1989-0142623L
N0. -014
AN ORDINANCE AUTHORIZING THE MAYOR TO EXECUTE AN AGREEMENT WITH
COOPERS & LYBRAND TO CONDUCT A COMPREHENSIVE STUDY OF THE CITY'S
EMPLOYEE INSURANCE PROGRAM; AUTHORIZING THE EXPENDITURE OF FUNDS
THEREFOR; AND PROVIDING AN EFFECTIVE DATE.
THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS:
SECTION I. That the Mayor is hereby authorized to execute an
agreement with Coopers & Lybrand, to conduct a comprehensive study
of the City's Employee Insurance Program and provide written
recommendations for changes, improvements, and adjustments, a copy
of which is attached hereto and incorporated herein.
SECTION II. That the City Council hereby authorizes the
expenditure of funds in the manner and amount as specified in the
agreement.
SECTION III. That this
immediately upon its passage
PASSED AND APPROVED this
ordinance shall become effective
and approval.
the day of 1989.
U
RAY ST S, YOR
ATTEST:
J 40I E*RE RS, CI Y SE ETARY
APPROVED AS TO LEGAL FORM:
DEBRA ADAMI DRAYOVITCH, CITY ATTORNEY
BY:
5221PI1189
THE STATE OF TEXAS § AGREEMENT BETWEEN THE CITY OF
DENTON AND COOPERS & LYBRAND
COUNTY OF DENTON §
The City of Denton, Texas, a Municipal Home Rule City
situated in Denton County, Texas, hereinafter called "City",
acting herein by and through its City Manager and Coopers &
Lybrand, hereinafter called "Consultant", hereby mutually agree
as follows:
1. SERVICES TO BE PERFORMED:
A. City hereby retains Consultant to perform the hereinafter
designated services. Consultant agrees to perform the following
services:
1. Conduct a comprehensive study of the City's Employee
Insurance Program and provide written recommendations
for changes, improvements, and adjustments. The
specific tasks to be completed are set forth in
Consultant's Proposal, marked exhibit A, dated December
22, 1988 and which is attached to this agreement and
incorporated as if stated herein.
2. Presentation of Comprehensive Report:
If such approval is unreasonably delayed or withheld,
the Consultant reserves the right to request an
extension of the schedules deadlines from the City's
Personnel Director. Consultant will provide twenty (20)
copies of the final report and agrees to present the
findings and recommendations to the City Manager and
City Council. Recommendations included in the report
will include estimates of financial impact on the
Insurance Program and implementation costs.
B. Availability of City Resources: City will make available
to Consultant the following:
1. Relevant Insurance Program information.
° An inventory of the benefit plans offered, including
initial plan implementation dates; dates and descrip-
tions of material changes in benefits; administra-
tors/insurance companies; funding arrangements, etc.
° Current and in force plan documents (PD's), summary
plan descriptions (SPD's), and contracts with
insurance companies or administrators.
° Monthly claims experience, premium rates and
enrollment for 1986, 1987, 1988.
Financial reports prepared by insurance companies
for plans that require a final settlement at the end
of a contract period.
° Communications materials that has been used over the
past year.
° Any historical demographic and cost utilization
reports.
o Current employee census information.
° Annual reports and any other materials prepared by
previous consultants.
° Medical claims history tapes from both Coordinated
Benefits Systems Inc. and the City's prior
administrator.
2. The Personnel Director and support staff will be
available for program update consultations.
3. On an as requested basis the City agrees to provide
assistance in the activities described in Consul-
tant's proposal, including distribution of reports,
providing information on the City's current insurance
program, scheduling of meetings, etc.
II. TERM OF AGREEMENT:
Consultant shall commence rendering services within five (5)
working days of receiving notification of contract approval.
Consultant agrees to adhere to the following project deadlines:
Final presentation to the City Manager shall be completed no
later than April 17, 1989.
Presentation to the City Council shall be completed no later
than May 17, 1989.
Deviation from this schedule will be allowed if prior
approval is granted by City's Personnel Director, or for
reasons beyond the Consultant's control.
PAGE 2
III. COMPENSATION TO BE PAID CONTRACTOR:
City agrees to pay Consultant for the services performed
hereunder as follows:
A. Amount of Payment for Services:
City agrees to pay Consultant for the services performed
hereunder as estimated below:
CONSULTING
TASK
HOURS
C
OST
1. Management Study and Actuarial
125-136
1
12,750/
Analysis
14,000
II. Insurance Fund Options &
40-48
$
000/
4
Proposed Changes
,
$
5,000
III. Actuarial Projections
30-38
$
3,000/
$
4,000
IV. Section 89 Compliance 80-88 $ 5,000/
$ 6,500
Total Professional Fees $24,750/
$29,500
V. Estimated Expenses $ 2,000
(Travel, computer, etc.)
TOTAL ESTIMATED FEES & EXPENSES $31,500
Consultant will charge the City based on actual
professional time spent and expenses incurred. In no
event will the total project cost exceed $31,500 for
Consultant's fees and expenses unless Consultant is
requested to perform tasks outside the scope
presented in the proposal.
B. Dates of Payment: The City will pay Consultant on a
monthly basis, within thirty (30) days of completion of services
provided for herein.
PAGE 3
VIII. CANCELLATION:
City and Consultant each reserve the right to cancel this
Agreement at any time by giving the other party fourteen (14)
days written notice of its intention to cancel. If the agreement
is cancelled before completion, the City agrees to compensate
Consultant for services provided and expenses incurred prior to
notice of cancellation.
Executed this the il~~-day of January, 1989.
CITY OF DENTON, TEXAS
BY:
RAY S ENS, AYOR
ATTEST:
F
A~UAJV- 11)1~1t&z
(I.Mr-'s. ^-I - -
N RS, CITY SECRETARY
PROVED AS TO LEGAL FORM :
DEBRA A. DRAYOVITCH, CITY ATTORNEY
BY:
li(o.l~
COOPERS & LYBRAND
BY:
TITLE.
DATE :
That Thomas W. Klinck, is hereby designated as the person to
administer the provisions of this agreement.
/-/.-7-cF?
DA RAY ST ENS, MAYOR
PAGE 5
EXHIBIT A
THE CITY OF DENTON
A PROPOSAL FOR PROFESSIONAL WELFARE BENEFIT
CONSULTING SERVICES
PRESENTED DECEMBER 22, 1988
COOPERS
& LYBRAND
ACTUARIAL, BENEFITS & COMPENSATION GROUP
Leaders in the Financial Advisory and Advanced Systems
Aspects of Human Resource Management, Insurance and Risk
THE CITY OF DENTON
A PROPOSAL FOR PROFESSIONAL WELFARE BENEFIT
CONSULTING SERVICES
PRESENTED DECEMBER 22, 1988
Coopers
&Lybrand
December 22, 1988
Mr. Tom Klinck
Director of Personnel
City of Denton
901 B Texas Street
Denton, Texas 76201
uartified public accountants
actuarial, benefits
and compensation
consulting division
1999 Bryan Street
Suite 3000
Dallas, Texas 75201
telephone (214) 7545000
in principal areas of the world
RE: Proposal for Management Study and Actuarial Analysis of Employee
Insurance Fund
Dear Mr. Klinck:
We appreciate the opportunity to present our qualifications to assist the City of
Denton in managing its employee benefit plans. Coopers & Lybrand is uniquely
qualified for this project. As consultants to two of Denton's largest employers (The
University of North Texas and Texas Woman's University) we are knowledgeable of
the Denton healthcare environment and have dealt with the difficult problems
currently facing the City of Denton. Second, we serve as consultants to a number of
local/Texas municipalities and hence, have experience in dealing with the unique
problems faced by municipalities. Our local municipal clients include the City of
Richardson and the City of Garland.
Finally, as a result of other engagements (City of Austin), we have reviewed the
internal administrative controls and systems utilized by your current claims
administrator (Coordinated Benefits Systems) and hence are knowledgeable of CBS'
management reporting and claims processing capabilities.
BACKGROUND
The City of Denton, along with most other municipalities and major commercial
employers, finds itself facing a very difficult dilemma in managing its employee
health care costs. During the early to mid 1980s, health care costs increased generally
at a similar rate as other components of the Consumer Price Index (CPI).
However, during the last two years, rate increases in the twenty-plus percent range are
being defined as low, and premium rate increases ranging above fifty percent are
becoming the norm. These rate increases are coming at a time when the economy
continues to be depressed and employee salary increases are minimal.
The City took the initiative to aggressively manage its healthcare costs through the
development of a Preferred Provider Organization program for general illness and a
separate program for Mental & Nervous conditions. However, several specific claims
have caused the City to reach its specific and aggregate stop-loss levels, with a
resultant deficit of $700,000 for the medical plan.
Mr. Tom Klinck
City of Denton
December 22, 1988
Page Two
In short, as with most other employers, the management of employee health care costs
has become increasingly difficult and complex. Unfortunately, the involvement of the
Federal government will continue to increase the complexity of benefit plans
administration and result in additional management time requirements, as reflected in
COBRA and the more recently announced Section 89 testing requirements.
COOPERS & LYBRAND
Coopers & Lybrand's (C&L) Actuarial, Benefits and Compensation (ABC) Consulting
division is one of the leading Human Resource consulting practices in the country in
all aspects of compensation and benefits management. We have pioneered several new
concepts regarding the employer's role in managing health care costs, developing
Preferred Provider delivery systems, supplying health care data and actuarial analysis
systems and creating flexible compensation programs to support cost management
goals. Further, while other consulting firms have knowledge of managed care
programs, we have developed programs for Denton employers, and hence, are
knowledgeable of local health care provider's true cost and services.
Located in Dallas, the C&L Southwest Group Practice is comprised of benefit
professionals from diverse backgrounds. Our staff's previous work experience has
been in insurance companies, HMOs, the corporate environment and other consulting
firms. We have expertise in actuarial science, health care statistics, claims
administration, employee benefit law, hospital administration, human resource systems
and corporate plan administration. This unique blend of skills and experience helps to
provide a global perspective to clients in dealing with compensation and benefit issues.
