Critical Condition

By Janice Castro

Executives at General Motors are deeply concerned about a rising cost of doing business. Escalating wage demands perhaps, or increasing prices for steel? No, the problem has nothing to do with making cars. What really alarms GM is the company's health insurance plan. During the first nine months of last year, GM spent more than $2 billion on medical care coverage for its 2.3 million employees and retirees and their dependents. In the same period, the profits earned by the giant industrial firm were $2.7 billion. And while those earnings were only marginally higher than they had been a year earlier, the company's health care bill grew about 30%.

GM's dilemma dramatically illustrates a mounting disaster that threatens all of corporate America. After years of trickling increases, insurance premiums that companies pay for group health plans are suddenly swelling at flash-flood rates. The Health Insurance Association of America, an industry trade group, says commercial health insurers are boosting their premiums about 20% this year, vs. just 4% in 1987. Some group health plans have been hit by price increases as high as 70%.

The premium hikes are part of a general surge in costs that is hitting everyone covered by health insurance. On Jan. 1 the Medicare premiums paid by elderly and disabled Americans jumped 38.5%, from $17.90 to $24.80 a month, the largest increase since the program was started in 1966. At the same time, Blue Cross and Blue Shield premiums for federal workers rose 38%.

These increases have stunned benefits managers, who believed health costs were finally starting to moderate. After all, medical care inflation, which was running at double-digit levels in the early 1980s, was just 5.8% last year. That was not much more than the 4.4% rise in the Consumer Price Index for 1987.

What went virtually unnoticed until now, however, was that while the pace of price increases was slowing, the number of medical claims filed with insurance companies was growing ominously, pushing up overall expenditures faster than expected. The total medical bill for U.S. health care rose last year about 10%, from $458 billion to more than $500 billion, or 11% of the gross national product. Those costs are expected to climb an additional 15% this year.

The new hikes in health insurance premiums are even larger than the current rate of growth in medical spending, in part because insurers base their premiums on past trends. Insurers concede that several years ago, actuaries underestimated the part that nonhospital care and increased utilization of medical services would play in pushing up health care expenditures. The increases now taking effect are designed to make up for rates that were too low for the past two to three years. Industry economists say rates should rise more slowly starting next year.

The explosion in medical premiums hits business especially hard. Except for Government workers and those covered by Medicare and Medicaid, most Americans are insured against medical expenses through private employers. To provide that coverage, U.S. companies will pay $130 billion in insurance premiums this year, up from $110 billion in 1987.

Since the early 1980s, companies and the Government have worked to bring medical costs under control. At first, efforts focused on hospital use, the single largest category of medical expense. (Average 1987 cost for a hospital stay: $697 a day.) Health-care analysts argued that the cost of many operations could be reduced significantly if, for example, patients checked in ; the day of surgery instead of one or two days in advance.

The Government first challenged the sky's-the-limit pricing practiced by hospitals in 1983. Congress enacted a set of maximum fees that it would pay for various kinds of treatment for Medicare patients. Because the hospitals made a profit only if they performed the procedures for less, they had an incentive to send patients home as soon as possible. Major insurance companies soon followed suit with their own cost ceilings, and employers devised incentives to encourage employees to reduce the time they spent in hospitals. For one thing, they required second opinions before elective surgery.

This encouraging progress was undermined, however, as people began turning from hospitals to neighborhood clinics and doctors' offices. Since those providers of health care were not constrained by the same cost controls that had been imposed on hospitals, they were in many cases able to charge higher fees. Patients did not mind, because generally they were paying at most 20% of the cost.

Spotting a promising new line of business, hospital corporations opened so- called satellite clinics, many in residential areas. The neighborhood centers found a clientele among workers who were impressed by the convenience and availability of treatment. Says Bernard Tresnowski, president of Blue Cross and Blue Shield: "The incentives for outpatient treatment were so strong that people took advantage of them."

Doctors saw ways to protect their incomes from corporate budget cutters. One tactic: scheduling more frequent office visits for patients. Physicians also began to sell prescription drugs as a profitable sideline. In all, nonhospital expenditures grew last year by 10%. Says Deborah Steelman, a health-care analyst for Epstein Becker & Green, a Washington-based law firm: "We squeezed on one end of the system, and it came out on the other."

In addition to changes in the ways that consumers buy medical services, advances in medical research and technology have contributed to rising costs. Doctors who might have ordered X rays ten years ago, for example, now may call for the much more detailed -- and more expensive -- images produced by nuclear magnetic resonance imaging equipment. Moreover, the rise in malpractice awards has prompted doctors to order more tests. Blue Cross estimates that $30 billion was spent on lab tests, X rays and electrocardiograms in 1986 and that as many as half of those tests were not necessary.

To help corporations hold down medical costs, a whole new industry of medical efficiency experts has sprung up to track employee health care. Cost Care, based in Huntington Beach, Calif., monitors medical treatment for 4,000 U.S. companies. The doctors and registered nurses who work for the firm follow the progress of hospitalized patients and sometimes give advice on appropriate treatment. Cost Care boasts that it can cut corporate health costs as much as 23%.

Another strategy is to try to keep workers healthy in the first place. Many firms now sponsor "wellness" programs to encourage better eating and exercise habits. CTI, a Knoxville-based manufacturer of medical equipment, holds aerobics classes for its 105 employees and organizes group hikes and ski trips.

In Memphis, Federal Express, Holiday Corp., First Tennessee Bank and a score of other local employers have joined to form the Memphis Business Group On Health, which negotiates rates and medical coverage for its members. In response, Baptist Memorial Hospital of Memphis has agreed to bill the firms at special low rates in exchange for employee referrals. Says Gordon Smith, president of the group: "Businesses are finally waking up to the fact that they have to manage health-care costs the way they manage everything else."

During the past five years, thousands of employers have added Health Maintenance Organizations to their coverage. HMOs treat employees and their families for a fixed annual fee. Since they make more profits if they provide less expensive medical care, they have a strong incentive to discourage overuse of their facilities. Though HMOs were widely heralded as an effective way for companies to trim costs, so far that promise remains largely unfulfilled. Many client firms have complained that HMO rates are just as high as those for ordinary insurance coverage.

A 15-year study of 5,800 employees conducted by the Rand Corp., the Santa Monica, Calif., think tank, suggests that the best way to curb overutilization of health care may be to shift more of the financial burden to workers. Participants in the study were assigned a variety of insurance plans, ranging from one that cost the worker nothing to one that carried a $1,000 deductible. Employees in the free plan used 50% more medical services than those who had to pay the high deductible. Recognizing this link between low payments by patients and heavy use of medical facilities, many firms have increased what their employees must pay for health care.

That will help, but it cannot halt the health-spending spiral. Many experts believe that at some point limitations will have to be placed on a physician's prerogative to order costly procedures. Says Dr. William Roper, chief of the Health Care Financing Administration: "You cannot have unfettered decision making by physicians and control expenditures."

For American business, the issue is crucial. Unless companies can control medical outlays, they will have to keep boosting the prices of their products and thus become less competitive in world markets. In that event, many workers might face a prospect even more troubling than rising medical premiums: losing their jobs.

With reporting by Richard Bruns/New York and Richard Hornik/Washington