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

By McDermott, Richard E.; Parsons, Robert J. et al. | Government Finance Review, October 1999 | Go to article overview

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


McDermott, Richard E., Parsons, Robert J., Cornia, Gary C., Government Finance Review


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 outpatient utilization. Analysis of these outpatient statistics revealed the following for Weber State University.

* Preventive-medicine services for the indemnity plan were used too infrequently. For example, the immunization ratio was 11 per 1,000 for the indemnity plan, as compared to 74 for the HMO and 248 for the PPO.

* Physicians who owned laboratories or x-rays had twice as much usage as those who did not.

* Radiological services were overused in the indemnity program.

* Cardiovascular surgery was highly used; lifestyle training was needed.

Because the university had paid an excessive amount for emergency-room services, a nurse practitioner was retained to review all cases for a 12-month period. The examination revealed that approximately 60 percent of emergency-room visits were being made for diagnosis that could have been treated through a physician's office or outpatient clinic in a more effective and less costly manner. …

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