As per your Request For Proposal (RFP), we have organized our response as follows:
I. Executive Summary
Understanding/Background of Project
Scope of services to be performed
Approach/Recommendations
II. Project Timing Phase I, II, III and IV
III. Estimated Fee Schedule Phase I, II, III and IV
IV. Engagement Team
V. Why Coopers & Lybrand?
VI. Client References
VII. Sample Letter of Engagement for Proposed Services
VIII. Biographies
Mr. Tom Klinck
City of Denton
December 22, 1988
Page Three
The City of Denton is truly facing some very difficult and complex issues. Coopers &
Lybrand has the hands-on experience in dealing with concerns similar to yours and,
has extensive municipal government experience.
We look forward to addressing any questions you may have regarding our proposal,
and further, to serve you as your benefit consultants. Please contact me at 214/754-
5204 if you should have any questions.
Sincerely,
4~' . P
(AJ alat~~
David J. Palatiere, M.P.H.
Senior Consultant
TABLE OF CONTENTS
Page
I. Executive Summary 1
II. Project Timing - Phase I, II, III and IV 12
III. Estimated Fee Schedule - Phase I, II, III and IV 13
IV. The Engagement Team
V. Why Coopers & Lybrand?
VI. Client References
VII. Sample Letter of Engagement
for Proposed Services
14
15
18
20
VIII. Biographies 21
I. EXECUTIVE SUMMARY
Understand inp/Background of Proiect
In addressing the Scope of Services outlined in your RFP, we have developed
an approach which is comprehensive, yet efficient in accomplishing the tasks at
hand. First, the City is to be commended for the thorough review it desires, as
it indicates your appreciation that there is no "silver bullet" to correct ever
escalating health care costs.
PHASE I ANALYSIS OF EXISTING EMPLOYEE HEALTH INSURANCE FUND
Phase I of the Scope of Services consists of an indepth review and analysis of
the City's current health plan from a multitude of perspectives (plan design,
claims administration, statistical analysis, etc.)
Our proposed services are as follows:
A. Conduct Initial Meetinas
Prior to initiating our review of the current health plan, we will conduct
initial meeting(s) with the City's staff to ascertain your objectives,
identify issues relating to association (Police and Fire) arrangements,
determine the limitations, if any, in the current Preferred Provider
program, etc.
The initial meeting(s) will cover high level management issues. In
addition, we recommend the establishment of a project team which
would meet periodically during the course of the project (e.g., after the
completion of each major phase of work), to ensure that we continue to
meet the City's objectives.
Upon completion of our initial meeting(s), we will perform a thorough
review of the current health plan as presented below:
B. Plan Design Review
A plan design must be developed which fits the needs of the
employees, is simple to understand and easy to administer. The
problem with current plans is that they:
Are difficult to administer, especially from the provider's
perspective.
Implement benefit cuts resulting in little more than cost-
shifting to the patients.
Enable hospitals and physicians to easily discount the
deductibles and co-payments and adjusting their billing
rates to „override the system".
In summary, a plan design must be developed and utilized that
fits the City of Denton.
We will focus on the City's two plans and the Utilization Review
program. Specifically, we will review the Indemnity Plan and the
Preferred Provider Organization Plan from the perspective of:
Deductibles and co-pays
Incentives to utilize PPO network
Utilization of PPO Providers (physicians and
hospitals) versus non-PPO providers from the
perspective of:
Services provided
Paid Claims
Comparability of cost per hospital admission,
length of stay
Referral patterns of PPO physicians to non-
PPO providers (physicians and hospitals)
An important step in our review process will be to obtain a
claims history tape from Coordinated Benefits Systems for the
past several plan M~ rs. We have developed a claims analysis
system (MedBasel) which allows us the ability to analyze
claims data and compare it against local Denton/Dallas area
employers as well as state and national norms. By performing our
claims analysis we will analyze issues such as:
The impact of adjusting deductibles and co-payments.
The effectiveness of UR and Cost Containment programs
such as the second surgical opinion and outpatient surgery
programs.
The paid claims by employee, spouse and dependents.
Plan Historical Background
In addition to performing a claims analysis, we will request to
review and analyze the following information:
An inventory of the benefit plans offered, to include
obtaining initial plan implementation dates, dates of
material changes and dates of changes in administrators,
insurance companies, etc.
Any available current and previous plan documents (PD's),
summary plan descriptions (SPD's), and contracts with
insurance companies or administrators.
2
Monthly claims experience, rates and enrollment.
Financial reports prepared by insurance companies for
plans that require a final settlement at the end of a
contract period.
Communications material that has been used over the past
three to five years, as available.
Historical demographic and cost utilization reports.
Annual reports and any other materials prepared by
previous consultants.
C. Review Health Plan Administrative and Funding Arrangements
In this segment of our review, we will focus on the administrative and
funding arrangements currently inplace. Specifically, we will review:
1. Plan Rates
The appropriateness of current rates by coverage level;
The appropriateness of rates to cover expected claims plus
administrative costs;
Assess revenue trends based upon employee demographics,
current and projected rates, and current and projected
health care costs.
2. Funding/Pricing Alternatives
As the City has entered into arrangements with both Denton area
and Dallas area providers, we will focus our attention on the
current negotiated contracts to determine if the City is obtaining
the savings it should. Specifically, we will review:
The appropriateness of current plan deductibles, co-pays,
maximums for both the Indemnity and PPO plans.
From the data we obtain from performing our claims
analysis, we will be able to report to the City whether or
not the currently negotiated contractual arrangements are:
1) Equitable from the City's perspectives, and
2) Saving the City benefit dollars.
3
As we have extensive experience in negotiating with area
providers, we can compare against what other employers
have obtained through negotiations.
(Please see Section V - "Why Coopers & Lybrand")
The appropriateness of the current Stop-loss levels:
Individual (Specific)
Aggregate Insurance
3. Claims Administration
One of the primary areas of managing your Plan is the claims
administrator/Utilization Review area. It is not uncommon to
have claims error rates approaching 5% of paid claims. As the
City's paid claims are approximately $1,000,000, it may be
exposing itself to a significant amount of mispaid claims.
Our review of the claims administration area will consist of:
An Operational Review of CBS to assess administrative
efficiency, internal controls, claims management reporting
capabilities and responsiveness to claims inquiries;
The identification and evaluation of claims processing
costs for both CBS and their UR firm (August
International).
4. Section 125 Plan Review
The City of Denton has implemented a Section 125 Plan and
desires a review of the program be performed. Our review will
consist of the following issues:
- Determine actual employee savings and City savings;
- Review participation levels to determine areas of employee
populations which are not participating in the program;
- Review 125 employer communication materials and
provide recommendations as appropriate.
- Review overall program and identify methods the City
might pursue to increase participation levels.
4
5. Employee Communications
Given the multitude of changes and complexity of benefit plans,
employee communication is critical to the success of
understanding exactly what is and is not covered and by which
providers. In this area, we will review:
Current employee records/documentation currently being
maintained.
Current employee communications material.
Develop recommendations regarding current procedures
and material.
6. Benefit Plan Comparison
The City of Denton must be competitive with other local Denton
and Metroplex based employers in order to retain qualified
employees. A major concern to employees is how their benefits
package compares with other local employers.
Based upon our service to numerous Denton and Dallas based
employers, we will develop a comparison matrix identifying:
Benefit Design
Coverage Levels
Cost Containment Programs
Rates
Employee Contributions
Major Plan modifications such as HMO, PPO
development
7. Statistical Analysis and Data
The importance of timely, accurate data is critical to the
management of your medical plan. Plan managers can no longer
make decisions based upon fragmented information or data of
questionable quality.
Utilizing our MedBase system, we will be able to produce relevant
inpatient hospital statistics such as:
Cost per day
Cost per stay (admission)
Cost by diagnosis
Number of admissions per 1,000 covered
employees/dependents
Number of patient days per 1,000 covered
employees/dependents
These statistical indices are critical to pinpointing areas of
utilization within the Plan and developing procedures to deal
with over-utilization, if any.
5
We have data on all of our Dallas/Denton based Group Benefits
clients and are able to compare the City of Denton's to this
group, as well as to regional/national norms.
8.
Review of Other Plans
As called for on your Request for Proposal, we will review the
City's LTD, Life Insurance and other plans from the perspective
of:
Appropriateness of current rates and costs
Comparisons against our other clients which have similar
benefit plans
Funding mechanism of these benefit plans
PHASE II
ASSESSMENT OF INSURANCE FUNDING OPTIONS AND PROPOSED CHANGES
As stated in your RFP, the City established a self-insured
program in 1978 with the understanding that along with
controlling its medical plan comes the responsibility of ensuring
financially secure Plan. Given your employee size and desire to
manage your plan, it is our belief that the City's desire to
implement a self-insured program was appropriate and that your
desire to be in more control to manage your health plan.
Simply stated, the issue of self-insured versus fully insured comes
down to a timing issue. For those employers who are fully
insured, should they have a "bad" year, the carrier will include
anticipated claims costs and their deficit recoupment amount in
the following years' re-rating process. Certainly the employer has
the freedom of terminating the contract, however, any new
carrier will be very cautious in bidding for the contract and take
into consideration claims experience and history of past carriers.
Ultimately, those employers who manage their plans effectively
and efficiently will be able to maintain premiums at levels which
their employees can afford.
In reviewing the options available to the City of Denton, we will
focus on:
1. Alternative Funding Options including:
Fully insured programs
- Self-insured programs
- Minimum Premium Programs
- Appropriateness of specific and aggregate Stop-loss
insurance levels
- Cost-sharing options and philosophy
Employees paying a portion of the premium
Use of deductibles and co-payments
6
In reviewing these options, we will concentrate on:
- Advantages/Disadvantages
- Flexibility/Control
- Cost (Internal/External)
- Cost (One-time and On-going)
2. Recommended Plan Design Alternatives
Based upon our analysis, we will recommend changes to
the City of Denton's Plans as follows:
Indemnity and PPO plan
Utilization Review/Cost Containment Programs
Provider Reimbursement Levels
Managed Care Options We will review other
managed care options to assess the feasibility of the
City in joining other established programs in
Denton.
