Cost Containment for Health Care Benefits: A Formula for State and Local Governments.

• Author: McDermott, Richard E.

Because most government entities struggle with health benefits inflation, appropriate cost-management strategies are essential in an era of growing demands on state and local budgets. This research describes a case study that public managers can use to reduce health-benefits costs for their employees. The case study is based on an internal health care costs audit completed by Weber State University in Ogden, Utah. The project saved approximately $1.5 million a year (on a total expenditure of $4.6 million) in health-benefits costs in its first year of implementation. This was done without reducing the quality or accessibility of the employee health-benefits plan. Six major areas of health cost were examined in the audit:

* benefit design and utilization,

* prescription drugs,

* catastrophic care,

* provider pricing,

* unsafe work habits, and

* employee lifestyles.

Each of these concerns are discussed in the context of the audit.

Utilization of Health Care Plan

Overutilization of health care services refers to the use of more medical goods and services than necessary to treat the patient successfully. Examples of often overused health care services include high-technology diagnostic testing, Computerized Axial Tomography (CAT), and Nuclear Magnetic Resonance Testing (MRI). Other areas of excessive use may include unnecessary hospital admissions, duplication of radiology and laboratory tests, unneeded elective surgery, and extensive use of inpatient mental-health and drug-abuse services that could be treated effectively in a less costly outpatient setting. Effective benefit design programs discourage the unnecessary use of products and services, while they encourage patients to get necessary treatment and preventive care.

Prior to the redesign of its benefits program, Weber State University provided its employees with a choice of four health-benefits programs. One of these (the indemnity plan) was experiencing an inflation rate exceeding 20 percent per year. In addressing the issue of utilization, researchers first compared plan costs with benefits provided. The university used the same third-party administrator for three of its four plans and was essentially self-insured. While it paid the same premium for each plan, the cost of each plan's service was not the same. Careful analysis indicated that the third-party administrator was subsidizing the inefficient plans and using the premiums of the more efficient plans.

Hospital utilization for all plans was lower than national norms for similar benefit programs when demographics are normalized. Hospital utilization for the indemnity plan, however, was still significantly higher than for the HMO or PPO plan. These findings are typical. Both HMOs and PPOs review utilization to eliminate unnecessary admissions and unnecessarily long hospital stays. In addition, most plans incorporate financial incentives to encourage physicians and hospitals to use outpatient services in lieu of hospitalization, when appropriate.

The next step by the research team in redesigning health-benefits program was an evaluation of...