Firms Making Deals to Cut Rising Health Costs : Medical care: Doctors and hospitals negotiate price breaks. Workers say the burden is shifted to them.

Major corporations across the country, staggering under the burden of soaring health expenses, are experimenting with new ways of trimming the costs of the benefits they provide to their workers.

After years of absorbing runaway medical bills, some companies have scrapped their traditional insurance programs and begun negotiating directly with hospitals and doctors for price breaks. Workers may go outside the company-approved list of physicians and hospitals--but they must pay more for the privilege.

Many workers are concerned and angry. Health benefits have eclipsed salaries as the key issue in many contract negotiations. Cutbacks in health benefits lay behind two bitter strikes last year involving coal miners for Pittston Coal Group in Appalachia and telephone workers for Nynex Corp. in New York.

“For many people, health-cost increases ate up their wage increases,” said Sharon VanMeter Bailey, a member of the state board of directors of the Ohio Civil Service Assn., which recently ratified a contract with the state government.

Companies began to act more aggressively to control costs after corporate spending for employee health care, just 9% of pretax profits in 1965, rocketed to 50% in 1987. Businesses initially had tried to slow this trend early in the ‘80s by requiring such things as second opinions before surgery and advance approval for non-emergency hospital stays. But health-care inflation continued at double-digit rates and now managers are trying to use companies’ economic power to negotiate direct savings with doctors and hospitals.

Southern California Edison Co. established a system that has become a prototype for other employers. After a 10-month collective-bargaining impasse, it imposed a network of 7,500 doctors and 140 hospitals that have agreed to care for its workers at discount rates.

Edison employees, who formerly paid nothing for their health care, now pay 10% of the cost of doctors and hospitals in the company’s network. The company pays the other 90%.

For doctors outside the network, however, the company pays only 70% of the fee that a doctor in the network would charge. If an employee’s personal doctor charges more than that, the employee pays all of the difference.

The program, which took effect on Jan. 1, 1989, paid quick dividends for Edison. Its medical costs dipped by $2 million last year to a total of $80 million. Under the old regime, Edison figured its expenses would have climbed to $100 million.

Company officials said they were forced to act because health costs had been going up nearly 20% a year and they felt those increases might eventually threaten their ability to offer health benefits.

Union officials at Edison don’t buy that rationale.

“Edison says it is controlling health-care costs,” complained Willie Stewart, senior assistant business manager for Local 47 of the International Brotherhood of Electrical Workers. “All that means is they went out and stuck their employees with the cost.”

Southern California Edison’s system, like most others already in effect, places an upper limit on out-of-pocket outlays by workers to forestall financial disaster if a serious illness strikes.

At Edison, workers pay no more than $2,000 of their own money toward treatment provided by doctors and hospitals in the company’s network. Edison says only 23 of its 55,000 workers reached the ceiling last year.

But for doctors outside the network, only the employee’s 30% share of the company-approved rate counts toward the ceiling. If the doctor charges more than the company-approved rate, the employee must pay that cost but cannot count it toward the ceiling. Consequently, out-of-pocket costs for employees can far exceed $2,000.

One employee, whose daughter has been hospitalized for mental illness, has already paid $8,000, and the cash register is still ringing. Under the old company health plan, the employee, who asked not to be identified, would have paid no more than $1,500, regardless of the total bill, according to union officials.

“Not many people have that kind of money, $8,000, lying around,” Stewart said. “We hear a lot of complaints like that, with people paying a lot of money out of their own pockets.”

For many workers, the alternative to those kinds of costs is to switch to a doctor who is part of the company’s network. That is sometimes an unpalatable course.

“People with the greatest need for care already have relationships with doctors, and they don’t want to give up these relationships,” said Dale Grant, a benefits consultant with the New York firm of Martin E. Segal Co.

So far, workers participating in company-imposed health-care networks have few complaints about the quality of the care they receive from doctors and hospitals in the networks. “There’s no reason to be concerned about quality at this point,” Stewart said.

Southern California Edison is now so deeply into the health business that its medical department has applied for accreditation from the same national agency--the Joint Commission on Accreditation--that certifies hospitals. Dr. Jacque Sokolov, Edison’s medical director, said the company went so far as to negotiate a package deal with Cedars-Sinai Medical Center when an employee needed a heart transplant.

First Interstate Bancorp has a similar network of health-care providers who were assembled by Metropolitan Life Insurance Co. Workers in California, Arizona, Colorado and Oregon pay 20% for doctors in the network but 30% for outsiders. The system, just a year old, will be expanded to Washington, Oklahoma, Utah and New Mexico this year.

Sun Oil, a third company to go this route, switched to its network of health-care providers on Nov. 1, 1989. Allied-Signal Inc. and Southwestern Bell Corp. are two more companies in this camp.

Major corporations are able to negotiate discount rates from doctors and hospitals because they can offer the prospect of a big flow of patients. A doctor treating a patient with a particular ailment is expected to order no more than the typical number of office visits, tests and procedures.