PHASE III ACTUARIAL ANALYSIS FOR PROJECTIONS OF INSURANCE
FUND AND RECOMMENDED CHANGES
We will prepare a 5 year forecast in conformance with generally
accepted actuarial practice, utilizing the data obtained in Phases I
and II.
Our methodology in performing this task is as follows:
Methodology
We will design a projection model that will utilize baseline
claim costs, enrollment demographics, cost and utilization
trend factors, administrative expenses and reinsurance
fees. The MedBase analyses done in Phase I of the project
will provide input for determining the claim costs and the
cost and utilization trends to be used in the projections.
The baseline costs calculated from historical City of
Denton claims experience will be weighted with the claims
costs from other Denton area employers to determine the
baseline costs to be used in the model. Trend assumptions
will be determined based on current regional health care
trends and recommendations from Coopers & Lybrand's
National Health Care Economics Consulting Group in
Washington, D.C.
The level of detail that the model incorporates will be
dictated by the intended applications as identified by the
City. A summary level model would provide a tool for the
City to do budgeting and cash flow analysis on an
aggregate basis. This model would use average costs,
contributions, etc. on a per employee basis. A more
detailed model would input and track costs based on actual
participation and premium levels on an employee only,
employee and dependent basis. This greater level of detail
would offer the City the opportunity to vary assumptions
pertaining to shifts in enrollment among coverage
categories and changes in premium contribution levels.
5 Year Proiections
A prototype of the output of the plan financial model is
included for your review in Attachment I.
Your RFP requested that the accuracy of the projections
be within .5% of actual experience. Due to the cyclic and
volatile nature of health care costs and trends we cannot
certify that our projections will vary less than .5%
especially when making projections for 60 months. Our
standard practice in projecting Plan costs is to prepare a
financial statement using our best estimate of trends and
holding all Plan provisions and funding arrangements at
status quo. In an effort to place those projections in the
proper context, we then prepare a second pro forma that
changes the trend factor by 1% to indicate the sensitivity
of the results to a variance in assumption.
The flexibility of the model will facilitate periodically
updating the projections for actual experience, benefit
changes, or growth/decline in Plan participation.
"What If" Analysis
The financial projection model will be designed to allow
for "what if" analysis. This will enable the City to analyze
the results of proposed benefit and enrollment changes.
The City of Denton management project team will be
asked to provide input regarding which of the initial
assumptions they would like to see changed and by what
degree. The model will then recalculate the Plan financial
projections based upon the revised set of assumptions and
quantify the short term and long term financial impact of
the specific change. Multiple assumption changes can also
be combined.
PHASE IV REVIEW AND ANALYSIS OF CURRENT COMPLIANCE WITH FEDERAL LAWS
Compliance with Federal regulations is becoming more and more
complex as Group Benefits plans are required to comply with
regulations previously established for qualified/pension plans.
8
Our assistance in this area will include the following:
Qualification Standards
The Qualification Standards require that all plans meet the
following requirements:
The plan must be in writing.
The employees must be notified of their rights and
benefits under the plan.
The employees' rights must be legally enforceable.
The plan must be established with the intention of being
permanent.
The plan must be maintained for the exclusive benefit of
the employees.
We will identify each plan affected and review all Plan
Documents and Summary Plan Description for compliance based
upon our current interpretation of Section 89 requirements and
provide a summary level analysis. Once the final regulations are
issued, we will reassess our compliance findings, if applicable. If
the plans are found not to be in compliance, we will identify
specific areas of non-compliance and provide the City with a fee
estimate for our assistance to bring the plan into compliance with
the Qualification Standards.
Non-Discrimination Testing
Prior to initiating tasks related to Section 89 testing, we will meet
with City management to develop a strategy for compliance.
Should testing be the selected approach, the following tasks will
be completed:
Collection of Ponulation Data
We will assist the City in testing benefit plans under the
Section 89 regulations. In performing the testing, the
availability of specific data elements will be critical. We
anticipate the City will provide us with the data elements
and other information noted in Attachments II via
magnetic tape.
Perform Compliance Testine
The Non-descrimination legislation requires that in order
to be in compliance benefit plans must pass either the 80%
Alternative Test or both the Eligibility and Benefits Tests.
Alternate Testing:
In this step we will examine the feasibility of
performing the 80% Alternative Test.
9
Eligibility Testing:
In this step, we will perform the 50% Eligibility
Test and the 90%/50% Eligibility Test. The 50%
Eligibility Test requires that 50% of the employees
eligible to participate in a plan must be non-highly
compensated.
The 90%/50% Eligibility Test requires that 90% of
the non-highly compensated employees be eligible to
participate in a plan that has a value of at least
50% of the value of the highest benefit available to
the highly compensated employees.
Benefits Tests:
To test for benefits compliance, we will perform
the 75% Benefits Test. The 75% Benefits Test
requires that the average value of the benefits for
the non-highly compensated employees be at least
75% of the average value of the benefits for the
highly compensated employees.
Section 89 Tests Results:
Upon completion of the testing phase, we will
deliver a preliminary compliance report
summarizing the results of the tests as well as any
possible alternatives where compliance was not
achieved.
ON-GOING CONSULTING ASSISTANCE
Although the RFP did not specifically request on-going benefit
consulting, we recommend a periodic review of experience/costs,
updating of legislative issues and assistance in renewal of plan
providers, administrators and insurers.
In this regard, we recommend the following tasks be performed:
We believe it is imperative that plan activity be reviewed
frequently, preferably on a monthly basis. Attachment I is
an example of the financial information which should be
available to decision makers on a monthly basis. This
Attachment provides management with a financial
perspective of the Plan on a monthly basis. Attachment III
provides management with utilization data (admissions/bed
days) which assists in identifying how the plan is
operating compared to budget.
Initially, we will assist the City in customizing and
implementing these spreadsheets, and anticipate that the
City will be responsible for their development on an on-
going basis.
10
As employee benefits become ever complex due to
legislation activities, it is imperative that management is
knowledgeable of critical legislation as soon as possible.
C&L's Washington, D.C. National Technical Services Unit
is responsible for providing timely identification and
analysis of legislation as it is passed by our elected
representatives. As a result, we are continuously updated
and informed of critical legislation, and will inform the
City of such critical legislation and its impact as soon as
possible upon release.
Also, as part of our on-going consulting, we will assist in
the renewal and negotiation of all plan vendors including:
Health Plan
- Plan claims administrator
- UR firm (if separate)
- Stop-loss insurer (if separate)
- Health care providers (hospitals/physicians)
Life Insurance
Accidental Death and Dismemberment Insurance
Our on-going support and role will be finalized based upon the
City of Denton's internal personnel capacity and time allowed
considerations, and an agreed upon task list. Attachment IV is
sample of the tasks we perform for other clients which have
requested on-going consultation services.
11
II. PROJECT TIMING
We are able to initiate this engagement immediately upon receiving your
approval to do so. The elapsed time requirements for each Phase are presented
below. Unless otherwise noted, tasks can be performed concurrently.
ELAPSED TIME
PHASE I ANALYSIS OF EXISTING EMPLOYEE 3-4 Weeks
HEALTH INSURANCE FUND
Conduct Initial Meetings
The time
Review Administration and Funding
requirement is
Arrangements
based upon how
Review CBS claims administrative
quickly CBS can
procedures
produce the
Review Section 125 Plan
claims history
Review Employee Communications
tape for our
Develop Benefit Plan Comparison
analysis.
Review LTD and Life Insurance Plan
Perform Statical Analysis
PHASE II ASSESSMENT OF INSURANCE FUNDING 3-4 Weeks
OPTIONS AND PROPOSED CHANGES
Review Alternative Funding Options
Recommend Plan Design Alternatives
PHASE III ACTUARIAL ANALYSIS FOR PROJECTIONS OF 3-4 Weeks
INSURANCE FUND AND RECOMMENDED CHANGES
Develop an actuarial study to project
claims for a 5-year period
PHASE IV REVIEW AND ANALYSIS OF CURRENT COMPLIANCE 2-3 Weeks
Review SPDs and PD The time
Section 89 Testing requirement is
Qualification Testing based upon
Non-discrimination Testing receipt of
Section 89 Data
Tape
12
III. PROJECT ESTIMATED FEE SCHEDULE
See fee quote schedule and signature form on the following page.
Costs are for professional services only and do not include out-of-pocket
expenses, such as travel, copying, computer processing, telephone,
communications printing, if any, etc. These costs will be billed separately and
are estimated to be less than 5% of the estimated professional fees.
13
CONSULTING COST ESTIMATE AND SIGNATURE FORM
Benefits Consulting for City of Denton DATE: Decembeti. 22, 1988
PROPOSAL OF: Caa eu 9 L btcand
Name
1999 Btc an St eet Suite 3000 Dattaz Texas 75201
A dress
City of Denton
Director of Personnel/Employee Relations
324 h. McKinney
Denton, Texas 76201
The undersigned, in
having carefully ex,
with all conditions
proposes to perform
benefits consultant
the above Documents
specifications, for
compliance with your Request for Proposal,
amined the documents, and being familiar
affecting the proposed services, hereby
the duties of an insurance/employee
for the City of Denton in accordance with
and in conformance with all performance
the following sums:
Consulting
Hours Cost
I. Management Study and Actuarial Analysis of City's
Existing Insurance Fund
125-136 $13,750 15,000
II. Insurance Fund Options and Proposed Changes
40- 48 5,000- 6,000
III. Actuarial Projections 30- 38 4,000- 5,000
IV. Review and Analysis of Compliance with Federal Laws
(Section 89)
80- 88 200- 7,900
TOTAL $29,950-33,900
It is understood that the City of Denton reserves the right to
accept or reject any and all proposals and to waive any
irregularities. It is further agreed that this Proposal shall
be valid and not withdrawn for a period of ninety (90) days.
