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Health Care Crisis

Health care costs are soaring and employees don't want to pay, leaving CEOs with one very expensive problem.


Who’s Who

  • Tom Beauregard is global health management practice leader at Hewitt Associates, a $2 billion global human resources outsourcing and consulting firm in Norwalk, Conn.

  • Brian Ferguson is chairman and CEO of Eastman Chemical Co., a $5.8 billion manufacturer and marketer of plastics, chemicals and fibers in Kingsport, Tenn.

  • Robert J. Greczyn Jr. is president and CEO of Blue Cross Blue Shield of North Carolina, a $3.2 billion heath care provider in Chapel Hill, N.C.

  • Vicky B. Gregg is president and CEO of Blue Cross Blue Shield of Tennessee, a not-for-profit health benefits company in Chattanooga, Tenn.

  • William J. Holstein is editor-in-chief of Chief Executive.

  • Edward M. Kopko is CEO of Butler International, a $263 million strategic outsourcing firm in Montvale, N.J., and chairman and CEO of Chief Executive Group.

  • Raymond F. McCaskey is president and CEO of Health Care Service Corp., a Chicago-based mutual company made up of Blue Cross Blue Shield of Illinois, Blue Cross Blue Shield of Texas and Blue Cross and Blue Shield of New Mexico.

  • Thomas O’Reilly is director of group benefits at Illinois Tool Works, a $10 billion multinational manufacturer of highly engineered fasteners, components, assemblies and systems, based in Glenview, Ill.

  • Edward Rabin is president of Hyatt Hotels Corp., a Chicago-based upscale hotel and resort chain with 123 Hyatt Hotels & Resorts in the United States, Canada and the Caribbean.

  • Scott P. Serota is president and CEO of the Blue Cross Blue Shield Association, a national federation of 41 independent locally operated
    Blue Cross Blue Shield companies with combined revenue of nearly $183 billion.

  • Diane C. Swonk is chief economist and senior vice president of Bank One, a $16.2 billion financial services company based in Chicago.
Mention “heath care” to the CEO of any large company and the prevailing reaction is an outpouring of frustration. And for good reason. Continuing a trend of double-digit increases, health insurance premiums rose an average of 14 percent last year and are expected to jump by 11 to 20 percent annually for the next three years. Small wonder that there are a rising number of Americans-some 43 million at present-without any insurance whatsoever. What’s more, as 77 million baby boomers head into retirement, increasing longevity and corporate cutbacks on retirement health care benefits are taxing an already shaky Medicare system.

For myriad reasons, the burden of shouldering this spiraling health care cost disproportionately falls on large U.S. corporations. With small businesses increasingly unable or unwilling to offer affordable health insurance, employees of large corporations frequently bring entire families into their firms’ insurance fold. Worse yet, thanks to price controls and restrictive national health programs in overseas markets, U.S. health care consumers pay the highest prices for drug therapies and medical diagnostic and treatment technologies, effectively subsidizing both health care R&D and treatment in industrialized nations as well as developing countries.

Efforts to manage these costs are fraught with problems. At best, attempts to cut health care benefits or raise employee contributions provoke outrage among employees or diminished morale; at worst, in the case of a unionized employee base, the cuts spur outright revolt. At the same time, pressure for private-sector solutions to the looming health care crisis continues to build, thanks to the real and growing fear that Congress will step up to the plate with a health reform bill.

The bottom line? From manufacturing industries to the service sector, CEOs are suddenly finding themselves in the health insurance business, desperately seeking solutions and strategies that will enable them to provide quality care at an affordable price.

Cost Control
For many, the invisibility of health care costs to the end consumers-in this case employees-is at the root of the problem. “People’s standards change when they’re not paying the cost for their choices,” Brian Ferguson, chairman and CEO of Eastman Chemical, told a recent roundtable discussion held in partnership with the Blue Cross Blue Shield Association. “If I were buying cars for people, what car would they pick versus if they were paying for it themselves? There’s an insulation between the users of health care and the cost that doesn’t exist in other situations-transportation, housing, education, food. The dilemma we see is, how do we connect our employees more personally with the costs and the choices of health care?”

But efforts to increase co-payments and health care deductibles so that employees “feel” the cost of their doctor visits and prescription drug medications tend to be met with strong resistance. As Vicky Gregg, CEO of Blue Cross Blue Shield of Tennessee, noted, employee expectations have risen over time to the point where they not only want health care benefits, they want them “free, perfect and now.”

