patients never know whether or not their treatment will be covered until they become il

Since providers may be at risk if they advocate for the consumer, this leaves consumers
‘often having to spend their energy on advocating for themselves when needed treatment is
being denied. Patients who do not have the abilty, self-confidence, or energy to advocate
for themselves may be seriously under-treated. Often, mental health patients are too
derpressed, anxious, or too humiliated by their problems to advocate for themselves. With
providers being at risk for unemployment if they advocate for their patients, there may be
1no one left to advocate for the elderly patient, especially if family is uninvolved or lives far

‘Since the MCO's now decide which providers will be able to continue working, many
have been frightened into silence. Many feel too powerless to protest poor treatment of
consumers to the MCO, the press, or to their legislators. When New York State's
Assembly held hearings on managed care in January, 1994, several providers told me they
were too afraid of being identified by the MCO's to testify. Their fear was that they would
be ejected from the networks, refused referrals, or that their patients would be refused
future sessions, These very real threats put the consumer at risk, especially in mental
health, where patients usually do not advocate for themselves, and especially with the
elderly patient, who may not be able to advocate for himvherself.

de -capitalized.
a) MCO's keep money that is not spent on treatment. Corporate profits are soaring
while beneficiaries are prohibited from receiving care for chronic and ongoing problems
and are being discharged from hospitals prematurely.

b) Even capitated contracts that are made between employers and providers directly,
bypassing MCO's, are problematic, One California therapist told me that she was called by
‘@ capitated plan and told that she would receive approximately $235 for each patient they
‘send her. Obviously, if she performs one session only, she does very well. She still does
wall if she performs only two, Obviously, if the patient requires 10 sessions, she is
receiving poor wages (with no benefits) for someone with a doctorate or even a master's
degree. If the patient requires 40, 50, or more sessions, it becomes ludicrous. Thus,
there is a strong incentive to under-treat, and clinicians may simply not be able to afford to


‘21

employees), 17% offer an HMO under a Medicare risk
contract, up from 7% in 1993. In the West, 36% of
large employers offer a Medicare risk contract HMO fo
their employees. Retirees traditionally have been very
reluctant (0 leave their own doctors and join HMOs.
Employers who move this high-cost population into
low-cost plans will improve their health care liability
over the fong term

Medical plan cost increases

hile total health benefit plan cost per employee

decreased. the average cost of the four types of
medical plans rose at various rates, With significant
shifts in enrollment from indemnity plans into man-
aged care plans (and even among the three types of
‘managed care plans). and growing use of prescription,
drug and mental health carve-outs, the relationship
between the medical plan costs and the all-inclusive
total health cost has become more complex. in addi-
tion, changing plan selection by retirees also affects
medical plan cost. Significant retiree enrollment in
HMOs will raise HMO cost but may lower the actual
cost of providing retiree medical benefits.

Indemnity plan cost averaged $3,850 per employee
in 1994, up 10 percent from 1993's average of $3.50,
This was a higher increase than was experienced in
1993. Enrollment in indemnity plans dropped from
48% to 37% in 1994. Lower enrollment raises the
potential for adverse risk selection in indemnity plans.
which likely contributed to higher cost.

Point-of-service plans. which saw a surge in enroll-
ment in 1994, cost on average $3,609 per employee in
1994, While this is a 10.5% increase over the average
cost reported in 1993, the increase largely reflects a
change in the regional distribution of POS enrollment.
In 1993, 46% of the employers offering POS plans
were in the West region, where the average POS cost
was low. Because of the rapid growth of POS plans in
the higher-cost Northeast and Midwest regions. in
1994 employers in the West represented only 17% of
those offering POS plans.

PPO plan cost rose 2.1% in 1994, from $3.317 10
53.386. PPO sponsors benefited not only from a lower
rate of growth in medical care costs, but also from a
significant increase in the use of financial rate guaran-
tees from PPO administrators.

Medical plan cost, 1993-1994
IN THOUSANDS OF DOLLARS.

i

HMO costs rose 6.4%, {rom $3,276 per employee in
1993 10 $3.485 in 1994. Some of this cost increase 1
the result of growing retiree enrollment in HMO plans,
which raises the per employee HMO cost but lowers
the cotal cost of providing health benefits to retirees.