The firm submitting this proposal is (fill in requested
information under one of the following):
a CORPORATION, chartered in the
State of and authorized to conduct business
in the State of Texas.
or
Coopeu 9 Lybtca.nd a PARTNERSHIP, in which the
following names individuals are partners:
Hater. y D. S p& ng
Geonge Menking
It is further understood that the person whose signature
appears below is legally empowered to bind the corporation or
partnership.
Submitted by:
Coopeu 9 Lybrand
Name o Firm
1999 Bryan Sttceet, Suite 3000
Mailing Address
DaUo-6, Texas 75201
City, State, and Zip Code
2141754-5000
elep o e Numbe
~ x
Byy: i atur anual
Hatrtc Y D . S pAing
By: Signature Typed
Regional Managing P net, ABC
Title
0813B
IV. THE ENGAGEMENT TEAM
In addressing your requirements, we have assembled a project team which has
extensive background in the significant tasks that are to be undertaken and experience
in working with municipalities. You can expect to receive the highest level of service
and attention from the consultants we have assembled for this engagement.
Mr. Harry Spring, Managing Partner of the Southwest Region, will serve as the
engagement partner. Harry will have overall responsibilities for ensuring a
successful engagement. His extensive experience in benefit planning and design
will ensure that the City's objectives are met.
Mr. Dave Palatiere, Senior Consultant/Group Benefits, will serve as the Project
Director and will have overall responsibility for the project on a day-to-day
basis. Dave is the Project Director for the University of North Texas and
Texas Woman's University and hence is knowledgeable of the Denton
healthcare environment. Dave has 12 years of experience in health
care/general group benefits consulting, with particular emphasis on benefit
design, development of Preferred Provider programs and selection of claims
administrators.
Ms. Megan Crossin, Senior Consultant/Group Benefits, will also be assigned to
this project and will oversee the work to be performed regarding Section 125.
Megan directs the Group Benefits Unit and has 14 years of experience in
employee benefits and Flexible benefits consulting. She has implemented
approximately twenty (20) 125 plans varying in complexity.
Mr. Gordon Grubbs, F.S.A., Senior Consultant/Group Benefits, has over 20 years
of experience in the employee benefits/healthcare field. Gordon will provide
the actuarial assistance in establishing rates and in plan design alternatives in
the area of development of managed care programs.
Ms. Alyce Meadors, Senior Consultant/Technical Services, has 13 years of
corporate experience dealing with compensation and benefit plans for union
and non-union groups. Alyce is a benefits attorney and will be responsible for
drafting and reviewing all benefit plan documents.
14
V. WHY COOPERS & LYBRAND?
We would like to summarize some of the reasons Coopers & Lybrand is the best
firm to serve you on this engagement.
Firm Size and Organization
Coopers & Lybrand is one of the world's largest most highly respected, public
accounting firms. We offer a full range of accounting and consulting services
to our clients in the public and private sectors, including accounting and
consulting for many Fortune 500 corporations. Our domestic operations employ
over 15,000 people located in more than 105 cities. Internationally, the firm
employs 41,000 people located in 550 offices around the world.
The domestic firm is divided into four service divisions, each of which is
headed by a National Director. These service divisions are:
Actuarial, Benefits and Compensation Consulting (ABC),
Management Consulting Services (MCS),
Tax, and
Accounting and Auditing.
Each of these four divisions has developed a distinct body of knowledge with
specific applications. The ABC Division has immediate access to the full
resources of C&L's Audit, Management Consulting and Tax Divisions, and it
frequently calls upon professionals in other disciplines as the need arises.
Thus, C&L brings to pension consulting and other employee benefit matters an
interdisciplinary approach which goes well beyond the customary scope of
benefit consulting services. For example, federal and state income tax
questions, financial planning matters and financial statement presentation
issues can be handled expertly and with ease.
Actuarial. Benefits and Compensation Consulting Division
Through its ABC Division, C&L is one of the few international public
accounting firms with professional expertise in the field of benefit plan
consulting. C&L's ABC Division and its predecessor, the Terriberry Company,
has provided high-quality consulting services since 1929. Prior to its merger
into C&L in 1961, the Terriberry Company was one of the nation's leading
independent actuarial firms.
Professional Staff
The National ABC Division includes more than 800 individuals located in 20
major cities. The professional staff includes over 250 actuaries, 115 of whom
are fellows or Associates of the Society of Actuaries or members of the
Casualty Actuarial Society. Our ABC Practice in the Southwest Region was
established on February 2, 1976, and is currently comprised of 35 benefit
professionals dedicated to serving clients in the employee benefits arena.
15
mmunications
Coopers & Lybrand can provide the City of Denton with a plan for
communicating your benefits and compensation plans to your employees. C&L
has the capabilities and expertise to develop a communications package from
the inception of a philosophy and strategy, to the determination of the types of
media to use, to the production of the communication package, to the formal
presentation of the material.
The communications strategy should incorporate the development of a central
theme with the production of all materials centered around this theme. The
strategy should also encompass the production of a major communications
campaign during the reenrollment period, using a variety of media, such as
printed material, slide presentations and video presentations, etc., plus the
development and presentation of complimentary material to reinforce the theme
of the campaign throughout the year.
C&L's employee communications specialists will coordinate our resources with
the staffing and communications production capabilities of the City. In
addition, the City will obtain our recommendations from the initial concept
through the final production on the best strategies, techniques and media to use
in order to meet your needs and objectives. As a result, the City will keep key
individuals and all employees knowledgeable concerning their benefits and
compensation programs.
A successful communications program must be well planned, coordinated and
targeted to the employee audience. The diverse demographics of the City's
employees and families represents a challenge to effectively communicate the
desired message. C&L's experience in all phases of compensation and benefits
design and implementation, combined with thoughtful and innovative
approaches to communication, will assist you in accomplishing this goal.
Cost Management/Provider Neeotiations
With health care trends again approaching 20%, techniques of cost containment
or the new term cost management, are the topic of discussion among plan
administrators. One of the critical challenges facing employers in the current
health care environment is the ability to manage a financially competitive
indemnity plan, while local HMO's are attracting a significant portion of the
eligible "healthy" employees away.
Coopers & Lybrand has again pioneered several innovative, employer
initiated approaches to cost management in the Dallas Metroplex. In
several of our Metroplex clients, we have aggressively approached area
hospitals and physician groups to negotiate cost saving PPO
arrangements. These contractual agreements have ranged from freezing
existing charge structures over the term of the contract, to volume
discounts, to capping per diem inpatient rates for hospitals. On the
physician side, our approaches have included negotiating a fee schedule
in developing an HMO-like program that advocates preventive care, and
charges the employee an encounter fee, rather than a standard
deductible and coinsurance.
16
The following identifies some of the cost management/provider
arrangements that C&L has negotiated in the Denton/Dallas/Ft. Worth
Metroplex:
Provider
Arraneement
St. Paul Medical Center
General discount, price
freeze
Presbyterian Hospital
Volume discount, price
freeze
Irving Community Hospital
Per diem
Irving Medical & Surgical Clinic
General discount, price
freeze
Denton Community Hospital
Per diem
Denton IPA
Price freeze
North Texas Physicians & Surgeons
Price freeze
Lewisville Memorial Hospital
General discount, price
freeze
AMI Denton Regional
Per diem
One of the features that makes Coopers & Lybrand unique in provider
negotiations is that MedBase(TM) allows us to identify an individual
institution's primary hospital and physician providers, and then analyze
that provider's unit costs per day, per admission, and per service type in
total, by diagnosis or on a service by service basis. Even the most
sophisticated Metroplex providers do not have a data base management
system that can provide that kind of information on a detailed basis. As
a major employer in the Dallas area, the City of Denton is in a unique
situation to leverage its purchasing power by initiating direct
negotiations for services with area providers.
Post Retirement Medical Liability Study
Based on Coopers & Lybrand's outstanding reputation in the financial
services arena and our unique blend of staff with expertise in health
care, actuarial science and accounting, Coopers & Lybrand has been
retained on a national basis by the Financial Executives Institute (FEI)
to perform a post retirement medical liability study. The stated
objectives of the FEI study are to utilize the actual health care claims
experience from 30 Fortune 100 field test companies to calculate the
present value cost of the post retirement benefit liability for each
participating company, and to estimate the impact of the proposed FASB
policy statement for reporting this liability on the company's balance
sheet. The Dallas office is responsible for the data analysis and the
actuarial projection phases of this project. Although the City is a public
sector employer, planning for the funding of medical and life post
employment benefit costs will be a critical long-term issue.
17
VI. REFERENCES:
University of North Texas
Mr. Fred Pole
Vice President for Fiscal Affairs
Mr. Joe Mitchell
Director of Personnel
P.O. Box 13497
Denton, Texas 76203
Telephone: 817/ 565-2103
817/ 565-2281
Texas Woman's University
Ms. Carri Stephens
Director of Personnel Services
P.O. Box 22939
Denton, Texas 76204
Telephone: 817/ 898-3551
City of Garland, Texas
Ms. Nancy C. Carney
Director of Personnel
203 N. Fifth Street
Garland, Texas 75040
Telephone: 214/205-2475
City of Beaumont, Texas
Mr. Van S. Barnett
Risk Management Department
Employee Benefits Coordinator
City of Beaumont
P.O. Box 3827
Beaumont, Texas 77704
Telephone: 409/880-3783
General Description of Services
Developed managed care
network, negotiated rates and
services with hospitals and
physician groups, for
employees in Denton
Developed new rates for multi-
option plan
Assisted in moving plan from
fully insured to self-insured
Selection and implementation
of claims administrator
125 Plan consulting and
communications
Section 89 Testing
Developed managed care
network, negotiated rates and
services with hospitals and
physician groups, for
employees in Denton, Dallas
and Houston.
Developed new rates for multi-
option plans
Assisted in moving plan from
fully insured to self-insured
Selection and implementation
of claims administrator
Selection and implementation
of claims administrator
Assisted in RFP development,
vendor selection, negotiation
and implementation
In process of analyzing plan
experience to assess benefit
changes for next plan year
In process of assessing
feasibility of developing a
managed care program.
