STATEMENT OF JACK K. SHELTON, MANAGER, EMPLOYEE INSURANCE DEPARTMENT, FORD MOTOR Insurance Department of Ford Motor Company. In this position, I am responsible for My appearance is on behalf of Ford Motor Company and the Michigan Cost Containment Coalition. The latter group includes representation from business, labor, and government interests. I will discuss in more detail its membership and activities later in my remarks. My testimony will cover five principle areas: (1) history of Ford's health care benefit costs and their impact on the Company; (2) major causes of the health care cost spiral; (3) actions the Company is taking and/or supporting that may help contain health care costs; (4) development of the Michigan Cost Containment Coalition; and (5) proposed Michigan legislation to reduce excess hospital capacity drafted and supported by the Coalition. Health Care Benefit Costs and Their Impact As one of the nation's largest employers, Ford is a major purchaser of health care services for nearly one million hourly and salaried employes, retirees, surviving spouses, and their dependents. Ford provides one of the most complete benefit programs in the country. Benefits include hospital and physician services, prescription drugs, and dental, hearing, and vision care. Most of the primary health coverages are "first dollar" benefits; however, employes share in the cost of dental, hearing, vision, out-patient psychiatric care, and prescription drugs. Since 1965, health care costs for Ford Motor Company have doubled every five years, and this trend appears to be continuing. In 1965, Ford's health care bill totaled $68 million and averaged $350 per active employe. For 1977, our costs are estimated to be about $450 million, or about $2,000 per active employe. There are several reasons for the dramatic cost increases which Ford has experienced - inflation, higher utilization, new benefits, and an increased number of covered individuals --but over two thirds of the increase since 1965 was due to inflation and higher utilization. These cost increases must be recovered either through higher prices or improved productivity. Health care costs represented $22 per vehicle produced in 1965 and in 1977 they totaled about $120 per vehicle -- an increase of nearly $100 per unit produced. Diversion of funds to pay for such health care cost escalation reduces the Company's limited financial resources which are urgently needed for product and capacity programs both government mandated and those necessary to - keep us competitive. Increases in prices can represent reduced volume potential and, so this diversion of financial resources is not therefore, reduced job potential Causes of Cost Spiral The causes of the escalation of health care costs are varied and, in large part, rest outside the control of Ford Motor Company. We believe major problems are: One - lack of sufficient incentives to contain costs The health care system tends to absorb all the dollars that are made available to it. This system is characterized by consumers and providers who are conscious of quality but insensitive to costs; and facilities which are encouraged to provide the most sophisticated, specialized, and technological services available. Fee-for-service and cost plus reimbursement policies remove financial considerations from health care decisions and there exist no incentives to weigh medical benefits against their costs. . Two -- over-capacity of health delivery facilities In most metropolitan areas, there exist excess hospital capacity, excessive amounts of diagnostic and laboratory equipment, and a surplus of hospital-based specialty physicians. Three resource distribution Distribution of both facilities and manpower is a problem. While the large metropolitan areas have excess resources -- many Four -- over utilization There appears to be a substantial amount of over utilization of services -- both consumer and provider induced. There is evidence suggesting that too much surgery is being practiced, too many drugs are being dispensed, people are being hospitalized when out-patient care would be medically appropriate, and too many outmoded procedures are being used. Five quality of care - It is an unfortunate fact, but there are facilities providing services at volume levels which are inefficient and could jeopardize quality of care. Six poor management of health care - The management skills that are applied to the delivery in hospitals, in clinics, and in private offices upgraded and made more productivity-oriented, and Seven - consumer over expectation - In recent years, most Americans have developed higher and more unrealistic expectations of what the health care system can or should accomplish. These expectations have led to an over-reliance on medical intervention for maintenance of health rather than the practice of a healthy lifestyle. We believe the major improvements in health status of Americans can be achieved best and most economically through changes in lifestyle and behavior rather than from increased medical care. We recognize that each of these areas is complex, and there are no simple, ready-made solutions. However, because of the seriousness of the health care cost spiral, we believe that all interests - business, labor, government, providers, and consumers must accept some responsibility for the problem and for the design and implementation of innovative solutions. Actions the Company is Taking or Supporting Because of our cost experience, Ford Motor Company has significantly increased its involvement in health care cost containment initiatives. In those areas where it can impact the problem directly, the Company has initiated new programs and strategies. These include: . Benefit Design - Benefit plans are being reviewed and, where possible, designed to provide only for medically appropriate care and to discourage unnecessary utilization and expenditures. Examples include the introduction of co-payments for new benefits and outpatient coverage of procedures that previously only were covered in hospitals. Preventive Care The Company has established pilot programs to assist employes in identifying and managing health problems. Programs include Cardiovascular Risk Intervention, Substance Abuse Counseling, and Hypertension Screening. Delivery Efficiency and Appropriateness of Care The Company and UAW are jointly working with insurance carriers and providers to increase the delivery system's cost efficiency and to improve the appropriativeness of the care being provided. Joint projects agreed to in our 1976 agreement with the UAW include utilization review programs, second opinion elective surgery, and model treatment screening. Ford also encourages the development of cost effective alternative delivery programs, including HMO's. Last year the Company commissioned a study to determine the feasibility of a new community-based HMO in Detroit. This report is being analyzed, by Ford and other business and provider interests, to determine if a new program can be launched. In addition to these areas, the Company is involved in the following community efforts: . Health Planning Agencies Ford is represented on the local health systems agency for Southeastern Michigan and active on the Michigan Statewide Health Coordinating Council. We believe that involvement in state and local planning agencies is one of the most productive ways for business to deal with health care cost problems. These agencies hold the key to cost-effective community management of the health care system. Hospital Trustees and Insurance Carrier Boards The Company encourages its management to become involved as hospital trustees, and Ford management also are active on several Blue Cross-Blue Shield and other carrier boards. Memberships on these boards provide opportunities to exercise leadership in developing productive cost containment initiatives benefiting the whole community. In addition to these key areas, Company representatives are active on several state and national advisory groups. We are heavily involved with the Michigan Cost Containment Coalition responsible for developing joint private-public sector programs to deal with Michigan's health care cost problems. This Coalition has drafted legislation in Michigan which is designed to address a priority cost containment problem excess hospital capacity. I now will describe the development of - this Coalition and the legislation it has drafted. Development of the Michigan Cost Containment Coalition You are familiar with national statistics documenting the health care cost problem; and earlier in my presentation I reviewed the impact of escalating costs on Ford Motor Company. The Coalition is the result of the Michigan Legislature's concern over Medicaid program costs and a desire to work with business and labor on mutually advantageous containment initiatives. Over the last eight years, the Michigan Medicaid Program has been confronted with higher costs for health services, an expansion in benefits, and until last year, an increase in the number of Medicaid eligibles. As a result, while national expenditures between 1970 and 1976 increased by 100%, Michigan Medicaid expenditures increased by 225% -- from $212 million to $690 million. The cost of the program for fiscal year 1978 is projected to be $795 million. These increases, especially during the 1974 and 1975 recession years, imposed serious fiscal problems on state |