Doctors who exceed the average will be paid. But the strategy is a risky one.

“First we pay him, then we throw him out,” said Philip Briggs, vice chairman of Metropolitan Life. “Our biggest weapon is the ability to say he is no longer in the network.”

For corporate managers, “there is one item on the balance sheet they seem to have no control of, and that is health care,” said Carson Beadle, managing director of Mercer Meidinger & Hansen Inc., a New York employee-benefits firm. “At some point the chief executive officer says: ‘Whoa, wait a minute, this is all I am willing to pay, and you figure out how to deliver it.’ ”

Grant, also a New York benefits consultant, said: “Either companies will pay more or employees will pay more. This will become a big question in health care. How much of the total cost can be placed on employees, and what is the breaking point?”

Strikers at Pittston Coal and Nynex Corp. believed that their employers had gone too far. At Pittston, the company withdrew its threat to cancel health benefits for retirees; Nynex backed away from its plan to force workers to pay a share of their health-insurance costs. Strikes against three other regional phone companies--Bell Atlantic Corp., Ameritech and Pacific Telesis--had similar causes and similar outcomes.

“For every Nynex situation, you have hundreds of others going through the same crisis,” said John Sweeney, president of the Service Employees International Union. “It’s a major issue, putting a lot of pressure on workers and their families.”

If business cannot force costs down by bargaining for discount rates from networks of doctors and hospitals, they may abandon their usual disdain for governmental involvement and call on the federal government to step in.

“If we keep going at this rate, and no one intervenes to control things, in 10 years we will have every big company asking for national health insurance,” said John Bauer, manager of legislative services for Armco Inc. “Business will say: ‘I’m so frustrated; you take on the job.’ ”

Chrysler Corp., which spends $700 on employee health costs for every car it makes, has already embraced the idea of tough government action.

“We support any program that brings costs under control,” said Walter B. Maher, Chrysler’s former director of employee benefits. Chrysler dispatched Maher to Washington to lobby full time on this issue.

Chrysler, engaged in a tough international competition with Japanese car makers, finds itself particularly squeezed by a large number of retirees who are drawing health benefits.

The company backs federal legislation that would require all employers to offer health insurance. Two other big companies who share Chrysler’s position are American Airlines, which must compete with non-union airlines that pay lower wages, and Baxter Travenol Laboratories, a drug manufacturer.

Such legislation, these companies believe, would indirectly reduce their own health-care expenses. About 37 million Americans, two-thirds of them workers and their dependents, now lack insurance and frequently leave their medical bills unpaid. To offset that, doctors and hospitals increase their fees for those who carry insurance. That, in turn, adds to the cost burden of such companies as Chrysler.

But most big companies still hope they can curb their own health-care costs by shifting more of the burden to employees and by using their economic muscle to demand discounts from doctors and hospitals.

The Times Mirror Co., whose properties include such newspapers as the Los Angeles Times and Newsday, will begin using a network of providers next month for mental-health problems and drug- and alcohol-abuse treatment.

The union representing editorial employees at Newsday says the network plan violates its contract with management; the union is pressing to keep the current benefits system.

Alberto Ibarguen, a vice president of Newsday, denied that the company is violating the contract. “It is Newsday’s view that they are acting both within the spirit and the letter of the contract,” he said.

In New England, it is a union that is taking the initiative in seeking to push health costs down. The Laborers Union National Health and Safety Fund is trying to negotiate a 40% to 50% price discount for giving a New England hospital its referrals for alcoholism treatment. For surgeries, the union fund wants to pick a few selected centers.

Unionized construction firms pay $1.75 an hour for each worker into the industrywide health fund. Knut Ringen, the fund’s director, warned that unless something is done, the cost will explode to $3.02 in three years--enough to drive contractors to break with the unions.

“If construction is going to stay unionized, we have to limit some of the health costs,” Ringen said. “We are going to have to do an awful lot of education on this. It’s a very different approach to medicine than we had before.”

Small businesses will find it particularly difficult to control health costs, analysts say, because they lack the economic clout of corporate giants such as Southern California Edison.

Not only will they have difficulty negotiating the sort of discount rates that big companies can get, but they stand to feel a backlash from those discount rates.

Doctors and hospitals that offer discounts to employees of large companies will try to make up the lost revenue elsewhere. Workers whose firms have not bargained for lower rates are likely targets.

That could force some businesses to drop health insurance altogether.

“Everyone has a vested interest in saving money and shifting costs to someone else,” said Mitchell Anderman, manager of benefits planning and design for Sun Oil. “You react to the environment with self-defensive measures. But you can only pass the ball around so much.”

Southern California Edison, which expects its network plan to save $150 million by 1992, is one of the lucky ones--so far.

“But there will come a point when even Edison can no longer live in isolation,” said Sokolov, the utility’s medical director.

Ultimately, he predicted, only the federal government will be able to assure that all individuals “have a right to a certain level of health benefits.”