Chrysler Corp., faced with the need to sell 70,000 cars a year just to pay health insurance premiums for workers and retirees, chopped $58 million out of its health-care bills in 1984 by an aggressive campaign against waste, overcharges and outright fraud by doctors and medical institutions treating Chrysler workers, according to a report from former secretary of Health, Education and Welfare Joseph A. Califano Jr.
Califano, now a member of the Chrysler board and chairman of its committee on health care, said Chrysler's experience -- which reduced projected health-care outlays from $460 million to $402 million in 1984, a $300 savings for each worker and retiree -- shows how "an aroused private sector" is "the key to health-care cost containment."
The Chrysler experience, as detailed by Califano in a report prepared for delivery today in Kansas City, Mo., to the Health Insurance Association of America, is almost a textbook example of how American companies, in a revolutionary new development in health care, are beginning to take a hard look at what they are paying for in health services.
Nationwide, firms now pay about $90 billion a year in health-care premiums for their workers, a major factor in overall business costs, as Califano detailed for Chrysler.
Califano said health-care inflation has burgeoned to the point where Blue Cross/Blue Shield has become Chrysler's single largest supplier.
He said "more than $530 of the cost of every car we sold in 1984" went to health-care premiums to private insurers and Medicare.
It was in this general context that Chrysler chief Lee Iacocca in 1981 brought Califano in to do something about health costs, warning him that their growth alone might block revival of the ailing company.
Working with Iacocca and then-United Auto Workers president Douglas A. Fraser, Califano set out to find out what Chrysler was getting for its health-care money.
"The first thing we discovered was that we didn't know," Califano said. Chrysler, which had simply paid premiums for insurance and not looked behind the premium charges, "had no idea what it was buying or from whom.
"We didn't know who the efficient suppliers were. We had no quality controls. We didn't have the slightest idea what health care our employes needed."
Working with Blue Cross and the union, Chrysler took a "30-month snapshot of our health-care purchases," cataloguing each treatment for each employe, how much was charged, what tests were given, how long patients stayed in hospital and the like.
"What we found was appalling," he said. For example:
* Chrysler, at a cost of $12 million a year, was paying for an average of five lab tests a year for every person it insured, although a large percentage never needed any tests at all -- meaning that doctors were ordering excessive numbers of tests.
* Chiropractors each year were routinely increasing diagnostic X-rays an average of 15 percent.
* Blue Cross/Blue Shield was paying dermatologists twice as much annually as it paid the average practitioner.
* For no apparent reason, average daily costs at six Detroit hospitals used by Chrysler workers varied from $452 to $608, and costs for the average length of stay ranged from $3,028 to $6,077.
Similar variations were found for doctor charges, X-ray charges and lab tests. A team of physicians examined hospitalization for nonmedical low-back-pain treatment and found that two-thirds of admissions and 85 percent of the total hospital days were medically inappropriate.
* The average Detroit ophthalmologist was charging $2,000 for a 20-minute cataract operation, which means he would receive more than $1 million a year for performing three operations a day for four days a week, 42 weeks a year. This is grossly excessive, Califano said, when the average charge for serious abdominal surgery requiring four to five hours, and much riskier than cataract surgery, was only $1,500.
There were cases of outright fraud -- a chiropractor selling "fake injury reports to auto workers, and billing our insured for phony treatments, X-rays and unnecessary lab tests. He charged $20 for phony work-excuse slips." One worker obtained 51 prescriptions for more than 6,000 Valium tablets.
With this information in hand, the Chrysler health-care committee took action:
* In the company drug plan, where workers paid $3 for any prescription and Chrysler paid everything above that, druggists routinely filled the prescriptions with expensive brand-name drugs. No more. Now the company payment covers only the cost of using cheaper generic drugs in the prescription. If the employe insists on a brand-name drug, he or she must pay the extra charge. This plan saved $250,000 the first year.
* Chrysler asks employes to check all their health bills to make sure there are no mistakes and overcharges: To encourage cooperation, it splits any savings with the workers.
* Chrysler pushes outpatient surgery where medically appropriate. Savings in 1984 were $2 million.
* Chrysler gives employes the option of joining a group health plan for dental services, where Chrysler negotiates a fixed premium in advance and there are no added charges or yearly maximums. This saved $3 million in 1984.
* Hospitals were confronted with findings about inappropriate admissions for low-back pain and asked to study them; in the next six months, such admissions were cut 64 percent.
* Hospitals in Detroit also were confronted with data showing Chrysler mothers were kept in hospitals an average of 3.8 days for childbirth, compared with an average of 2 days in California. As a result, hospitals cut stays above 3 days by 67 percent.
* For salaried employes, but not union members so far, all nonemergency, non-maternity hospitalizations are now prescreened by a second, independent medical expert, to make sure the visits are necessary; and lengths of stay are similarly monitored. Second opinions are also required for surgery for all employes. Savings: $32 million.
Looking back over the experience, Califano said, "The most important lesson is that hard-negotiating buyers, who treat health care like the other products they purchase, can change the system -- and we are only beginning to realize the benefits of competition."