COMPANY NEWS; Rochester Serves as Model In Controlling Health Cost
By MILT FREUDENHEIM,
Published: August 25, 1992
ROCHESTER In the search for ways to slow the surge in national medical spending, policy makers and economists are paying growing attention to this prosperous industrial city of 232,000 in upstate New York.
Health-care experts say Rochester is one of the few American cities that have systems that work. Although medical costs have also been rising rapidly here in recent years, they are still at least 25 percent lower per capita than national levels. And in Rochester, only 6 percent of the population does not have insurance, according to a survey by Louis Harris & Associates, far below the 14 percent national rate.
By cooperating closely, instead of competing ferociously as they do in most cities, the doctors, the hospitals and the local businesses have kept the quality of care high, with a relatively low level of waste and unnecessary care. The General Accounting Office is preparing a report on the Rochester system for Congress. Program Called 'a Jewel'
"Rochester is a jewel in a sea of health-care despair," said Stephen Skorcz, a Toronto hospital executive who was president for four years of the Rochester Area Hospitals Corporation, a nonprofit planning and research group that the hospitals established.
The Rochester program has served the interests of the city's largest employers, including Eastman Kodak and Xerox, by holding down the growth in costly health-care benefits. But the chief beneficiaries have been the families and small businesses that would typically not have access to affordable care because they were not part of a larger group.
Equality of Payments
Under the Rochester plan, they pay the same monthly premiums for each person as Kodak and Xerox, for equal benefits. And unlike most health-care plans for small groups, no one pays more or is refused coverage because of age, sex or a previous medical condition.
Doctors and business and hospital executives around the country say one reason the Rochester system works is that local industry, vigorously led by Kodak, which has 39,000 employees here, cooperates closely.
All but a few employers buy their insurance from Rochester Area Blue Cross and an independent health maintenance organization, instead of following the national pattern of insuring themselves in separate arrangements. This self-insuring can reduce a large company's costs, at least for a time, but it often increases the burden for small companies, which have few employees over which to spread the risks.
David E. Edwards, Kodak's benefits director, compared the company's community-first philosophy to the maxim "the family that prays together stays together." Kodak's 1991 health costs averaged $2,100 an employee in Rochester, which was 25 percent lower than at the company's operations in other cities. Kodak's total cost last year for all employees, retirees and dependents was $240 million.
Rochester Area Blue Cross and Blue Shield said the cost of health-care coverage per employee in company plans here was $2,378 in 1991, about one-third less than the $3,573 reported in a national survey of employers by the A. Foster Higgins benefits consulting firm. Those numbers include both employer and employee contributions.
In addition, Blue Cross administrative costs were 7 percent of revenues, much lower than national estimates of 14 to 24 percent for most insurers. Rochester Blue Cross officials said the reasons for their lower costs included the efficiency of their electronic claims processing, the high productivity of their employees and therelatively low spending on advertising.
More than half of the region's one million people are in health maintenance organizations, which are prepaid health plans that offer comprehensive coverage, including regular checkups, and try to help their members avert expensive hospital stays. Even the handful of self-insured employers, including Bausch & Lomb and General Motors' Delco Chassis and AC Rochester units, say most of their Rochester people are in one of the two local H.M.O.'s, one of which is offered by Blue Cross. Blue Cross H.M.O. premiums last year were as much as 25 percent lower than for comparable for traditional coverage.
Reins on Hospitals
Another area of industry cooperation has included close oversight of the area's seven hospitals, which represent a large portion of the costs of health care. Backed by state health planning laws that require approval for big projects or purchases, the Rochester business executives who sit on the hospital boards have kept a tight lid on new buildings and technology. "No one proposes a Taj Mahal," said Albert D. Sharbonneau, executive vice president of the Genesee Hospital in Rochester, which has 424 beds. "It's not worth your time."
No additional hospital beds have been authorized since the 1960's, so more than 90 percent of the beds are always occupied. With all the patients they can handle, "the hospitals haven't had to get into helicopter wars," said Arthur Liebert, president of the 526-bed Rochester General Hospital, referring to the helicopters some hospitals deploy in emergencies.
