The challenge of containing health care costs.

• Author: McGarvey, Michael
• Position: Special Report: Health Care

There are a number of techniques to contain health care costs and discourage unnecessary services. But, to be effective, they must be well managed.

New issues confronting the nation and its businesses are as perplexing as the growing cost and complexity of health benefits programs for employees. Business spending on health benefits has become so great that corporate financial officers today are frequent -if often reluctant-participants in the key decisions associated with health care coverage for their companies' employees.

What's going on? NATIONAL HEALTH SPENDING

Total health care spending in the United States in 1990 was $666.2 billion, accounting for 12.2 percent of Gross National Product (GNP) and, according to varying estimates, from 40 percent to 60 percent of business spending as a percent of corporate profits. The trajectory these numbers are following is even more alarming. Informed estimates now project the nation's total health expenditures by the year 2000 will account for 17 percent of GNP and 70 percent of business spending as a percent of profits if present trends persist. Despite this massive expenditure, which dwarfs that of any other developed nation, some 35 million Americans are without health insurance coverage.

COST OF EMPLOYEE HEALTH BENEFITS

By 1989, the cost of health benefits accounted for 5.6 percent of wages, surpassing that of retirement (4.7 percent). In the face of manifest public anxiety over the growing cost of health services, employees value their health coverage highest among their benefits. In a 1990 survey conducted by Gallup and the Employee Benefits Research Institute, fully 61 percent of employees rate their health benefits as the single most important one. (Pensions were rated first by 17 percent, and disability programs by five percent.) This fact has been dramatized in recent years by a series of bitter labor strikes in which management efforts to alter health benefits was the key issue.

It is particularly frustrating to managers that, despite rapidly growing corporate expenditures on behalf of employees' health care coverage I satisfaction with employer-provided benefits has dropped precipitously. A multi-year, longitudinal study of 112,000 employees was compiled by International Survey Research Corporation and reported by the Alexander Consulting Group and ISR earlier this year. The study, covering employees in a broad range of work settings and economic strata, revealed that employee satisfaction with their benefits reached a high in 1984. That year 88 percent of those questioned rated their benefits as "good" or very good," up from 86 percent in 1982/83. That percentage had dropped to 77 percent in 1986/87 and had plummeted to 42 percent by 1989/90.

This sharp drop in benefits satisfaction corresponds to a similar decline in employee morale. The authors of the study attribute the steep decline to several factors, most notably the "historic restructuring of medical benefits during the past decade." Employees have viewed these changes as restricting free choice and altering the doctor-patient relationship.

In short, we're spending more and we're liking it less.

DRIVERS OF CORPORATE HEALTH COSTS

It's instructive to look at what is driving health care benefits costs for Corporate America. By understanding these forces and how they apply to your organization, you can formulate a reasonable and effective approach to managing costs.

Medical inflation-Medical inflation, pure pricing, drives fully 39 percent of the cost increases experienced by private-sector purchasers of health insurance. in some ways, this is good news. Prices can be negotiated.

Cost shifting-Twenty-three percent can be attributed to cost shifting. This has several aspects:

* Medicare accounts for 17 percent of total national health expenditures. But, because...