Implications for employers

Disease ensouring results he ath cae
cost crisis is by no means over, A large part of
‘employers’ favorable experience in 1994 is a one-time
savings due to moving employees {rom a higher cost
plan to a lower cost plan. The underlying factors dri-
ving health cate cost—the aging population. expensive
new technology. and cost-shifting from government
programs and the working uninsured—have not gone
away.

‘At the same time, managed care has the potentiat to
deliver long-term savings by emphasizing prevention.
mote efficient care, and better outcomes. To help
achieve that porential. employers wil! have to face new
challenges. with new measures of success. Quality,
access, and effectiveness of care—issues employers
haven't had to deal with in the past—will now be of
‘greater concern,


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95

Mr. ENSIGN. Just a couple of quick questions. We do have an-
other vote, and so we will wrap this hearing up.

But being from the private sector myself, 1 have gone through
these same changes. What was your experience and did you survey
your employees as far as satisfaction with their health care cov-
erage before these changes and after these changes, especially the
managed care changes?

Mr. REIKER. We have been continuously surveying our employees
for the past 5 years. And probably we had a little blip of negative
response when we went to the harder approach—with the disincen-
tives. But since we have used the soft opening approach the first
year without disincentives, it wasn’t very great and that went
away, I would say, within the first 2 months.

We encouraged employees to have their physicians petition for
membership within the network. We provided them the forms to do
that. We would facilitate that where possible, made it as easy as
possible. We gave them the choice to stay with their physician and
just pay the difference. So it really quickly rebounded to the
prechange levels, and in fact it is higher now than it ever was be-

‘ore.

Mr. ENSIGN. To follow that up to apply to Medicare, you know,
the testimony, and you hear this all the time, is educating seniors;
and both companies sound like they went through extensive com-
munications efforts and education efforts of your employees——

Mr. SPENCE. Absolutely.

Mr. ENSIGN [continued], To try to educate seniors on some of the
benefits, some of the ways that this is actually going to be better
for them than worse for them. Do you see that as the soft approach
maybe the first year and the disincentives the second, third, or
fourth year, whatever it is?

Mr. SPENCE. I think so, and I think the option, or one the things
that you can do, that didn’t make sense because of how we work,
was to offer a choice of plans. We needed to put our eggs all in one
basket, if you will, and so we chose only one plan. But I think to
provide the seniors with a choice of plans and the ability to get
their doctors to enroll in those plans; if they wanted them, let them
continue to choose providers, but if they go outside, they pay the
difference.

That took away all the opposition that we had; it seemed emi-
nently fair. So I would say that to offer the choice, to educate them
about the differences, I think is very valuable.

Mr. ENSIGN. One last quick question—maybe both of you could
comment on it, because you both mentioned something that the
Speaker has mentioned about giving seniors incentives for errors in
billing or fraud as far as financial rewards. Do you have any statis-
tics on how successful that was?

Obviously, it is well received by the employees, I am sure, but
do you have any dollar amounts or anything?

Mr. SPENCE. It is not very significant from a dollar standpoint.
I would say we have rewarded less than $150,000 in savings since
the beginning of the plan and that is based on $50 million a year
in claims. But if you used those stories in your communication, you
build heroes out of those people, you get far more in terms of active
consumers and people really watching the bills. And I have talked


33

and kept under control. Because of the increase in point-of-service
plans’ in 1994, particularly in the Northeast and the Midwest,
where costs are naturally higher, you see a dramatic rise in point-
of-service plans, but it is due to the mix or the shift from the West
Coast to the East and the greater popularity of point-of-service
plans.

Mrs. JOHNSON of Connecticut. Thank you.

Thank you, Mr. Chairman. I thank the panel.

Mr. ENSIGN. Mr. Cardin.

Mr. CarpIN. Thank you, Mr. Chairman.

Let me first comment about the discounting as a way of saving
costs. I find that somewhat suspect. I appreciate managing the uti-
lization of services as being a real way of bringing down health
care costs.

I am concerned that by discounting, in many cases, what we are
doing is shifting costs, rather than bringing down health care costs
generally; and that because of the large presence of certain health
care providers in our community, they can negotiate lower costs
when, in reality, it is not lower health care costs for our community
because the cost is just picked up by another segment.

