WSJ: Attacking Rise in Health Costs, Big Company Meets Resistance

From: Sufaud (sufaud_at_hotmail.com)
Date: 07/13/04 

Date: 12 Jul 2004 23:53:53 -0700

The Wall Street Journal
July 13, 2004
PAGE ONE

Pressure Points
Attacking Rise in Health Costs, Big Company Meets Resistance
Pitney Bowes Finds Culprits, But Can't Beat Them All;
$11,447 Knee Arthroscopy
Marketplace 'Wasn't Working'

By VANESSA FUHRMANS
Staff Reporter of THE WALL STREET JOURNAL
July 13, 2004; Page A1

STAMFORD, Conn. -- Pitney Bowes Inc., the mailing-equipment and
services company, has a team that aggressively seeks out ways to
contain ballooning health costs. Last year, it scored a small victory.
Employees who went to a hospital in 2003 stayed for an average of 3.7
days, unchanged from a year earlier. The overall number of admissions
didn't rise, either.

So Pitney Bowes was startled to nonetheless discover that the average
cost of each hospital visit jumped 9% to $10,600. The average cost per
day jumped 17%. One of the biggest culprits? Increasingly powerful
hospital groups in California, whose price increases pushed the
company's average cost of a hospital admission in that state to
$20,500, twice what it paid elsewhere.

By combing through claims data from its 46,000 U.S. employees and
their dependents, Pitney Bowes can pinpoint some of the big
contributors to the nation's surging health-care bill: Local hospital
mergers; entrepreneurial doctors prescribing costly MRIs and CT-scans
at their own private clinics; marketing for expensive drugs such as
the heartburn medicine Nexium, which became Pitney Bowes's
third-highest drug expenditure last year after an advertising blitz by
maker AstraZeneca PLC.

What Pitney Bowes learned tells the larger story of why health costs
keep rising in America: A dysfunctional market creates few incentives
for any of its participants to deliver efficient care. In fact,
competition among insurers, health-care providers and producers of
drugs and equipment can often lead to higher, not lower prices.

Even a big company with an entire team dedicated to rooting out the
source of rising health-care costs has little power to change these
dynamics. "We can isolate certain phenomena and try to act on some and
advocate policy for others," says Jack Mahoney, the corporate medical
director at Pitney Bowes, who oversees its health-care strategy. "But
when you come right down to it, even the biggest company out there
will tell you they don't have much influence on the market."

The struggle by American businesses to rein in health-care costs is
nearing crisis levels. Despite recent benefit cuts, U.S. employers
still pay the majority of health-care costs for more than 130 million
Americans and have borne the brunt of double-digit annual increases.
General Motors Corp., for example, says it spends "significantly" more
on health care than steel. Recent surveys suggest costs to employers
could rise as much as 10% next year.

Pitney Bowes, which is best known for inventing the postage meter,
runs eight state-of-the-art medical clinics for workers who logged
31,000 appointments last year, saving money on doctor visits. It
operates its own "Health Care University," where employees can earn
credits toward lower premiums while learning, for example, how to use
health care more efficiently. Its seven-member strong strategy team
uses complex predictive modeling software to spot the next place where
health-care costs will rise, and designs initiatives to counter them.
Pitney Bowes, more than many other companies, has had some success in
tackling costs by changing the behavior of its employees and improving
their health.

Yet in 2003, the total cost of claims Pitney Bowes paid directly --
covering about 80% of its employees -- rose 11.5%, more than it
expected. About 20% of Pitney Bowes's employees are covered by
health-maintenance organizations, for which the company pays a simple
premium. That brings the average increase in prices for the entire
company down to 7.5%. Pitney Bowes also managed to reduce its overall
costs by increasing employee contributions and winning discounts on
certain drugs and services.

The Pitney Bowes team headed by Dr. Mahoney, a 60-year-old former
White House physician, has helped moderate the expansion in Pitney
Bowes's $135 million health-care budget. But despite its most vigilant
efforts, Pitney Bowes's health-care costs continue to climb faster
than the rate of inflation and faster than increases in most other
business expenses.