And who can blame them? Spurred by ad campaigns for prescription drugs, Americans have become avid consumers of brand-name prescription medications for everything from allergies to heartburn. The resulting spike in what some view as unnecessary doctor visits and medications, experts say, has contributed to health care cost hikes.

At the same time, important medical advancements also spur cost increases. And, in most cases, treatment with these expensive innovations-even pricey ones with uncertain outcomes-is warranted. After all, when facing a serious condition, a costly treatment therapy with a small chance of success is vastly preferable to having no chance of recovery at all.

It’s an irony not lost on CEOs and health care professionals that improvements in medical technology, diagnostic tests and health care treatment success rates are, in part, fueling the coming health care crisis. It’s hard to fault medical advancements for raising the average life span, and yet those very increases in longevity translate to a burgeoning population of retirees, many of whom will require decades of health care. “At a time when Medicare is going through dramatic changes and we know what the viability of Social Security is, how do we make retiree medical coverage affordable for people?” asked Thomas O’Reilly, director of group benefits at Illinois Tool Works. “Can we make it affordable for them once they switch over from being a wage earner to being a nonwage earner?”

As Raymond McCaskey, CEO of Health Care Service, pointed out, the cutting edge medical technology and new treatments don’t come cheap-and yet no one wants to slow advancement in medical treatment, let alone be denied, or deny, access to them. “Would you go back to paying 1950s cost levels and be willing to take the best 1950s medical treatment you’d get?” he asked. “Few want to go there. There has been rapid escalation in unit cost, but the unit today is a very different unit from the unit we had in the ’50s. So it’s a highly complex issue. And yet [the rising costs] and having 15 percent or more of the population not being able to get adequate health care or health care at all are a huge societal problem.”

A growing number of companies are attempting to address the issue through new variants of health care programs and plan offerings. Recognizing the 80/20 principle-that 80 percent of health care usage comes from 20 percent of the employee base-more companies are adopting wellness programs that educate workers about the benefits of healthier lifestyles and provide incentives for behavior modifications proven to prevent health issues or slow the progression of existing diseases. Often, such programs include educating employees on proactive management of chronic conditions such as diabetes, arthritis, asthma and heart disease and offering financial incentives for following the care protocol. These can range from waiving co-payments for necessary medical monitoring visits to a reduction in health care contribution costs if recommendations on smoking cessation or weight reduction goals are met.

While acknowledging that wellness initiatives and disease-management programs have proven effective for reducing costs in some benefit plans, some CEOs expressed concern about potential legal issues arising from the programs. “If I give a person incentives not to smoke, drink, be fat or live wrong in other ways, when do I cross the line between a lifestyle choice and a disability?” asked Ferguson. “If we declare that drinking or obesity is a genetic problem more than a lifestyle choice, at what point do lawyers step in and make me the target of the next class-action suit?”

Cost-benefit issues also come into play with wellness programs, noted McCaskey. “The biggest barrier we’ve found is the mobility of the work force,” he said. “Employers make an investment in getting somebody healthy only to have them move to their competitor across the street who reaps the rewards.”

Pay-to-Play Programs
Revamping benefit plans to address cost issues is another emerging approach to deal with rising health care costs. Some firms adopt tiered plans, where employees choose from an assortment of plans at different contribution cost levels to the employee, who pays more for greater flexibility and lower co-pays and deductibles. Others make the jump to consumer-driven health care plans, which combine a high-deductible health insurance policy with a tax-advantaged, employee-managed medical savings account that covers some or all of the deductible. Money left in the account at the end of the year generally rolls over to the next year, providing an incentive for prudent spending.

While both plans theoretically give employees an incentive to use their health care benefits wisely, critics argue that they simply shift costs to employees-particularly those with chronic illnesses-or actually create disincentives to seek preventive care. “There are no silver bullet solutions,” noted Robert Greczyn Jr. of Blue Cross Blue Shield of North Carolina. “With consumer-driven plans, the incentive is perverse-to create a tax-free savings vehicle that may, in fact, drive people away from preventive care.”

Such efforts may also have unintended consequences for lower-income employees. “There’s a huge social aspect to the decisions we make,” noted McCaskey. “For example, increasing a deductible from $500 to $2,500 might be easily absorbed at the senior executive level, but be devastating at the entry level.”