Just to underscore that, in Maryland where we have an all-payer
rate system for hospital care, where we have no discounting, you
still have a very high penetration of HMO, the third highest in the
country on a per capita basis, which indicates that managed care
can work very efficiently by managing utilization and not relying
upon the deep discounts, which is happening in many other parts
of the country.

But my question I would ask any of the panelists, if they would
like to respond, is why have we not seen much improvement in
HMO’s or managed care as it relates to special needs categories?
Is there a way in which a capitated plan can deal with people who
have special needs? Has the private sector come up with any way
of dealing with targeted groups?

I know that the private insurance market has found it hard to
come up with ways of doing risk adjustments. Is there some way
that we can utilize a capitated system for dealing with target
groups, whose health care needs may be more expensive than oth-
ers? I find in most cases HMO’s try to steer away from these
groups of people. Any suggestions?

Mr. HusTEabD. Well, actually, quite a bit is going on in that area.
The sellers and buyers of health care at all levels are working with
innovations like disease management approaches where, say, the
drug companies will work with the HMO’s to try to take charge
and control of all asthma cases and make sure that the most effec-
tive delivery is made of treatment to these asthma cases.

It may not necessarily involve the drugs of that particular com-
pany. We are trying to take an overview of all care.

Another thing that happens with psychiatric care is that a good
deal of carving-out is going on. One problem with all of that is that
if these are segmented. there is a danger of loss of total treatment
of the individual. If one group is dealing with the psychiatric care
for this individual and another person with their nonpsychiatric,
there may be a loss of quality and control on them.


ui

‘Among those who don't average cost is $3,238.

In 1994, for the first time, employers induced a significant number of retirees to joint
HMOs, particularly in the West. Among large employers (500 or more employees),
17% offer an HMO under a Medicare risk contract, up from 7% in 1993. In the
‘West, 36% of large employers offer a Medicare risk contract HMO to their
employees. Retirees traditionally have been very reluctant to leave their own doctors
and join HMOs. Employers who move this high-cost population into low-cost plans
will improve their health care liability over the long term.

‘While total health benefit plan cost per employee decreased, the average cost of the
four types of medical plans rose at various rates. With significant shifts in enrollment
from indemnity plans into managed care plans (and even among the three types of
managed care plans), and growing use of prescription drug and mental health carve-
outs, the relationship between the medical plan costs and the all-inclusive total health
cost has become more complex. In addition, changing plan selection by retirees also
affects medical plan cost. Significant retiree enrollment in HMOs will raise HMO
cost but may lower the actual cost of providing retiree medical benefits.

HMO costs rose 6.4%, from $3,276 per employee in 1993 to $3,485 in 1994. Some
of this cost increase is the result of growing retiree enrollment in HMO plans, which
raises the per employee HMO cost but lowers the total cost of providing health
benefits to retirees.

Survey results also show that many employers are beginning the process of measuring
the performance of their health care vendors: cost-effectiveness and quality of care,
including medical outcomes, access to providers, and patient satisfaction, With this
information, employers can determine which plans offer the best value and make their
buying decisions accordingly. Fifty percent of large employers offering HMOs tried
to evaluate the quality of their plans in 1994, up sharply from 38 percent in 1993. In
the West, where managed care first took hold, 68 percent of large employers
measured HMO quality last year.

While employee satisfaction surveys are the most common type of quality evaluation,
employers are also seeking data on provider outcomes, Thirty-seven percent of large
employers sought outcomes data from their point-of-service (POS) plans, 29 percent
from their PPOs, and one-fourth from their HMOs.

Despite these encouraging results, the health care cost crisis is by no means over. A
large part of employers’ favorable experience in 1994 is a one-time savings due to
moving employees from a higher cost plan to a lower cost plan, The underlying
factors driving health care cost — the aging population, expensive new technology,
and cost-shifting from government programs and the working uninsured — have not
gone away.

‘At the same time, managed care has the potential to deliver long-term savings by
emphasizing prevention, more efficient care, and better outcomes. To help achieve
that potential, employers will have to face new challenges, with new measures of
success, Quality, access, and effectiveness of care — issues employers haven't had to
deal with in the past — will now be of greater concern.