Change in the Market

Much of the surge in recent years is traceable to a change in the
market for health-care services. A decade ago, HMOs were helpful in
tamping down costs because they micromanaged patient care and had
power to negotiate favorable prices with individual hospitals. But
consumers fought against their increasingly tight restrictions,
forcing companies to give employees a larger choice of providers, a
move that weakened HMOs' clout with hospitals. At the same time,
hospitals consolidated to counterbalance HMOs. The result has been
steep price increases in many areas.

One of Pitney Bowes's fastest-growing health-care expenses is
outpatient services such as laboratory tests and radiology services.
Among the most popular are MRIs -- magnetic resonance imaging tests --
and CT-scans, both of which are designed to give doctors a detailed
look at a body's internal organs or tissues.

Last year, Pitney Bowes paid for 7% more CT-scans than the year
earlier -- 1,914 in total. The average cost of the tests leapt 15% to
$560 apiece. Much of the rise is coming from advances in technology
related to CT, or computed tomography. New machines can perform
higher-resolution scans faster but more expensively.

Graph:
http://tinyurl.com/4rqw7

Pitney Bowes blames rising prices too, particularly from
entrepreneurial medical practices not attached to hospitals, which are
also prescribing more tests. Dr. Mahoney says he realized the
aggressiveness of this new business when he drove by Westport, Conn.,
and saw an advertisement offering 2-for-1 CT-scans.

Physicians such as Glenn Elia, chief executive of Connecticut
Orthopedic Specialists in New Haven, say they plan to install their
own MRI machines to provide patients better, faster and cheaper
diagnostic tests. "It will set us apart from other orthopedic
practices," says Dr. Elia. The group currently prescribes about 300 to
500 MRI scans a month.

Dr. Elia says he won't order more tests simply because he has a
machine in-house, but other physicians aren't as cost-conscious.
Cardiologists with their own imaging equipment prescribed cardiac
stress tests for 20.2% of the patients they saw, according to a 2003
Connecticut-based study conducted by National Imaging Associates, a
company that manages radiology benefits for health plans. Doctors who
didn't have their own equipment prescribed tests for 5.1% of patients,
the same survey found.

Imaging tests performed in hospitals have also become more expensive.
Richard Jones, chief financial officer at Stamford Health System, the
single hospital in Pitney Bowes's headquarters city, defends the price
of such treatments by noting the extra costs hospitals incur. Last
year, he says, the hospital provided $24 million in free care, a 6%
jump from 2002.

Since January, Pitney Bowes has required employees to pay a deductible
of about $250, depending on their health plan, plus 20% of the costs
of MRIs, CT-scans and other tests, unless they are preventive, such as
mammograms. Previously, employees were only required to hand over a
$75 co-pay. "We want to give people the impetus to start asking about
price," says Dr. Mahoney.

The Pitney Bowes medical analysts saw similarly sharply rising costs
from hospitals, and quickly discovered that much of the problem in
2003 came from California. Pitney also suffered from a rash of severe
cases among dependents of its Californian employees that year.

Traditionally, HMOs paid a set fee for procedures, requiring hospitals
to keep their costs under that target. In recent years, hundreds of
California's independent community hospitals have consolidated into
networks so big that insurers can't afford to shut them out. Many are
using their economic power to charge for every specific procedure and
service. Sometimes, health plans agree to pay a set percentage of
billed charges, but hospitals retain control over determining what
those charges will be.

In the San Francisco area, where the Sutter Health hospital network
has a large presence, the average cost of knee arthroscopy at a
hospital climbed 36% to $11,447, according to First Health Group, a
managed care company. Sutter, a nonprofit network of 26 hospitals, is
one of the largest hospital operators in Northern California, where
most of Pitney Bowes's 2,000 employees in the state live and work.