While far from ideal, for the companies adopting them, these programs are seen as preferable to an across-the-board increase in employee benefit contributions. “I describe it as palatable cost-shifting,” explained Tom Beauregard, global health management practice leader of Hewitt Associates. “The idea is offering more choices or health savings accounts that meet the criteria of a catastrophic health plan. But there’s a limit on generic institution rates and drugs and to how much high- deductible plans will control demand. If all we’re doing is giving people plan choice, we are just running out the clock. Ultimately, it won’t work. Decreasing primary care office visits doesn’t get to the underlying problems, which is that there is tremendous inefficiency in the health care system.”

Solution Strategies
Rather than simple attempts to defray increases through cost shifts and incentive programs, a more wholesale approach is required, argued Beauregard and other roundtable participants, who noted that there is plenty of room for improvement. Health care accounts for 15 percent of the national GDP, or $1.7 trillion, yet broad performance metrics are virtually nonexistent, fraud and abuse taps in at between $50 billion and $75 billion a year, and the little quality outcome information that exists is not available to the majority of consumers.

“If you think about it as the equivalent of a manufacturer not having the systems and information flow to understand and measure quality, that’s pretty scary,” said Blue Cross Blue Shield of Tennessee’s Gregg, who pointed out that predominantly paper-based medical records impede the information-sharing essential to the development of best practices in medicine. “You would think it would be fairly simple to say that for a given condition this treatment has the best outcome. But if you take a simple example-a urinary tract infection without any complications-there are 135 different ways that physicians treat that same urinary tract infection. Which is the best? Which is the most cost efficient? And why don’t all physicians use whatever that is?” To bridge the information gap, Gregg urged a shift to electronic record keeping, which would facilitate the kind of data crunching essential to quantifying results.

Even when information on quality of care exists, consumers may be unaware that it’s available or unable to access it, said Diane Swonk, senior vice president and chief economist at Bank One. “The information issue is huge,” she noted. “My son has severe asthma, and as someone who has used a lot of health care, I’ve found that the burden is on me to find the information about the best specialists and best facilities. It shouldn’t be that hard. In any market situation, if you want to get markets to reduce costs and work more effectively you have to free up information.”

Health care, however, is currently plagued by a dearth of information and asymmetric information-a disconnect where employers understand costs and may even have access to data on results, but employees don’t. Happily, progress on that front is under way, according to Scott Serota, CEO of Blue Cross Blue Shield Association. “We have made great strides in defining quality, and we’re reaching consensus with some of the specialty groups as to what defines quality service,” he said.

Ideally, as insurers and employers gain information on the quality of health care providers, access to that information will change the way employers and employees make health care choices. As O’Reilly of Illinois Tool Works put it, “I don’t think I can tell my union employees, ��Go to these hospitals and these doctors or you won’t have health care.’ But I can say, ��You will be reimbursed 60 percent here versus 80 or 90 percent there and this is why.'”

Ultimately, the hope is that making information about quality of care widely available will improve both the care and cost side of the health insurance equation. “Quality drives costs,” Beauregard explained. “We’re in a model where there’s tremendous variance of care, and between 30 to 40 percent waste in the system from a cost standpoint is due to hospital admissions as a result of errors by specialists. If we can define for someone in really simple terms which specialist and hospital they should use for a particular episode of care, that’s where the savings exists. So, it’s not just a patient safety and quality issue-it’s a cost issue.”

Hawaii, Serota added, is already serving as a test market of sorts for just such a quality-driven market reform. “The Blues have done a tremendous job with quality and incentive-based reimbursement there,” he said. “They have created a situation where the only increases in physician and hospital compensation year over year are based on quality statistics. It’s a closed system in that the physicians and the people aren’t going anywhere else; there’s a lot of water between the next available provider. But it shows that it can be done if you get everybody moving in the same direction and you don’t say, ��Well, until we get this 100 percent perfect we’re not going to do it.’ “

In fact, for companies with a strong presence in relatively remote markets, the Hawaii model could serve as a prototype. A few big players willing to pool information have the ability to make their own island of efficient and affordable health care. “We have 7,000 employees in Kingsport, Tennessee, and in Longview, Texas,” mused Eastman Chemical’s Ferguson. “If in each of those ponds where we are a large frog we gang up with two or three other large frogs and work with an adviser, we could be a little Hawaii situation. If three of us get together, we’ve got 60 percent of the population.”