In process of performing
review of all aspects of plan
administration including:
- Plan design
- Claims administration
- Plan financial management
- Managed care feasibility
- Post-retirement benefit study
for Police and Fire workers.
18
City of Richardson
Mr. Bill Keffler
Deputy City Manager
Mr. Tony O'Rourke
Assistant to the City Manager
P. O. Box 830309
Richardson, Texas 75080
Telephone: 214/238-4200
City of Austin, Texas
Mr. Steve Klepper
Internal Audit
P.O. Box 1088
Austin, Texas 78767
Telephone: 512/499-2070
Ms. Libby Sartain *
Director, Benefits & Compensation
Southwest Airlines Company
Personnel Department
P. O. Box 37611
Dallas, Texas 75235
214/902-1561
We were recently selected as
consultants for the City and
have been working with the
City for approximately 2
months. Our project includes:
- Comprehensive review of all
benefits in terms of services
offered, costs.
- Implementation of a
Preferred Provider
Program.
- Selection of a claims
administrator.
- Implementation of a Section
125 Plan.
- Section 89 Testing.
- On-going Consulting.
Claims administration selection
Assisted in RFP development,
vendor selection, negotiation
and implementation.
Performed operational review
and Contract Compliance
review on City's administrator
Coordinated Benefits Systems.
Selection and implementation
of claims administrator.
Implementation of a full-Flex
125 plan.
Developed new rates for multi-
option plans.
Developed managed care
network, negotiated rates and
services with hospitals and
physicians groups for
employees in Dallas.
On-going benefit consulting.
Provided services while at Recognition Equipment Incorporated.
19
VII. SAMPLE LETTER OF ENGAGEMENT FOR PROPOSED SERVICES
Upon selection as your Consultants, we will develop a Letter of Engagement. The
Letter of Engagement will be very similar to our proposal as it will outline our
understanding of the tasks to be performed, scope and approach, project staffing,
timing and our estimated fees.
20
HARRY D. SPRING
Managing Partner
Harry D. Spring is the Managing Partner for the Actuarial, Benefits and Compensation
Consulting practice in the Southwest Region. In that role, he is responsible for:
Qualified and non qualified retirement plans,
Compensation,
Group benefit plans.
His primary area of expertise is the design and management of corporate health care
plans. He is particularly adept at helping companies improve profitability and cash flow
through the control of their benefit plan costs. Harry has directed a wide range of
consulting engagements, some of which, include the following areas:
Flexible Benefit Plan implementation.
Development of a Claims Data Base Management System. (MedBase (TM) )
Development of Employee Sponsored Preferred Provider Networks with local
Metroplex providers.
Participation in a National project to model the financial impact of the FASB
policy statement regarding the accounting for post retirement benefit costs for
Fortune 100 field test companies.
Total reviews and redesign of benefit and compensation programs.
Before joining Coopers & Lybrand, Harry was a consultant with William M. Mercer, Inc.,
in Dallas, Texas. Prior to that, he owned his own firm which specialized in corporate
benefits.
Harry is a licensed insurance counselor and a Chartered Life Underwriter. He is a
graduate of Texas Christian University with a Bachelor of Arts degree. Harry is
currently serving as a member on the Dallas Business Committee for the Arts Task Force
and is also a member of the Dallas Museum of Art Corporate Council.
DAVID J. PALATIERE
Senior Consultant
David J. Palatiere is a Senior Consultant in the Actuarial, Benefits and Compensation
Consulting Group of Coopers & Lybrand's Dallas office.
His areas of practice include:
Group Benefit Program analysis and implementation
Group Benefit Communications
Flexible Benefits Program design
Healthcare Cost Containment Program planning, implementation and analysis
Healthcare data processing
Claims processing systems
Evaluation of HMO's and PPG's
His current projects include:
Assisting several clients with the installation of the MedBase reporting system.
MedBase is a data base reporting system which, upon installation, enables
organizations to better analyze, monitor and control healthcare costs.
Assisting several clients in establishing a comprehensive employee cost containment
program.
Assisting several clients in evaluating Health Maintenance Organizations (HMO's).
Before joining Coopers & Lybrand, Mr. Palatiere was responsible for directing the Health
Care Systems practice of Ernst & Whinney's Dallas office. Prior to Ernst & Whinney,
Dave was employed by EDS, Inc. and worked as a systems analyst in the Texas Title XIX
Program.
Dave holds an MPH Degree majoring in Healthcare Administration, and M.S. and B.S.
degrees in Science. He is a member of the Texas Hospital Association.
MEGAN CROSSIN
Senior Consultant
Megan Crossin is a Senior Consultant in the Actuarial, Benefits and Compensation
consulting practice in the Dallas office of Coopers & Lybrand. Her major areas of
concentration are the financial and administrative aspects of group medical, life and LTD
benefits.
Her experience includes:
Designing, pricing and implementing a Flexible Benefit programs for
clients;
Performing systems reviews and claims audits of major insurance carriers;
Assisting clients in analyzing their benefits data in order to make budget
and plan design decisions; and
Assisting clients in complying with Section 89 testing requirements.
Megan has 14 years of actuarial and underwriting experience for group benefit plans.
Prior to joining Coopers & Lybrand, she was the Director of the Actuarial/Statistical
division of Blue Cross and Blue Shield (N.H./Vt.).
Megan received a degree in Mathematics and Economics from Manhattanville College and
a Masters in Business Administration with a concentration in Management Information
Systems from New Hampshire College.
GORDON GRUBBS, F.S.A.
Senior Consultant
Gordon M. Grubbs, F.S.A., is a Senior Consultant in the Dallas office of Coopers &
Lybrand's Actuarial, Benefits and Compensation consulting practice.
Prior to joining the firm, Gordon was employed with Diversified Consultants, Inc., in
Dallas, Texas, working primarily with self-funded welfare plans, while attending
Southern Methodist University in the doctoral program of the Economics Department.
Gordon's areas of expertise include:
Design, pricing and valuation of life, disability and health plans.
Design and analysis of PPO plans.
COBRA rate certifications.
General consulting in the areas of plan administration and regulatory agency
compliance.
Gordon graduated with honors from the Choate School, Wallingford, Connecticut and
received a Bachelor of Arts Degree in Economics from Rice University.
Gordon is a member of the following organizations:
Fellow, Society of Actuaries,
Member, American Academy of Actuaries,
Fellow, Conference of Actuaries in Public Practice,
Member, Actuaries Club of the Southwest.
ALYCE TENDER MEADORS
Senior Consultant
Alyce T. Meadors is a Senior Consultant in the Actuarial, Benefits and Compensation
Consulting unit of Coopers & Lybrand. Prior to joining the Firm she was the Director of
Corporate Benefits for a Fortune 200/major manufacturing company. She also had
experience as Director of Compensation and Benefits, Director of Financial Services and
Attorney during her tenure at the company.
As an attorney, she specializes in employee benefits and compensation law, including legal
research, drafting and rendering opinions, and employee benefits plan design.
A representative selection of Alyce's applicable experience includes:
Design and implementation of a variety of defined contribution plans,
including 401(k), class year, ESOP and non-qualified plans.
Development of compensation programs including executive compensation
programs.
Ensuring plan compliance with the various benefits laws including ERISA,
TEFRA, DEFRA, REA and the Tax Reform Act of 1986.
Negotiation and management of the GIC bid process.
Design and implementation of qualified and non-qualified defined benefit
and welfare plans.
Alyce holds a Doctorate of Jurisprudence from Indiana University Law School and a
Bachelors of Science from Ball State University.
She is a member of the American Bar Association, Indiana Bar Association, and Southwest
Pension Conference.
ATTACHMENT II
SECTION 89 - DATA ELEMENTS
1. SOCIAL SECURITY NUMBER
2. DATE OF BIRTH
3. DATE OF HIRE
4. DATE OF TERMINATION
5. MONTHS OF SERVICE OR WEEKS OF SERVICE IF NOT FULL-TIME
6. HOURS OF SERVICE IF NOT FULL-TIME
7. LOCATION CODE (IF ANY)
Indicate different company locations.
8. JOB CATEGORY (IF ANY)
Indicate various job categories.
9. EMPLOYEE CLASSIFICATION
full-time
part-time
other (explain)
10. COMPENSATION (CURRENT YEAR AND PREVIOUS YEAR
Includes all taxable wages, salaries, earned income, overtime pay, bonuses
and commissions, plus any elective deferrals under a cafeteria plan, a 401(k)
plan, a SEP and a tax-sheltered annuity. If life is based on salary, indicate
the salary used to determine the total amount of life insurance.
11. PLAN PARTICIPATION
- Indicate the health plan in which the employee is a participant. (i.e., HMO,
PPO, Indemnity, Dental, Vision, etc.)
- Indicate the Term Life Insurance Plans in which the employee is a
participant.
- Indicate whether the employee is a participant of a group legal plan (if
more than one group legal plan, indicate which plan the employee is a
participant).
- Indicate whether the employee is a participant of an educational assistance
program.
- Indicate whether the employee is a participant of a dependent care
assistance program.
12. LEVEL OF COVERAGE
For each plan, indicate the level of participation that the employee selected.
13. EMPLOYEE CONTRIBUTION
Provide the amount of employee contribution made to each plan; both pre-
tax contributions and after-tax contributions.
14. HIGHLY COMPENSATED EMPLOYEE
Indicate whether the employee is a highly compensated employee as defined
by the Internal Revenue Code Section 414(q).
15. FAMILY MEMBER
Indicate whether the 5% owners or the top 10 paid employees have any
family members who are classified as non highly compensated employees.
SECTION 89
PLAN INFORMATION
1. DESCRIPTION OF PLAN
AN SPD OR DESCRIPTION OF THE FOLLOWING PLANS
GROUP TERM LIFE (SECTION 79)
ACCIDENT OR HEALTH (SECTIONS 105, 106)
DEPENDENT CARE (SECTION 129)
CAFETERIA PLANS (SECTION 125)
2. PLAN ELIGIBILITY
DESCRIBE THE ELIGIBILITY CRITERIA USED BY EACH PLAN DESCRIBED ABOVE.