Sutter is unapologetic about raising its prices. "We were at a point
where we couldn't continue to make the investments we needed to and
hope to serve our communities," says Bill Gleeson, a Sutter spokesman,
who says the group barely broke even during the 1990s. Instead of
allowing health plans to negotiate with individual hospitals, it now
centralizes all such discussions.

Mr. Gleeson says Sutter has to cover other costs, such as meeting
regulations relating to staffing levels, serving the uninsured and
meeting state-mandated requirements to make buildings
earthquake-resistant.

There's little Pitney Bowes can do to fix this problem. The California
Public Employees' Retirement System, which provides benefits for
415,000 members, said last month it was dropping from its network 38
hospitals -- 16 of them Sutter facilities -- because of soaring
hospital costs. Dr. Mahoney says Pitney Bowes isn't powerful enough to
make such a dramatic move because hospitals wouldn't change their
prices in response.

Dr. Mahoney decided to hear for himself why so many hospitals were
raising prices. On a recent visit to Northern California, he heard
each hospital in turn complain that it was bearing the brunt of
serving the area's poor and uninsured. "By the third hospital, I was
saying, 'Now, wait a minute, you can't all be that hospital,' " he
recalls thinking.

Drug costs are a smaller part of the company's budget, but they remain
stubbornly resistant to Pitney Bowes's efforts. Like many companies,
it has started charging employees up to 50% of a drug's price when a
generic alternative is available, to encourage employees to seek
cheaper alternatives. As a result, the company's pharmaceutical costs
increased 11% in 2003, a slight improvement from the 12% jump in 2002.

Uphill Battle

Still the company is fighting an uphill battle. The price of drugs
bought by Pitney Bowes rose 12% last year and in a few cases,
drug-industry marketing neutralizes the company's cost-control
efforts.

Last fall, Procter & Gamble Co. started marketing the popular
heartburn pill Prilosec in an over-the-counter form that was
significantly cheaper than AstraZeneca's Nexium. For Pitney Bowes
employees, the potential savings were significant. Under the company's
various plans, employees could buy a month's supply of Nexium for
about $50, or over-the-counter Prilosec, which was originally
developed by AstraZeneca, for $25 or less.

But last year, the British drug maker spent $233 million on television
and magazines ads for Nexium, more than any company spent on
advertising for any one drug, according to Nielsen Media Research.
Some 55% of the millions of U.S. heartburn sufferers are aware of the
Nexium ads and nearly 7% of that group will likely end up with a
Nexium prescription, according to NOP World Health, a health-care
marketing research firm. As a result, Nexium was Pitney Bowes's
third-highest drug expenditure, after anti-depressants and Lipitor, an
anti-cholesterol drug made by Pfizer Inc.

Pitney Bowes staffers worry about the rise of more expensive biotech
drugs, including drugs for asthma, rheumatoid arthritis and lung
cancer. Dr. Mahoney believes these drugs can bring remarkable
improvements to patients, but notes they are replacing conventional
drugs that cost a fraction of the price.

For example, Biogen Idec Inc.'s Avonex multiple-sclerosis treatment
can cost more than $1,200 a month. Last year it was the company's
17th-highest drug expense -- even though it's used by less than
one-tenth of one percent of people covered by the company's health
plan.

In some instances, costs shoot up purely because the health-care
industry makes changes that ill-serve its consumers. New York
emergency-room visits by Pitney Bowes employees rose last year even
though the company had begun charging employees extra to curb
unnecessary visits. Dr. Mahoney saw some employees going to emergency
rooms for routine problems such as children's ear infections.

Pitney Bowes discovered that local doctors had shortened their office
hours -- some closed at 4:30 p.m. -- making it impossible for
employees who work certain shifts to get appointments. The ER visits
were mostly in the late afternoon or early evening.

Pitney Bowes is putting pressure on New York insurance carriers to get
physicians to lengthen office hours or contract with more walk-in
clinics. Pitney Bowes says it may resort to setting up its own on-site
clinic in the city.

"We knew it wasn't a matter of throwing higher co-pays at people to
change their behavior," says Dr. Mahoney. "Something wasn't working in
the marketplace."

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