Yet even in markets where quality of care data is available and accessible, it can be difficult for both employers and employees to act on the information. Within many communities, doctor’s reputations and relationships with patients are deeply ingrained. “You have to be willing to say, ��I know Dr. X is your next-door neighbor and that you’ve been going to him for 20 years, but his outcomes aren’t very good. You can still go to him, but you just have to pay, because it’s not of the quality that meets the minimum threshold for our health plan.’ Those are tough conversations,” Serota noted. “But we’re closer to making some big strides than we’ve ever been.”

Consumer education about health care is also a barrier, added Serota, who pointed to a disconnect between health care realities and patients’ perception of quality care. “We have a system that’s misaligned,” he noted. “Right now, people think that if they go to the doctor and don’t get a prescription it was not a very good visit. If we can break the mind-set that quantity equals quality, we can make a difference.”

Mandate Mode
Already, progress on that front is under way. Thanks to the drastic rise in health care costs, recent years have seen employers and, to some degree, consumers gain a greater awareness of the inefficiencies, information gaps and cost-versus-quality issues plaguing health care.

At the same time, overcoming the inertia inherent to an admittedly inefficient but deeply entrenched system is no small challenge. Ultimately, it’s the threat of government intervention that may well provide the sense of urgency necessary to overcome initial resistance and speed reform, noted Swonk, who added that while the status quo is unsustainable, changing the system will be a long and arduous process.

“No matter who wins the election, there will be a push for health legislation, because it is a crisis common to both sides,” she said. “The concern is that we will end up with legislation that will have unintended consequences, which could actually mean less use of good practices. We’ve got to go through this corridor where consumers, providers and health insurers are going to feel the pain, going to see it. Then we’ll reach a point where we’re collectively working toward a better way to do this.”

Will the private sector be able to develop and implement health care solutions before Congress steps in? The answer, Serota pointed out, may depend on just how proactive Corporate America is willing to be. “The clock is ticking on a private sector solution,” he said. “We need to come together and find solutions to these health care cost issues lest we face government intervention in some form or fashion. But while we’re solving these macro issues, there are small issues we can act on today. By taking steps to eliminate fraud in the system and other problems, we can fend off federal intervention as we craft a new approach that really realigns the incentives within the health care system.”

The conviction that government solutions, such as mandates, simply wouldn’t work was universal. Participants argued that the health care system is so complex with so many different players-companies, insurers, medical device makers, pharmaceutical companies, hospitals, doctors and others-that it will defy a public policy solution. The burning imperative, they agreed, is for CEOs to work to discover new solutions.


A Work in Progress

With costs skyrocketing, Hyatt focuses on improving employee wellness

At Hyatt Hotels, double-digit cost hikes for three years running prompted a health care revamp. “After bearing increases of 12, 16 and 17 percent, we finally concluded that the rising costs are not just going to go away,” says Ed Rabin, president of the Chicago-based hotel company.

To address the issue, Hyatt has launched health programs to educate employees on wellness and is exploring ways to administer claims more efficiently. “In health care, as in any other business, better management and supervision can help drive down costs without losing any of the care being provided,” says Rabin, who notes that compensation and benefits represent the hotel industry’s single biggest cost component.

Further complicating the issue is the fact that while all employees receive health care benefits, many workers value cash far more than the costly benefit component of their compensation. Since Hyatt extends benefits to every worker on its staff, the company is exploring new health care offerings geared toward employees lower on the pay scale who may place less value on health care benefits.

“Many employees-especially the younger ones-would much rather see 10 cents more an hour than be covered with some level of insurance,” explains Rabin. “We’re considering the opportunity for special coverage that will offer some safety net for them in the event of some catastrophic major event.”

While Rabin is less than enthusiastic about the idea of legislative solutions to managing health care, he does see potential benefits from other forms of intervention. “The government’s role initially can be to help curb malpractice insurance costs and consider the funding of better physical education about health care in schools, which has been the object of some budget cuts in recent years,” he says. “We’ve been seeing insurance costs impacting doctors and hospitals, so capping awards or anything else that can be done to address abuses in the system will benefit all of us-employers, the health care industry and patients. That would be a good start.”


Can the Train Wreck Be Avoided?

Eastman Chemical CEO sees much handwringing, but few pilot programs.