61

me
VaePeacer:

May 5, 1995

‘Mr. James Wrocklage
Chief Executive Officer
‘Bealth Care Network

250 Bishops Way

‘Suite 300

Brookfield, WI 53005-6222
‘Deer Jim:

‘You asked for a statement segarcing Firstar’s puticipation in the Health Care
‘Network for testimony to the House Ways and Means Subcommittee on Health. As
2 charter member and continuing with representetion on the board of directors,
Firstar Corporation remains committed to the philosophy and objectives of HCN.
‘Participation in HCN has enabled us to better control and manage our self-insured
health care expense in the greater Milwaukee area. You should know that Firstar's
self-insured cost for 1995 is $% below 1954 ccst levels. In addition, participation
bas given us the opportunity to commumicate tc providers about the concerns that all
cauployers face with respect to cost and quality of care.

I bope this information is of valne to you a3 you prepare for your sppesrance before
the Subcommittee.

Sincerely,
i
Chaniel


114

the insurance companies.
G, Mental Health professionals need a safe forum to address the process of
becoming casualties in this frenzy of Managed Care and Managed Competition which
has penitrated the central Massachusetts area more than anywhere else in the
country. All eyes are upon us. We need to support each other and have the

courage to tell it like it is, and work to find better alternatives,

°


IR. OF

Any person or organization wishing to submit a written statement for the printed
record of the hearing should submit at feast six (6) copies of their statement, with their
address and date of hearing noted, by the close of business, Thursday, June 8, 1995, to Phillip
D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives,
1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written
statements wish to have their statements distributed to the press and interested public at the
hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on
Health office, room 1136 Longworth House Office Building, at least one hour before the
hearing begins.

FORMATTING REQUIREMENTS:

cy or pratiag wo 0 ty a wines, any wet | or exh for tae ptatad record
any wrtuen comments fn respenss ta 3 quent fir ween comments must coor tothe guietioes ited Yalow. Aay ealement or
‘eat nt wi a oot be peta, bet wb ‘a Sho Comemtne fies fer review und se by fae
Conan

1 0 statements and any accompanying eclbe forpratiag must be ped tx stgle apace ou legalize paper aad muy ust
eceed a ttl 010 page intang amackment

2 Copan of whe docementseabentod as eit atrial wil ne be accaped fer ptaing.ustond, eit material shouldbe
ference and quoted or paraphrased, Al eit mara! net mowing thane apectiatons wl ba malatined in the Commie en fer
‘ara und use by the Comicon,

2 anh rine rants be ang mbng «mn te rte Mig ming tn
repeats 8 eae fer aust ice « ‘ata of all
‘Stews pee. w wruazateu eg whos baal ewe aoa

<A eapplemenal stest mast accompany each statement Kstag the aime, fll utr,» tlephone member where Ga winens
tae canigaied representative may be reached nd upieal enti of menmary of the remsats abd recomendations tx Oe fall
‘Setameat Tis supplemental sheet wl nt be tchded i he praia recent.

Ma adore spety ant wo mater bing at etc
curt ehaiet olay hr eee we Manors he pret ope tg rome ot ue sg ayo me
(per terms.

Note: All Commitee advisories and news releases are now available over the Internet at
GOPHER.HOUSE.GOV, under “HOUSE COMMITTEE INFORMATION’.


93

TOTAL MEDICALIDENTAL PLAN COSTS

DOLLARS # OF EMPLOYEES
‘25000000 8000

‘5000000

000

‘MERE MEDICAL PLAN COSTS
{INCLUDING DENTAL AND

ADMIN FI
—o-BOPLOVEES covERED if

2000

1000

CHART #1

1988 1989 WRaceo! ke wt &ouced Fo 1904

PERCENT OF EMPLOYEES ENROLLED IN PPO AND EPO AND
BENEFITS PAID PER EMPLOYEE 1934

35%

65%

CHART #2



38

Mr. Treat. It is significantly higher than that. Depending on
how you define “managed care,” if you include—

Mr. HOUGHTON. But you would say the major driving force has
been the managed care programs?

