Seven high-technology firms in California's Silicon Valley have banded together in an unusual effort to cut health-care costs by referring employes to specific hospitals and doctors in return for discounted fees.
The companies, which include Apple Computer Inc. and Lockheed Corp., are negotiating contracts with nine hospitals and seven doctors groups in an effort to cut health-care costs by as much as 25 percent to 30 percent a year, according to organizers of the program with the American Electronics Association, an industry trade group.
The program illustrates the more aggressive approach some companies are taking to containing health-care costs by negotiating cost-saving deals directly with doctors and hospitals, health-care experts say.
Other firms such as Honeywell Inc., Hewlett-Packard Co., Stouffer Corp. and Sara Lee Corp. have taken similar steps, but the Silicon Valley effort is believed to be the first undertaken on an industry basis.
"They're using their joint buying power to negotiate good deals," said Sharon Graugnard, a health-care expert in Alexandria. "I think we're going to see a lot more of these joint ventures."
The companies are setting up what is known in the health-care industry as "preferred provider organizations," or PPOs. PPOs offer health insurance to individuals, collecting premiums and paying doctors and hospital bills just as traditional fee-for-service companies do.
The difference is that, through a system of incentives and disincentives, a PPO encourages enrollees to use its network of private physicians and hospitals, or "preferred providers."
Physicians and hospitals like to join such networks because they are guaranteed a certain stream of patients. In return, they often agree to reduce their fees and enact measures to contain health-care costs, such as trying to limit unnecessary hospitalizations.
The growth of PPOs has been explosive in the last two years, to about 380 from fewer than 150 at the beginning of 1985, according to Graugnard, an official with an Alexandria trade association representing PPOs.
Most of these have been set up by doctors, hospitals and insurance companies. The program in Silicon Valley is one of a handful that has been initiated by companies, which expect to achieve significant savings.
"By doing it ourselves, we have direct control. We have input, we have the data, and we know what's going on," said Leslie Andrews, benefits manger for Apple. Until now, she added, "We have only been putting out money and never knowing what we're getting for it."
The Electronics Association program had its origins in a study last summer of the health costs of 10 self-insured Northern California companies at the participating hospitals and doctors groups.
The study showed the average cost for certain surgical procedures, the average length of stay in the hospital and other information previously unavailable to the companies. The hospitals and doctors also could see for the first time how they compared with others in cost-effectiveness of treatment, organizers said.
With this data in hand, seven of the companies have been negotiating deals with hospitals and doctors to treat their employes. An official with the Electronics Association said more than 70 other firms have expressed interest in the program.
For the providers, the prospective arrangement signals an opportunity to improve sagging volumes of patients.
Richard Cargile, an official with Health Dimensions, a San Jose holding company for three hospitals participating in the program, said that his hospital beds have been half filled of late. The hospitals expect to get 15 percent to 20 percent more business from the companies they sign with, he added.
Health Dimensions already has struck a deal with Xidex Corp., a firm in Sunnyvale, Calif., is close to an agreement with Apple and has had discussions with a few others, Cargile said.
Meanwhile, the Health Dimensions hospitals have agreed to offer Xidex lower prices in return for the increased volume, as well as to practice forms of cost containment, such as seeking to perform more procedures without hospitalizing patients. Doctors involved in the program also have agreed to such procedures.
For their part, the companies are expected to revamp their health benefits packages to encourage employes to use the preferred providers.
Currently, for example, Apple employes must pay 20 percent of the cost of doctors' visits. Under the new system under consideration, Andrews said, they would pay a fixed amount -- perhaps $5 -- for a visit, with the company picking up the rest of the tab if the employe uses one of the doctors in the network.
Hewlett-Packard has enjoyed success with a PPO it set up with a hospital and doctors group near its headquarters in Palo Alto, a company official said. In the 10 months since the PPO was established in January 1984, the company was able to reduce its health-care costs by about 27 percent, said Art Young, benefits manager for the firm.