NO MORE HEALTH CARE ON THE HOUSE The bosses who foot the bills for active and retired workers can't bear the increasing burden. Employees had better brace themselves: They're going to have to pay up.
By Alan Farnham REPORTER ASSOCIATE Patricia A. Langan

(FORTUNE Magazine) – AMERICA'S TOP CEOs view rocketing health care costs as a drain on profits and a threat to the very competitiveness of U.S. industry. Health care consumes more than 11% of GNP -- twice the bite it took 25 years ago and more than any other industrialized nation spends. Business's share of the nation's doctor bill has grown to a staggering 45% of operating profits. While not all executives agree on the cause of this illness, they seem united on treatment: An overwhelming majority have asked present or retired employees to shoulder more of the costs -- and nearly as many plan further shifts in the future. These are among the most striking results of the latest FORTUNE 500/CNN Moneyline CEO Poll. Clark Martire & Bartolomeo, an independent opinion research firm, conducted the survey from January 16 to 24. Respondents were 209 CEOs of FORTUNE 500 and Service 500 companies. Edmund Pratt Jr., head of Pfizer, the pharmaceutical company, points out that employees who imagine health care to be free are unlikely to consume it wisely. He and fellow CEOs have pricked this bubble by requiring workers to pay part of health care costs. Says G. David Hurd, head of Principal Financial Group, a financial services company: ''It's a philosophical thrust, to increase employee cost-consciousness.'' Some CEOs feel cost sharing alone is not enough. ''It puts the employee back into the decision-making process,'' agrees Thomas Frist Jr., head of Hospital Corp. of America, ''and it has shown results. But we're still not satisfied. In April we'll be instituting a flexible benefits program.'' Flex programs typically give employees several choices of how to spend their health care dollars: Traditional ''unmanaged'' plans let them pick their own doctors, while less expensive ''managed'' programs require them to use a specified group of doctors -- often in a health maintenance organization (HMO) -- with which the employer has negotiated favorable rates. Employees who pick the cheaper plans can spend their savings on other benefits, such as child care. Managed plans have spread rapidly and, according to the Health Insurance Association of America, account for 72% of all plans. Richard Clarke of Pacific Gas & Electric uses a flex plan already. ''Every option is priced,'' he says. ''We're entering into contracts with doctors and care givers, including HMOs, where we can negotiate rates. With 27,000 employees, you have a lot of buying power.'' PG&E has also adopted fitness and diet programs, which Clarke calls ''a fruit-and-granola exercise regime.'' He estimates that the company's health care changes saved $15 million in 1988. Pratt had a powerful incentive to revise Pfizer's health plan: The company's insurer, Metropolitan Life, told him in 1987 that Pfizer's premium would rise 35%. Why? Pratt says Metropolitan explained it to him this way: ''You guys are suckers.'' Pfizer was paying for many kinds of hospital costs from the first dollar. It now requires a $200 deductible -- ''a modest takeback,'' says Pratt, ''but we got little negative reaction. You have to explain these changes to employees. I did a videotape.'' Pfizer's subsequent premiums increased far less. Besides money, morale is at stake when a company starts fiddling with health care. Philip Lippincott, head of Scott Paper, thinks that how a company announces benefit changes to employees can determine whether those changes gain acceptance. ''You must be fully open and candid -- no hidden agendas,'' he says. ''We test-marketed our changes, got people's reactions, then held employee meetings around box lunches to talk over specifics.'' Frist of HCA adds: ''Saving money isn't enough. You have to save money and make the employees happy.'' A minority of CEOs (17%) say they have not asked employees to pay any health care increase. Some companies in tight labor markets feel they must continue offering existing plans to stay competitive. Others intend to make changes but have not decided what to do. More CEOs have been willing to put the bite on active employees than on the retired. But their reluctance to touch retirees begins to melt as they contemplate the future; 41% say that over the next four years they intend to ask them to pay more. Pfizer's Pratt has already bit both the active and retired. ''Our plan gives us the legal right to do it,'' he notes. Not every company reserves that right, and the courts have questioned whether those that reserve it can exercise it.

How successful have CEOs been at curbing health care costs? Although more than three out of four feel they have had moderate success, only 8% rate their efforts ''highly successful.'' Scott Paper's Lippincott says he hasn't found the savings he had hoped to capture. ''It's like squeezing a balloon,'' he says -- as soon as one cost shrinks, another bulges. Herbert Kelleher, chief of Southwest Airlines, says, ''Our employees are concerned. They see rising costs as a threat to profitability.'' Surprisingly, support for some form of national health coverage appears to be growing among the CEOs, a heavily Republican and conservative group according to past polls. A fifth said that they have grown friendlier to the idea of universal health insurance, and 6% recommended such a plan. Says Avram Goldberg, head of Stop & Shop Cos.: ''I think we should explore the potentialities of the Canadian National Health Plan, as was recently advocated in the New England Journal of Medicine.'' A large majority of CEOs still oppose any substantial government program. Richard Zimmerman, head of Hershey Foods, speaks for them when he says, ''Get the government involved and they'll just foul it up.'' Most CEOs favor a variety of strategies for making the present system work better. The most popular, mentioned by 38%, is establishing procedures to control or reduce costs, such as price guidelines for medical fees. John Tait, head of Penn Mutual Life Insurance, favors pegging fees to an index, perhaps the consumer price index. Pratt, however, cautions against too many restrictions on doctors, who happen to be customers of his: ''We must resist * the temptation to come down hard on health care providers, because some good doctors left England when they restricted their doctors too much.'' Scrimping on high technology won't work either, he says: ''You could spend less on technology, but you'd spend a lot more burying people.'' Eventually, some feel, Americans may have to change their attitudes about death. John Rollwagen, head of Cray Research, observes that, after all, ''dying is as much a part of life as anything else.'' He questions whether using high-tech procedures on the elderly makes sense in a world of limited resources. A more rational system would stress prevention and natural healing, he says, and ''We may have to face the fact that once you'd reached a certain age or level of infirmity, certain treatments might not be available to you.'' Bruce Seaton of American President Cos., a shipping line, adds, ''Too much of total health costs are applied to the last year of life, yet we underspend on care for inner-city children. It's a political problem. The old have tremendous power.'' CEOs are no youngsters, and it no doubt pains them to take medical benefits from employees past and present. But as most of them see it, the rising doctors' bill so threatens their corporate health that they have no choice but to operate.

BOX: Q. Has your company in the past four years asked active employees or retirees to pay for more of their health costs? A. Active employees and retirees 36% Active employees only 46% Retirees only Less than 1% Neither 17%

Q. In the next four years do you anticipate asking active employees or retirees to pay for more of their health costs? A. Active employees and retirees 40% Active employees only 32% Retirees only 1% Neither 13% Not sure 14%

Q. How would you rate your efforts to curb wasteful or excessive use of health services? A. Highly successful 8% Moderately successful 77% Unsuccessful 11%

Q. As employers' difficulties with health benefit programs have grown, has your interest in some sort of universal national health insurance plan increased? A. No 79% Yes 20% Not sure 1%

Q. If it were in your power to make any change in the U.S. health care system, what would it be? A. Establish procedures to control or cut costs, such as guidelines for medical fees 38% Require individuals to assume more of their health costs 15% Impose limits on malpractice suits 7% Require greater accountability by medical professionals and hospitals 7% Adopt a universal national health plan 6%