Mr. TREAT. Yes, sir.

Mr. HouGuTon. Could the rest of you gentlemen just share with
me your thoughts.

Mr. Husteab. I think the differences between the trends in the
two, the Medicare and the private sector, can be overemphasized.
Taken over any long period, they are about the same. Each one has
its different ways of responding. A large single Medicare Program
cannot respond as effectively or quickly as managed care in situa-
tions like an employer can do.

I think, in general, the idea of moving to managed care will be
of help; but keep in mind that Medicare has already taken many
of the steps that would be involved in management such as the
DRGs and relative value schedule. So I cautioned at the beginning
that solutions that work in the private sector may not work in
Medicare, and vice-versa.

Mr. HoucHTon. What would be the primary issue you think that
we ought to latch on to when we are rethinking this whole Medi-
care cost deal here?

Mr. HusTeaD. I think to continue to try to get somebody involved
in the decision between the patient and the doctor, other than
those two people. And if that can be done through more managed
care, that could achieve savings, but they will be fairly slow sav-
ings. Medicare is a glacial program.

Mr. FRONSTIN. I think the single most important lesson is that
people are generally satisfied with their managed care plan, with
their HMO, their POS plan, and the ones that tend to be
unsatisfied with it generally don’t understand the system. That is
what one employer has shared with us, that there is a learning
process involved with moving individuals into the managed care ar-
rangements and there is a time commitment involved.

I think one of the reasons why the point-of-service plan premium
increased data from A. Foster Higgins was higher in the Northeast
than in the West was because of this learning process, the time it
takes to implement the system to people opposed.

Mr. Houcuton. I can’t hear you.

Mr. FRONSTIN. Part of the reason why the data on our point-of-
service premiums were higher in the Northeast than in the West
was because of this time adjustment people need, the time that
people need to make the adjustment to managed care arrange-
ments. There is a learning process people need to go through, and
I think people on Medicare will have to go through that same
learning process.

Mr. HouGuHTON. OK. Can you say that in one sentence?

Mr. FRONSTIN. If we move individuals in Medicare into managed
care, there is going to be—you are going to need some time for peo-
ple to make the adjustment to the different system.

Mr. HouGuTon. So the direction is, right, time; we have got to
be patient on that, and we have got to have proper understanding
and education in the process.


100

treat patients properly due to under-capitation. itis the bias of the corporations that people
should only require 1-3 sessions. This is not reality.

©) Itis true that under the fee-for-service system, there was some incentive to
over-treat the patient. However, not all providers over-treated, as wise clinicians knew that
they would receive future referrals from patients whom they treated appropriately. Also,
under a fee-for-service system, if a consumer feels that he/she is not being treated
properly, he/she can easily leave that clinician and find another. Further, a system of
appropriate co-payments, when used by the insurers, encouraged consumers to be cost-
and ufiization-conscious.

8 Desnte cams that managed cate nnd manages: compotion cemprise afree naket

free market. tient 1a\ ,
ed compeltion is realy about ihe elimination of competition. As
consolidation continues, only a few large insurers wi remain,

b) In several areas, the industry already controls 90% of the market. Where managed
care squeezes out fee-for-service plans, there is no competition for managed care itself. A
lack of competition always bodes poorly for quality.

) A free market for the patient would mean that the patient is the one wha would
determine what care is needed, determine the value of that care, and choose freely from all
who are qualified to provide that care. Managed care does not allow the patient these
liberties. As managed care becomes an arrangement between employers or goverments
ang the insurer, and the "consumer" becomes the employer or goverment, for they pay
the premiums, the “free market" exists between the MCO and the payor. Under managed
care, the MCO determines who will receive what kind of treatment, for how long, and who
can deliver it. The true consumers of care, the patients, as well as the body of
professionals who could administer care, are kept out of the "marketplace."

d) The managed care industry controls both supply and demand in regard to health
‘care services. MCO's have declared that there is an over-supply of mental health
professionals. This is predicated, however, on the industry's assumption that only brief
forms of crisis-oriented therapy are needed, and that few people need treatment. This is
not based upon true demand, which would be based upon the citizens’ requests for care.
Although fee-for-service is a “subsidized” market, it is still based on a more true supply and
demand than under managed care. Under a fee-for-service system which had, in recent
years, seen extremely high co-payments for psychotherapy, the demand for services was
far greater than what is allowed under managed care. There will soon be a drastic
shortage of mental health professionals and other providers, for the number will be based
‘on what the managed care industry "needs," not upon what our citizens need. This will
affect our entire society.