3. FUNDING ARRANGEMENT
INDICATE THE PER PERSON PREMIUM LEVEL (COBRA RATES) CHARGED BY LEVEL OF
COVERAGE FOR EACH PLAN. ALSO, INDICATE WHETHER THE PLAN IS FULLY-INSURED.
a~
2: o
O
H
H
H
J-1
G
41
U
co
41
JJ
Y~ffi
L ~ O
N `
1 N •G M
t V
1 O ~
1 ~
1 p
1
1 O
I
I G
I W :
1 N
I ~p O N J
1 O • M
1
1
1
i
1
1 O + •O
1 ~ • M
1
1 7 •
1 1
1 N M O
1
1
1 ~ .
1
1
i w M J
1
1 Y
1
i Z
1
i w +
1 O ~ H /f
I O n
1
1 ~
Ig:
i
i
I r N N
I O ~ M/ J
I O M1
1
K •
1 < .
1 Z
1
1
1 O N O
I W
1 W
I
1 p w M
q h
I
I 1 .
I
I pp
w N MI N
O M
I U
p
I
I
A . N N N
1 O Mf
I
1
1
1
1 A ~ O
I d M
1 u
1 O
1
1
1
1
1
1
1
i
1
i
1
1
1 N M
i O
1 O
1 • ~ N W_
1 . N . t • •
r ~ r A
N N • O O
N N • N O
N ~ h
N ~ ~ M
N ~ N O
~ N
N o o N
~ • M
N O M MOf
N O ~ ~
N O ~ O
N O O v
N P v v
O
i
O
~
Q
N
W
yI
v
s
W
8
s
~
a
t
r
W
N A
O M
O O
M g
O O
O
N N
O ~1
P •O
r
.O O
N
J N
r
O N
O M
A A
O ;
r• N
O
N M
h N
2 O i O
C C r
N . H
s ~ ~ s
N
O
A
Y
P ■
N
N
N
•
h
•
•
•
~ i
P
N •
v
i
p
N •
N
~ ~
■
P
N
+
O A
J
~
h
A i
v
i
■
P
N .
h
■
O ■
.
Y
■
i
P
N
+
■
J
P ~
•O
N 1
I
N
1n Y
■
•
P
N •
A
•
A •
J
O
•
O •
O
•
•
P
N
.O
h i
J
P
•
■
■
P
N
P
+
O• •
IV
M
M ~
■
M
Y
P
N
•
O
d A
p
p
W
■
m
•
■
■
tZWy
P
N•
N
1
O 1
Y
i
■
v ■
•
~
P
•
N
.
A
P ~
yip
6
J
p
p•~
~
V7 Y
Y
N
v
v .
t
O
•
•
•
O
N.O
r r yy11
1 Y O
~ p v
Y • WW O O
. Z W H
W ~ J
ATTACHMENT IV
ON-GOING
CONSULTANT SERVICES
PLAN YEAR 10/1/88
I. PLAN DESIGN/ADMINISTRATION
PERFORM ANALYSIS OF PLAN DESIGN:
COVERED SERVICES PER SB 95.
NETWORK PROVIDER VS. NON-NETWORK PROVIDER
DESIGN CHANGES BASED UPON DATA ANALYSIS.
PERFORM REVIEW AND SIGN-OFF OF SPD/AMENDMENTS.
ASSIST IN PREPARATION OF 5500 FORM REQUIRED
BY DOL FOR IMPLEMENTATION OF SECTION 125 PLAN.
PROVIDE ASSISTANCE TO RESOLVE ADMINISTRATIVE PROBLEMS
INTERFACING WITH CLAIMS ADMINISTRATOR AND UR FIRM.
PROVIDE TECHNICAL SUPPORT FOR REVISIONS TO
MEDICAL PLAN COMMUNICATION MATERIALS.
II. CLAIM CONTROL
PERFORM OPERATIONAL REVIEW/AUDIT
OF INCUMBENT CLAIMS ADMINISTRATOR TO ENSURE
APPROPRIATE INTERNAL CONTROL (IC), ACCURACY
LEVELS, ETC.
NEGOTIATE RATES WITH INCUMBENT CARRIER,
UTILIZATION REVIEW FIRM.
III. FINANCIAL CONTROL
TRAIN CLIENT PERSONNEL IN DEVELOPMENT OF:
PROFIT/LOSS STATEMENT.
UTILIZATION & BUDGET REPORT.
PRECERTIFICATION REPORT.
ANNUALLY
ANNUALLY
ANNUALLY
ONGOING
ANNUALLY
ANNUALLY
ANNUALLY
MONTHLY
UPON COMPLETION OF TRAINING PROGRAMS, WE ANTICIPATE
THAT CLIENT WILL BE RESPONSIBLE FOR THESE REPORTS.
Small Company, Big City:
Negotiating with Providers
in Dallas
Elizabeth P. Sartain and David J. Palatiere
Ah, Dallas home of the Cowboys, 42 hospitals, a passel of
billion-dollar businesses and countless people named Ewing. Home,
too, of half the approximately 2,000 employees who work for
Recognition Equipment, Inc. (REI), a manufacturer of data cap-
ture systems that make human-readable and bar-coded infor-
mation ready for computer processing. Like many of its Dallas-
area neighbors, REI has experienced higher and higher health
care costs. Unlike the companies with much larger employee pop-
ulations, however, one of the most attractive health cost manage-
ment strategies - direct contracting with providers - is not avail-
able to a small company like REI. Right?
Wrong - though most observers would have agreed not long
The prevailing wisdom has been that
ago. A company with such a potentially low volume of patients
companies offering health care pro-
would not have drawn the interest of big-city health care pro-
viders only a small volume of
viders, even those willing to deal directly with purchasers of their
patients have little leverage in ne-
services. Not a company to yield easily to the popular wisdom,
gotiating favorable financial ar-
however, REI began in late 1985 to take steps that others could
rangements. REI is one company
follow. Working with Coopers & Lybrand, REI developed and
helping to change the prevailing
implemented arrangements with four Dallas providers - includ-
wisdom.
ing hospitals and physician groups - for cost-effective, managed
health care for its employees and their dependents.
A Progressive Effort
REI is innovative in the management of both its human and its
financial resources. The Company began an aggressive benefits
cost containment program in 1985 by installing a flexible, cafe-
teria-style (Section 125) plan and contracting with a more efficient,
sophisticated administrator for its self-insured medical plans. Un-
der the flex plan, employees and their dependents can choose REI saw its efforts result in lowered
medical coverage from among two group indemnity plans, various health care costs overall in 1986,
HMOs, a dental plan and a vision care plan. while its per-employee costs rose.
In 1986, REI adopted more health care cost containment strat- Senior executives are not looking for
egies, such as eliminating coverage of nonemergency weekend major cost reductions for three to
admissions and adding incentives for outpatient surgery and sec- five years.
HEALTH COST MANAGEMENT • VOL. 4 NO. 3 • MAY/JUNE 1987
and surgical opinions. The Company also began comprehensive
utilization review of all REI hospital admissions nationwide, pro-
vided by its administrator. In 1987, its cost management efforts
are expanding to encompass the program described in this article,
a wellness program and an Employee Assistance Program (EAP).
The Company has a long-term perspective on its health care
cost management program. Mike Kelly, Vice President of Human
Resources, notes, "We knew when we started implementing these
programs that we would not see an immediate payback, and that
three to five years would be required to demonstrate significant
improvement in our health care costs. We take the long-term
approach and are convinced that through our efforts, we will be
in a better position to manage our costs."
Without inhouse expertise, finding
To date, the cost containment program has worked well in many
one's way through a big-city pro-
regards and has been favorably accepted by REI employees. Al-
vider system is an intimidating pros-
though health care costs have leveled off, they still represent a
pect. Yet REI elected not to ally itself
significant corporate expenditure. Medical and dental claims costs
with other area employers for sev-
for employees and dependents under the two group plans
eral reasons.
amounted to $2,479,596 in 1985 and $2,166,412 in 1986. REI
spent $1,583 per employee on health care in 1985 vs. $1,722 per
employee in 1986, however - an 8.8% increase. Hence, though
overall medical and dental claims costs for these employees had
decreased by the end of 1986, per-employee costs continued to
rise.
Going It Alone
Strengthening the effectiveness of the cost management pro-
gram in light of REI's relatively small Dallas-based employee pop-
ulation called for creativity. Management realized the potential
advantages of closer alliances with health care providers. But it
lacked the inhouse expertise to maneuver through the Dallas pro-
vider system, to "sell" providers on the idea of working directly
with the Company and to negotiate successfully with hospitals and
doctors. Which providers to approach? How to approach them?
What if the popular "wisdom" prevailed after all?
REI considered joining forces with other employers but decided
against it for a number of reasons. The Company believed that:
• Its employee demographics were unique;
• Its medical utilization experience was unique;
• Its medical data were superior in quality to those of most other
employers;
• Negotiations would be slower and more difficult if a group
of employers was involved.
As a result, REI chose to go it alone. For outside assistance in
pursuing a Preferred Provider Organization (PPO) arrangement,
REI drew on its longstanding relationship with the Actuarial, Ben-
efits and Compensation consulting group of Coopers & Lybrand.
SMALL COMPANY, BIG CITY: NEGOTIATING WITH PROVIDERS IN DALLAS
REI's experience shows that smaller companies - even those lo-
A way around the small number of
cated in the big city - can deal effectively with health care pro-
potential patients was suggested by
viders.
analysis of 1984 and 1985 medical
claims data: there were some pro-
Data for an End-Run
viders with a serious vested interest
Although the Company initially saw a PPO as a way to reduce
in REI employees' health care.
its health care expenditures, it was aware that its relatively small
number of potential patients would act for providers as neither
carrot nor stick. Its strategy thus had to encompass an end-run
around the problem.
The Company's initial task was to pinpoint where its health care
dollars were being spent. Using Coopers & Lybrand's MedBase~
software, REI analyzed its paid medical and dental claims for the
years 1984 and 1985 to determine:
• Top providers utilized (in terms of admissions and charges);
• Top diagnoses treated (in terms of volume and charges);
• Utilization statistics, such as patient days, average length of
stay (ALOS), cost per day, cost per admission, etc.
