Managing Health Care Costs: Private Sector Innovations

By Sean Sullivan; Polly M. Ehrenhaft | Go to book overview

Caterpillar Tractor Company

Caterpillar Tractor Company's health care bill for its U.S. employees was about $35 million in 1973, reached nearly $100 million five years later, and exceeded $155 million in 1982. The company's health care costs have more than doubled since 1976 and now total nearly $2,500 per employee, or almost 10 percent of payroll costs. This rapid escalation has led Caterpillar to undertake cost containment efforts both inside and outside the company.

Caterpillar began administering its own claims in the early 1950s. By doing so, it has accumulated a broad data base that it uses for cost analysis. In 1978 the company contracted with the professional standards review organization ( PSRO) in Peoria, where about half its domestic employees are located, to monitor hospital admissions and lengths of stay. After a year the average length of stay was reduced by one day, and admissions also declined. This favorable experience led Caterpillar to sign contracts with PSROs in other locations where it has large concentrations of employees. It now has six such contracts, and 80 percent of its hospital admissions are being reviewed. Since this review began, patient-days per 1,000 covered have been reduced by more than 300.

Benefit redesign is another avenue the company has taken in its efforts to control costs. Of course, its ability to change the health benefit plan is limited by its contract with the United Auto Workers; that is, changes must be agreed to by the union before they can be implemented. Two such changes that were negotiated in 1983 are a program of voluntary second opinions for elective surgery and a program to encourage the use of generic drugs.

The company has also added home nursing care to its plan as a newly covered benefit, integrating it into the hospital discharge system with the expectation that it will save money and in many cases be more humane than continued hospitalization. The plan also contains significant outpatient coverage for laboratory and X-ray services, ambulatory surgery, and preadmission testing. These benefits try to come to grips with the largest part of the problem of escalating health

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