C) Recommendations:

1. Allow Medicare beneficiaries to choose among a variety of health plans, including
fee-for-service plans, Medical Savings Accounts, MCO's, and any other type of health plan that
is be

‘a) Medical Savings Accounts (MSA) are attempts to retur the rights of the "free
market’ to the actual consumers of health cara. Incentives are provided that make the
‘consumer cost- and utilization-conscious. Up to the catastrophic limit of the MSA, the
‘consumer retains the right to choice of provider, the right to privacy, and the right to make
his/her own treatment decisions.

») There are some problems with MSA's, however:

’) Beyond the catastrophic limit, the consumer retains freedom of choice, but loses
privacy and the right to make his/her own treatment decisions, as treatment may be
subject to utilization review. However, because there are no panels, and MCO’s can't
threaten the providers with unemployment, providers are free to advocate for patients.

i) The standard MSA contract written by the Golden Rule Insurance Company, has
a limit on mental health services of $10,000 per year per individual. This is generally
adequate for a patient requiring only psychotherapy, but not for one requiring a day
treatment program or hospitalization.

There is some concem that MSA's will not be appropriate for those who are
unable to be responsible for their funds. This may affect some of the elderly. It may be
necessary to arrange for a relative to make MSA decisions or, when there is no such
relative close by, for a consumer case manager (not a case manager contracted by the
insurer) to do so.



41

We implemented managed care programs for our employees, and
we created incentives to encourage employees to enter such plans.

We also, later in the 1980’s and into the early 1990's, consoli-
dated our health plan offerings. Many of us had been offering more
and more choices to our employees, but we found that we needed
to increase our leverage, that is, our purchasing power in terms of
price and quality.

We also increased the employee share of cost through higher pre-
miums, copays and deductibles.

Finally—and you have heard much about this already—we im-
plemented new forms of managed care, such as point-of-service
plans, which are basically a hybrid design combining aspects of an
HMO and the traditional fee-for-service plan. For most of us, these
initiatives helped to at least moderate the rate of growth in health
care costs. But we began to run out of techniques that were effec-
tive and we needed more information and we needed more exper-
tise to manage these costs. To that end, a number of employers
formed PBGH, the Pacific Business Group on Health. Its initial ac-
tivities were focused on information-sharing and research in the
areas of cost control, benefit plan design, and employee satisfaction,
that is, employee satisfaction with their plans. We developed, initi-
ated and implemented a series of annual surveys of employees’ sat-
isfaction.

Our early experiences were favorable. We found there was enor-
mous value in pooling our expertise, and it became immediately
clear that there were numerous opportunities for win-win situa-
tions, that is, ways in which we could both improve quality and re-
duce long-term costs.

A few examples of our early activities: We spent a lot of time in
the area of ‘wellness and preventive care in researching plan design
and also initiating some activities—data collection, research, et
cetera—in the area of best practices.

In 1992, we saw an opportunity to manage costs and improve
quality through more aggressive techniques, to engage in collective
negotiation with the health plans that we offer to our employees.
We realized that, given our bargaining power, we could readily
identify win-win situations for both our employees and ourselves as
employers.

With 2 years of preparation, we successfully completed our first
round of negotiations with 17 HMO’s last year. The result was a
10-percent price rollback with multiyear caps on future premium
increases and performance guarantees, with a percentage of pre-
mium at risk in order to meet those guarantees.

There was enormous effort behind this result. We had to design
a common benefit plan. We had to develop quality and performance
standards that were common to all of us. We needed to develop
contractual relationships between employers. We needed to seek
the concurrence of the Department of Justice in terms of this pur-
chasing approach, and we also needed to develop a negotiating
strategy.

We are pleased with the outcome, and we are now expanding
into other areas, into Medicare plans for retirees and into other
types of health plans other than HMO’s. Workers compensation is