Based upon the preliminary analysis, REI identified several pro-
viders that might be interested in discussing a PPO arrangement.
With a vested interest in maintaining or increasing their REI-
generated patient volume, the Company reasoned, these pro-
viders would be most likely to see participation in a PPO as an
appealing opportunity.
Unsure of which local providers would be willing to participate,
Two approaches - a general one
REI used two different approaches. It drafted a Preferred Pro-
to 50 Dallas providers and a spe-
vider Arrangement Request for Proposal (RFP) and sent it to 30
cific one to the Company's top six
area providers, 8 of which responded. A review of their proposals
providers - were used. The city's
indicated that the Dallas provider community, in general, was not
provider community proved gener-
prepared to operate in an "at-risk" environment.
ally unprepared to put itself at risk.
Having identified its top providers with respect to utilization
and charges, REI's second approach was to contact them and
initiate formal discussions. Of these, three were willing to discuss
the kind of program that REI was contemplating. However, one
of them was not considered because it had been identified as the
highest-priced provider serving REI. Among the others, one would
discuss only an exclusive provider arrangement, and two indicated
that they were not interested in developing negotiated price ar-
rangements.
Based on its data, the Company decided to pursue talks with
three of the top-ranked providers, adding other potential pro-
viders to its target list according to its geographical needs and to
Data analysis indicated that the
further responses to the RFP.
Company should go beyond a PPO
to a full managed care program.
Refined Data and a Refined Approach
"Efficiency statistics" for targeted
The accumulated data disclosed employee demographics and
providers added valuable informa-
existing patient/physician utilization patterns that, combined with
tion to REI's negotiating base.
3
HEALTH COST MANAGEMENT • VOL. 4 NO. 3 . MAY/JUNE 1987
early responses from the providers, led the Company to modify
its strategy. REI decided to blend the utilization review capabilities
of its medical plan administrator with financial arrangements with
a number of selected providers. The administrator would apply
its existing precertification, retrospective review and case man-
agement efforts to the services of contracted Dallas-area pro-
viders, as well as keeping track of those providers' adherence to
contract provisions. Meanwhile, employees would be able to choose
from a number of cost-effective doctors and hospitals. All this,
the Company concluded, would constitute more than a PPO; it
would mean a managed care program for REI.
Data on those providers who were identified as "players" were
further refined in a search for "efficiency statistics": the number
of each REI employee/dependent visits to each provider; the cost
per day of each case treated by each provider; the cost per ad-
mission for each; and the top 25 diagnoses by provider. These
breakouts established which providers were treating which kinds
of REI cases, as well as comparing the efficiency with which dif-
ferent providers were handling the same ailments.
The providers treating the most fre-
The analysis revealed that the five most common major diag-
quently-noted diagnoses among REI
noses among REI medical plan participants in 1984 and 1985
employees and dependents were the
were mental and nervous diseases, circulatory system diseases,
major targets of negotiation efforts.
gynecologic ailments, childbirth and digestive system disorders.
They included three hospitals, a
The providers treating these and other frequently-noted diag-
physicians' PPO within one of the
noses in the most efficient manner, according to the REI/Coopers
hospitals and an independent phy-
& Lybrand evaluations, became the focus of ensuing negotiation
sician group.
efforts. They included primary and tertiary care hospitals and two
physician groups:
• Presbyterian Plan PPO (which included Presbyterian Hospital
of Dallas and Presbyterian Physicians)
• St. Paul Medical Center
• Irving Community Hospital
• The Medical and Surgical Clinic of Irving (physician group).
The Providers' Reception
The decision to target these providers for participation in REI's
managed care program was logical, and it stood the Company's
negotiators in good stead as they made their way through the
Dallas provider community. For one thing, most of the Company's
health care dollars were already going to these hospitals and phy-
Able to offer only a limited financial sicians, so it could best manage its costs by concentrating effort
incentive to employees in the first on them. For another, it was believed that these providers would
year of the program if cost man- be interested in securing revenues and an audience for their an-
agement goals are to be achieved, cillary services (such as wellness programs) by becoming "pre-
the Company hopes that a desire to ferred" for REI employees/dependents.
maintain doctor-patient relation- In addition, employees and their families would suffer little or
ships will also motivate employees to no disruption in their doctor-patient relationships if these pro-
use the selected providers. viders participated in the program - an important factor in any
4
SMALL COMPANY, BIG CITY: NEGOTIATING WITH PROVIDERS IN DALLAS
event, but one particularly crucial to the management of REI's
health costs. REI's medical benefits plan normally pays 80% of
covered charges after a $150 or $500 deductible (depending upon
the plan). To meet its objectives in the first year of the managed
care program, the Company is offering employees a limited fi-
nancial incentive to use the selected hospitals and physicians. If
they do so, the plan will pay 90% of costs instead of the usual
80%; the deductible remains the same. (Of course, employees also
benefit from participating providers' lower rates.) Ultimately, suc-
cess with the managed care program may permit plan redesign
that gives employees an increased financial stake in using the
contracted providers.
The approach to all the providers was the same: REI simply
wanted to have more control over buying products - in this case,
health care. The Company had some ideas - backed up by solid
data on volume and costs about how to achieve this goal in a
way that could also benefit their bottom line. Some of the providers
were readily receptive to this approach, and some were not.
As noted previously, two of the six hospitals initially contacted
declined to negotiate prices. They questioned REI's request for
concessions based on their belief that their charges for specific
procedures were the lowest in the area. They also noted that REI's
relatively small employee base gave it less leverage than larger
Dallas companies. One provider was reluctant to become involved
because its internal information systems had not yet been devel-
oped to allow for designing negotiated arrangements. Yet this
hospital was at the top of REI's target list. To implement its strat-
egy, the Company knew it had to work hard to persuade this
provider to enter into an agreement.
Playing the Game
The internal operations of the health care provider system in
any community are often elusive to non-health care people. Ne-
gotiating in this strange environment requires new insights, as a
few companies are beginning to acknowledge by recruiting their
own health care specialists and/or engaging consultants with ex-
pertise in the field. On the provider side, more and more hospitals
and others are hiring professionals to contact and initiate discus-
sions with corporate employers.
Up to this point, REI had spent well over six months dealing
with the key target hospital's management without making sig-
nificant headway. Then, the large group of physicians identified
as major admitters of REI patients to that hospital became in-
volved. At a time when the project was becoming more and more
frustrating, even in jeopardy of termination, the intervention of
this group became the catalyst for forward movement.
The physicians in the group were invited to participate in an
arrangement with REI - one which would, if successful, enhance
their incomes and those of the hospitals with which they were
affiliated, they were told. REI described to the physicians the
The top spot on REPS target list was
occupied by a hospital reluctant to
negotiate prices because its own data
systems were not yet equal to the task.
The Company was determined to en-
list this hospital's participation.
The entire program was in danger
of being scrapped after nearly eight
months of frustrated effort when the
key to forward progress was discov-
ered.
5
HEALTH COST MANAGEMENT • VOL. 4 NO. 3 - MAY/JUNE 1987
advantages of encouraging Company employees to buy health
care from their group and its associated hospitals instead of from
other doctors and hospitals in the Dallas area.
One of the ways of "playing the The Company knew from its data analysis how much revenue
game" is to understand how impor- REI employees were already creating for these doctors. And REI
tant physicians are to hospitals' rev- knew that these physicians were the ones who chose the hospitals
enues. And physicians are interested for, and directed the care received by, many of its employees. So
if a hospital's unwillingness to con- the Company was not surprised when the physician group reacted
sider new ideas may adversely affect favorably to the idea of becoming a preferred provider for its
their incomes. managed care program. In turn, doctors in the group met with
the key target hospital to try to persuade its management to con-
sider REI's proposals seriously.
The Negotiations
The extensive data analysis that preceded overtures to providers
seemed to boost REI's credibility with the hospitals and doctors
when meetings finally took place. Several hospital executives said
that REI was one of the few employer groups they had encoun-
tered that could knowledgeably support its inquiries with hard
data. Among the data components that most impressed them were:
• Total number of REI admissions to each of their institutions
per year
• Diagnostic category breakouts of those admissions
• Average cost per diagnostic category, per admission and per
day.
The considerable resources ex-
Additionally, the data were offered as a discussion-opener, not
pended on data collection and eval-
as a cudgel: "You can tell us if we were wrong," REI said, "but
uation gave REI an unusual ne-
here's what we've learned about REI employees and your hospi-
gotiating advantage. Specific data
tal." After evaluating the data, the providers agreed with most of
on each provider proved especially
the information REI presented. Each, then, had to shape its con-
useful, since each turned out to have
tract negotiation strategy on facts available and clear to both par-
unique needs.
ties, giving REI an advantage that many employers do not have
when developing contracts with health care providers. In the long
run, the time and other resources allocated to data collection and
analysis paid off in money saved for REI.
As negotiations for what came to be called the "Preferred Health
Network" progressed, the hospitals and physician groups turned
out to be quite different from each other. This meant tailoring
negotiating approaches to each provider so that each agreement
that emerged was unique. In some cases, formal contracts were
developed; in others, letters of understanding were acceptable.
One thing of which everyone was aware, however, was the nov-
elty of these proposed arrangements. Consequently, all initial con-
tracts were signed for one year: January 1 through December 31,
1987. Renegotiations are slated to begin in the fall of 1987 and
will take into account the progress of the Company's relationship
with each provider in terms of quality, volume and cost of care.
While the details are, of course, confidential, the general arrange-
SMALL COMPANY, BIG CITY: NEGOTIATING WITH PROVIDERS IN DALLAS
El
The Medical and Surgical Clinic of Irving.
ments with each of the providers are described in the following
paragraphs.
The Medical and Surgical Clinic of Irving
This provider is a large, multi-specialty clinic with 26 physicians
who provide care to a great many REI employees. Located in the
Dallas suburb of Irving some three miles from REI, the Clinic was
receptive to the Company's proposals from the beginning.