Avoiding expensive duplication, the hospitals have agreed over the years on which institutions should perform certain specialized services -- like organ transplants, open-heart surgery, pediatrics, psychiatry -- usually with related teaching programs at the University of Rochester medical school.
Under industry pressure, the hospitals agreed to let the Hospital Corporation set communitywide budget ceilings for a time in the early 1980's. This forced them to squeeze down spending. Then because costs were lower than the going rates paid by Medicare, Rochester voluntarily gave back to surprised Federal officials a total of $4.8 million in 1984 and 1989 to prove the effectiveness of its approach.
"When we took the check down to Washington, they didn't know what to do with it," said Dr. James A. Block, who headed the Hospital Corporation at the time and is now president of Johns Hopkins Hospital in Baltimore. "Nobody had ever returned Medicare money before."
But when the hospitals began to experience operating losses in the late 1980's, they rebelled against the budget ceilings. Other developments, including expensive new diagnostic equipment and surgical procedures, soon were pushing medical costs in Rochester up as rapidly as in other cities, albeit from a much lower base.
Costs Begin to Climb
"Costs have been creeping up in the past few years," said Patricia M. Nazemetz, Xerox's benefits director. But she said that local business executives were trying to get planning back on the table, with all the interested parties taking part in the discussion.
To keep the hospitals cooperating, Donald D. Zrebiec, a retired Xerox executive, is helping to direct a program in which management experts from Kodak, Xerox, General Motors and I.B.M. are advising eight Rochester area hospitals on how to improve the quality of their service.
With hospitals closely controlled in New York State, most health-care spending has moved to physicians' offices and clinics, which often buy their own computerized scanners and magnetic-imaging machines. The Rochester Area Blue Cross and Blue Shield Association is considering an innovative plan that would put pressure on these buyers to get approval as the hospitals do.
Another cornerstone of the Rochester plan is the single-price approach, known as community rating.
Under community rating, everybody -- young and old, healthy and infirm -- is grouped together so the risks and costs are spread evenly across large numbers of people. By contrast, when they become sick or grow old, most individuals and members of small groups have to pay higher premiums or drop their coverage, joining more than 30 million Americans who are uninsured.
Al Ross, a 59-year-old home maintenance contractor, kept his Blue Cross coverage in Rochester after he moved with his wife and two children to Hilton Head Island, S.C.. "Here they charge according to your age," he said of South Carolina, "and there is an additional charge for each child. I'd feel crushed if I had to pay that."
Trends in Health Insurance
Only a few other places, notably Hawaii, have kept community rating, which was common before insurers began to compete for the business of small groups with varying rates. This and other kinds of competition in health care came into vogue in the 1980's in hopes that the pressures of the marketplace would slow rising medical costs, but the practice has tended to favor groups of healthier people and exclude people who are at risk of incurring higher medical bills.
Modified versions of the single-price approach have recently been adopted statewide by Maine, Vermont, Oregon and New York, where the law will take effect on April 1. Community rating is also under study in several other state legislatures and in Congress.
Commercial insurers who oppose community rating say the system would force them to raise premiums beyond the reach of many young and healthy policyholders. That has not happened, however, in Rochester. But Chris Petersen, a senior counsel with the Health Insurance Association of America, a commercial insurers' group, contends that the Rochester system can function only because Blue Cross plans in New York are exempt from state taxes and get discounts on hospital charges.
Power of Example
Policy makers in Washington and across the country express interest in adopting at least parts of the Rochester system. But experts disagree over how many of the Rochester advantages could be replicated elsewhere.
People in Rochester "have been out in front in showing how they can behave as a community," said Dr. Merlin DuVal, a former Assistant Secretary of Health, Education and Welfare who is dean emeritus of the University of Arizona College of Medicine.
Dr. Block of Johns Hopkins said the Rochester approach could be transferred to any city if local business leaders would join in supporting a unified regional insurance program. Kodak executives said they were discussing similar approaches in several cities where the company has large plants.
But Humphrey Taylor, chief executive of Louis Harris and Associates, was doubtful. "They have a sense of community in Rochester, which just doesn't exist in most places," he said.
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