Brian Ferguson, CEO of Eastman Chemical, sees lots of handwringing, but no real solutions to the health care train wreck looming on the horizon. Excerpts from a conversation:

What effect do health care costs have on companies competing globally?
Domestic health care costs in the U.S. are roughly 15 percent of GDP, compared with 8 and 10 percent in the developed regions, such as Japan, Europe and Canada. The double-digit pace of growth is also an issue. Aside from energy recently, health care is the most consistent high grower in my cost base. So it is a large factor in the competitiveness of domestic manufacturers.

What role do you feel the government can or should play in this issue? Are we on a road toward socialized medicine?
It would be a lot easier to improve the health care system we have than to start over. In our system there is a significant insulation of the consumer from the provider that creates a strange dynamic where the normal relationship between supply and demand is reversed. In the worlds I live in competitively, the more supply, the lower the pricing; in the medical community, pricing just keeps on going to pay for the additional supply. My bias would be toward trying to do a better job connecting the consumers with the providers so that they are more sensitive to what is going on and make better choices.

Will consumer-driven health care help with that?
The phrase “consumer-driven health care” sounds good until you peel back the onion and find out what it really means. There are a variety of mechanisms around trying to increase people’s sensitivity to the choices they make and what it costs, and have some personal affect on that. In some cases, it can be something as simple as the healthier your lifestyle, the lower your premiums.

Could incentive programs that reward employees for adopting a healthier lifestyle put companies at risk for discrimination suits?
That is the strangeness of our tort system. Some of the 20-plus percent of extra cost incurred in this country is based on our legal system. [Wellness initiatives] are an example of programs where there are no losers, and yet the legal system could get in the way.

What are you doing to connect employees more with the costs?
We have a variety of initiatives encouraging people on healthier lifestyles, but so far no financial incentives. We have been working very hard on the way we buy our health care and on making employees aware of the way that we buy it. In 2003, for example, we set up a pharmacy on company property here in Kingsport, Tenn., where we have 8,000 employees. We tell our employees, “Here is your cost structure at the Eastman pharmacy. You are free to go elsewhere, but the cost to you will reflect that.” We are essentially taking away the margin that would have gone to the local pharmacist, which doesn’t make us popular in the community. But it allows us to buy smarter and it puts control in the hands of the employees.

What needs to happen to better educate employees?
Information is one of the keys. When consumers shop for cars they go to Consumer Reports or check the Kelly Blue Book. People have become educated over time about how to buy cars, houses, washing machines. But the data systems used by doctors are arcane and fragmented, which doesn’t allow for pooling and understanding of data efficiently. How many different ways do you treat acid reflux disease, and what is the best most efficient way to treat it? That information is not readily available to consumers.

Under the status quo, big companies like mine will see rates go up the fastest. That’s when the train wreck happens. At some point companies start adding up all of these costs-more than 20 percent in North America- and shutting down or moving. Then you see the indignant response of lawmakers.

I don’t see a lot of pilot programs that are trying to find a private health care delivery answer. I see a lot of handwringing, but no public-private partnerships working to try some of these answers out and see if we have a private solution that works. In the absence of those, we wait for the train wreck to happen and for government to get handed the problem.


Reform Roadmap

Addressing costs is only half the solution.

Often, companies facing skyrocketing health care costs address the issue through measures that nibble away at benefits, transfer some costs to employees or attempt to give employees greater personal exposure to the costs associated with their health care choices. But cost-focused measures like these address only half the problem, point out experts in the field.

“You do have to focus on plan design to control discretionary demand, but you also have to focus on the supply side,” asserts Tom Beauregard, global health management practice leader at Hewitt Associates, who explains that in addition to skin in the health care game, employees need quality-of-care data in order to make smart health care choices. “We want to be able to provide an individual having heart surgery with hospital system-specific information on efficiency and effectiveness, which can be defined as the frequency with which they provide this service and the clinical outcomes.”

While data on effectiveness of care exists-particularly for “big-ticket procedures” such as surgeries and chronic condition care-it’s often not aggregated into a report or simply not made available to companies or patients. But whether that’s due to provider resistance or a lack of organization within the medical industry, it’s an information gap companies can push to close. “Employers need to be absolutely committed to contracting with health plans that will provide us with data on physicians and hospitals so that we can present consumers with information on the price and effectiveness of care,” says Beauregard. “There are immediate payoffs if you can identify the most effective providers for the four most comm


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