How to launch a managed-care effort.

• Author: Hennessy, Edward L., Jr.
• Position: Allied-Signal Inc.'s managed care plan called Health Care Connection - Chairman's Agenda: Managing Health Care Costs

The story of Allied-Signal's Health Care Connection, a nationwide managed-care plan that was the first of its kind in the U.S.

One of the most challenging problems facing our country is the need to control the cost of health care. Health care costs are rising at more than twice the rate of inflation and are expected to exceed $650 billion in 1991. By 1995, the tab is expected to soar to $1 trillion. Health care spending currently accounts for about 12% of the gross national product, yet an estimated 34 million Americans have no health insurance and lack access to routine health care.

Against this background of skyrocketing costs and uncertain solutions, what can companies do? In my view, companies must learn to manage the health care area much as they do any other part of their business.

That's what we have done at Allied-Signal for over three years. The results are interesting and encouraging. Our program, called the Health Care Connection, is a nationwide managed health care plan. It was the first of its kind of the U.S., and in its first 18 months it reduced costs by $700 per employee -- 20% below what those costs would have been under a traditional indemnity-based health insurance program.

Initially, our program suffered from some administrative and start-up difficulties as we learned the nuances of operating a point-of-service plan. Those difficulties were corrected, however, as claims handling and other procedure were improved. As a result, savings to the corporations per employee in 1991 are now projected to be almost $1,400.

The plan cover nearly 50,000 Allied-Signal employees in the U.S. and 80,000 of their dependents. Approximately 80% of our employees covered by the managed-care plan use the network 95% to 100% of the time. We estimate that by year-end 1991, the total savings to Allied-Signal since the program was introduced will reach $163 million.

Like most employers, Allied-Signal first experienced sharp increases in health care costs in the early 1980s. In 1982, we took a series of steps to mitigate rising costs by increasing employee cost-sharing through deductibles and coinsurance, and we increased employee contributions as well. We also introduced utilization management programs like preadmission certification and mandatory second surgical opinions. We encouraged the use of outpatient services to limit questionable hospitalizations and surgery, and offered over 100 health maintenance organizations nationwide. Yet, despite...