Knowing that this physician group practices cost-effective med-
icine, REI simply wanted more of its employees to utilize the
Clinic. The resulting arrangement reimburses an employee who
does so 90% of charges after payment of a deductible.
All the doctors at the Clinic benefit from being part of REI's
Preferred Health Network, so there is an advantage for each in
networking his or her high quality/high efficiency practices to the
others. All will have access to utilization review reports on REI
cases, and they may raise treatment questions among themselves.
The financial incentive is there for them to work toward providing
optimally appropriate levels and types of care to REI employees.
Presbyterian Plan PPO
Presbyterian Hospital of Dallas, an 838-bed institution, was ap-
proached because REI wanted to include in its program an effi-
cient, full-service provider serving employees who reside in North
Dallas. The Hospital had developed a joint PPO venture - the
Presbyterian Plan PPO - with its medical staff by the time of
REI's initial contact. The Presbyterian Plan PPO expressed a will-
ingness to negotiate costs from the beginning and developed a
good rapport with REI in the process. The contract the Company
developed with Presbyterian is exclusive to those doctors partic-
ipating in the PPO. It also includes all other inpatient and out-
patient hospital services.
In one physicians' groin with which
a. contract has been negotiated, the
doctors are at financial risk if they
do not treat each REI patient within
agreed-upon cost and quality pa-
rameters.
7
HEALTH COST MANAGEMENT • VOL. 4 NO. 3 • MAY/JUNE 1987
A freeze on 1987 charges and a
The agreement constitutes a freeze on all hospital charges
discount based on patient volume are
through 1987, plus a volume discount predicated on REI inpatient
major features of the contract with
and outpatient utilization of the hospital. An REI employee/de-
a hospital and its own PPO physi-
pendent must use one of the Presbyterian Plan PPO-enrolled phy-
cian-participants. The hospital
sicians in order to be counted toward the patient volume needed
would like the arrangement to spur
before the discount kicks in.
more of its physicians to join the in-
REI therefore has an incentive to point employees and de-
house PPO.
pendents toward these Presbyterian doctors. Employees' incentive
to use the Presbyterian PPO physicians is coverage of 90% of their
eligible charges, rather than the customary 80%. And Presbyterian
doctors who have not yet joined the Hospital-based PPO might
be motivated to do so when they see that PPO physicians are
enjoying increased patient volume and revenue. Since they have
a financial incentive, it is also possible that REI people who use
non-PPO physicians at Presbyterian will discuss with them the
subject of their participation in the PPO.
Many employers would be delighted
Hard negotiations took place before the Presbyterian agree-
to be offered a per-diem arrange-
ment was signed. The hospital at first offered REI a contract based
ment by a provider. In REI's case,
on per-diem charges - often a highly desirable arrangement for
preparatory study allowed the Com-
an employer. Here again, though, REI's preliminary preparations
pany to recognize that a hospital's
proved valuable, for the data indicated that these per-diems were
proffered per-diems were unaccept-
excessive in light of REI employees' utilization history with Pres-
able.
byterian. As a result, REI declined the per-diem arrangement
offered.
St. Paul Medical Center
St. Paul Medical Center, the sixth most utilized provider of
hospital services to REI medical plan beneficiaries, has 600 beds.
In this hospital, the Company was seeking an efficient tertiary
care provider serving employees who live in the Irving area. Al-
ready involved in several Dallas HMOs, St. Paul was very expe-
rienced in dealing with purchasers. It ranked lowest on REI's
targeted provider list, as it was not absorbing as many Company
dollars as the other major providers. So REI's bargaining with St.
Paul was less aggressive than in other cases.
Along with a freeze on prices for The contract that REI and St. Paul signed was relatively simple.
1987, an across-the-board discount REI obtained a freeze on all hospital charges for 1987, along with
on charges billed to REI was ne- an across-the-board discount on all charges billed to REI during
gotiated with another hospital - one the year. St. Paul has already benefitted from working with REI,
which went on to be chosen as the having recently become the provider of the Company's new, com-
supplier of the Company's wellness prehensive wellness program.
program.
Irving Community Hospital
A 213-bed hospital just outside Dallas, Irving Community Hos-
pital was at the top of REI's list of most-utilized, efficient pro-
Per-diems below the prevailing fee- viders. It had been cool to the Company's proposals in the early
for-service charges are the main fea- going and sat with REI through some difficult bargaining sessions.
ture of the arrangement with REFS Negotiations ultimately ended with a well-crafted agreement to
most utilized, efficient provider. This a list of 1987 per-diem charges specifically geared to REI em-
hospital had been cool to the Com- ployees' medical, surgical, special care (e.g., intensive care, cardiac
pany's early proposals. care, obstetrics) and other service needs. No discounts per se are
8
SMALL COMPANY, BIG CITY: NEGOTIATING WITH PROVIDERS IN DALLAS
Presbyterian Hospital.
w
■
w
-
Nommm"W~
No
-
■ONE
NEWS
r
St. Paul Medical Center.
involved, but the per-diem charges are designed to be below the
Hospital's regular fee-for-service charges.
Timing/Communications
A year elapsed between the onset of REI's data-gathering and
analysis work and the signing of these contracts. The greatest
amount of time was consumed by efforts to interest the provider
I.M 'L . v a [L+s
- at
It took a full year to gather and
analyze data and bring these con-
tracts to fruition. Along with nurs-
ing its relationships with providers,
the Company has been working on
employee relations in light of its ben-
efit changes.
iyy
• Y'~'q~ M
9
HEALTH COST MANAGEMENT • VOL. 4 NO. 3 • MAY/JUNE 1987
community in listening to REI's ideas. Once that hurdle had been
cleared, it took four months from the first provider discussions
to final contract signing.
The milestone event in the process was precipitated by the phy-
sician group, which, seeing the merit of REI's proposals, prompted
the key target hospital to consider them. Other purchasers - large
and small - have had similar experiences. Physicians, who gen-
erally have the biggest impact on a company's medical expendi-
tures and a hospital's revenues, quite often pave the way toward
discussions with other providers.
Provider relationships are one side of the coin. Employee re-
lations are the other. To avoid confusion during a benefits change-
over, employee communications must be carefully and consist-
ently planned and executed. REI used an outside benefit
communications expert to develop two internal marketing pieces
for the Company's Preferred Health Network. These were ap-
proved by the Network's providers. REI will maintain ongoing
communications using a newsletter and is planning a benefits fair
to further educate employees. This communication process also
provides an excellent opportunity for providers to market their
services and gain recognition within the community.
The Many Roles of Data
Data played - and continue to play
A purchaser cannot negotiate effectively without good data.
- many useful roles in REI's health
Carefully analyzed data are the key to effective provider negoti-
cost management efforts, some of
ations - and the smaller the purchaser's local employee popu-
them obvious, others less tangible.
lation, the truer this is.
Information serves a company es-
Identifying the right providers is the first job that data can do
pecially well when the pressures to
for an employer. Suggesting the appropriate providers to ap-
contain costs are intense and pro-
proach, the order and perhaps the tone of the approach, are other
viders' offers look tempting.
functions of data. Then there is the credibility that good data lend
to a purchaser's negotiating stance. And, of course, data are es-
sential to establishing and monitoring various financial arrange-
ments.
For example, Presbyterian was not the only Dallas hospital to
suggest new, but unacceptable, per-diems to REI. Other health
care purchasers are likely to receive similar offers from local pro-
viders. Many will be negotiating under serious cost containment
pressure. Without complete and comprehensive background in-
formation, it can be tempting to accept a provider's offer. Without
data directly applicable to each provider with which an employer
negotiates, one provider's reasonable offer may seem - but not
be - equal to another's. In some instances, purchasers need data
to see that an offer will not be as cost-effective for them as con-
tinuing to pay fee-for-service charges to a provider would be.
If a proposal for volume discounts is laid on the bargaining
table, a purchaser must have data to prove that employees rep-
resent a given patient load to a given provider in any one year.
An employer must also be able to calculate how many patient days
above that normal volume comprise a reasonable trigger-point for
10
SMALL COMPANY, BIG CITY: NEGOTIATING WITH PROVIDERS IN DALLAS
the discount. And data are required for a purchaser to figure out
the most advantageous discount rates.
As provider contracts are signed and implemented, their value
and workability can be monitored only by amassing new data and
holding it against the benchmarks created by the earlier statistics.
Coopers & Lybrand will use its MedBaseT" system to check REI's
quarterly medical claims for each provider under contract in 1987.
It will scrutinize these claims to be sure that REI is getting the
agreed-upon discounts from St. Paul and Presbyterian (where
matters are somewhat more complicated because not all of that
hospital's doctors are involved in the arrangement); that charges
are not creeping upward among providers committed to freezing
them throughout 1987; that the per-diems agreed with Irving
Community Hospital are being properly applied; and that the
arrangement with the Medical and Surgical Clinic of Irving is
working smoothly. All of this information and more will come
into play when contracts with these providers are renegotiated.
Once such a monitoring system is set up, it should not be expensive
to maintain.
What's Next?
REI has recently installed an aggressive wellness program for
its Dallas-area employees, as mentioned previously. Later this year,
it plans to round out its cost containment program by imple-
menting an EAP featuring rates negotiated with providers of care
for employee/dependent mental and nervous disorders, substance
abuse and related problems.
The Company's dental claims costs rose from $387,000 in 1985
to $451,000 in 1986 - some 16.5%. Hence, this area is also viewed
as one where there is a great opportunity to control expenditures.
To help accomplish this, REI is considering development of a
dental PPO which would employ the same methodology used in
medical provider contracting. •
1~
4
r 'y \
David J. Palatiere
Elizabeth P. Sartain, M.B.A.,
C.C.P., is Manager of Compen-
sation and Benefits for REI. She
previously served as a Compen-
sation Analyst for Mary Kay
Cosmetics. David J. Palatiere,
M.P.H., is a Senior Consultant
at Coopers & Lybrand in Dallas
with expertise in health care and
insurance/information systems.
He formerly worked for an-
other national accounting/con-
sulting firm in the area of health
care information systems.
II
Elizabeth P. Sartain