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Deciding who pays to save lives (Fortune, 1985)

July 1, 2012, 4:41 PM UTC

Editor’s note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week, we turn to a piece from 1985 about the burgeoning healthcare crisis. Who will pay — to save lives, to keep families whole and employees working? Those were vital questions in the 1980s as national healthcare costs began to rise dramatically and technology made radical advances. Those are still vital questions today, of course. This piece shows how companies — not doctors or patients — began making major life and death decisions through their healthcare policies, sometimes for better, sometimes for worse. It is a fascinating preamble to this week’s landmark decision on President Obama’s healthcare law.

By Fern Schumer Chapman

FORTUNE — Each new advance in high-technology medicine sharpens the debate over tortuous ethical questions — who should receive treatment with these expensive new technologies, who should pay, and who should decide. Increasingly the critical decisions are being made not by the government, doctors, insurers, or patients, but by those who pay as large a share of health care costs in America as the government does — corporate employers. Executives at these companies don’t relish confronting the painful questions, but they can’t avoid them. In the U.S., corporate spending on health insurance has almost doubled since 1980, to about $90 billion a year. That has thrust corporate America into a new role as health care policymaker.

”Corporations are being asked to play God with money,” says an official at one FORTUNE 500 company. ”It’s a brutal issue — the most sensitive thing companies have had to deal with in employee relations. Our employee benefits man walks around here with bags under his eyes.” Should the company pay for controversial and extraordinarily expensive procedures that may prolong life only for a short time? Should it pay for a liver transplant that costs up to $240,000 but keeps most adult recipients alive for less than a year?

The burden of these decisions and their costs falls on the corporations because 69% of the population has employer-provided health insurance, with the employer typically paying about 80% of the premium. The cost of health care has soared in recent years — total spending on it has climbed from 4.4% of the gross national product in 1955 to about 11% these days — significantly upping the ante for companies. Indeed, business spending on health last year was almost equal to after-tax corporate profits. Some of that money in effect ended up paying the medical bills of people who were never employees. Since doctors and hospitals are not fully reimbursed for costs on Medicaid and Medicare patients, they charge privately insured patients more than they otherwise would to make up the difference. This cost shifting raises the bills of employers an estimated $9 billion a year.

In the past, corporations could afford not to pay too much attention to these matters. The costs were relatively small and have always been fully tax deductible to employers. The resulting openhandedness encouraged more, though not necessarily better, treatment. Assured payment also fueled research into expensive technologies, which have been a major cause of soaring (health care costs. In the estimate of some students of medical costs, as much as 40% of the annual increase in health care spending in the 1970s can be attributed to new technology. These innovations carry staggering price tags. Last year some $300 million was spent in the U.S. for transplants — principally of the heart, liver, kidneys, and pancreas. If the supply of organs could be increased through donations or a market in cadaver organs, that figure could jump to $3 billion annually.

Cyclosporine, the antirejection drug that transplant patients take for the rest of their lives, runs up to $18,000 a year per patient. About 28% of the $70 billion Medicare will pay out this year will go to maintaining people in their last year of life — with 30% of that spent in the last month. The cost of keeping alive the 5,000 permanently comatose patients in the U.S. — Karen Ann Quinlan and others — runs about $100 million a year. Insurance companies pick up the tab for much of this, but then pass the costs along to their customers. To pay for the use of those expensive new technologies, for instance, insurers hike next year’s premiums. ”If an employer wants the insurance company to pay for these procedures, it will,” says Mark Trencher, director of public policy issues analysis at Aetna Life & Casualty Co. ”It’s the employer or the public that pays the bill. Insurance companies are only agents.”

As agents, insurance companies also pass profound ethical decisions along to their corporate clients by having clients determine what treatment will be covered. Geza Kadar Jr., lawyer and lobbyist for the Health Insurance Association of America, says insurance companies aren’t equipped to make these decisions and aren’t comfortable making them. ”Nothing could hurt an insurance company more than making the evening news with headlines that some huge insurance company won’t pay for little Sally’s liver transplant,” he says. ”The public relations stakes are too high.”

Those stakes are high for companies too, but they have no one to pass the buck to. Faced with mounting medical expenses, they’re forced to find ways to contain and manage costs, particularly for expensive catastrophic care, while trying to act humanely. Many patients covered by corporate insurance plans are in that costly final year of life. They may be young workers who are accident victims or organ transplant recipients, or they may be retired employees still covered by corporate plans. Managing employee health care costs is part of what Dr. Paul Gertman, chairman of Health Data Institute Inc., a health research and consulting firm, calls an ”unrecognized revolution.”

The revolution is particularly evident at corporations that act as their own insurers, reimbursing claims directly out of their own pockets. The number of such ”self-funded” health care programs has risen dramatically in recent years, partly in response to the surge in premiums charged by regular insurers. Most experts estimate that over half the FORTUNE 500 industrial companies are now self-funded. Typically these companies use firms called third-party administrators to process claims, but the corporations ultimately have to decide what medical treatment they will pay for. To make these tough decisions, some corporations have increased their staff in the health benefits department. Others have changed the job requirements for an employee benefits staff member.

”Benefits departments, which were once staffed with paper pushers, are now staffed with people with solid health backgrounds,” says Peter O’Donnell, director of RCA’s employee benefits in Princeton, New Jersey. ”We’re trying to make decisions rather than have the decisions made for us.”

But should corporations be making decisions on what is appropriate medical care? Absolutely not, says John Larkin Thompson, president of Blue Shield of Massachusetts, a nonprofit insurer: ”I don’t believe these ethical questions are decisions for insurance companies, and frankly I don’t believe they are company decisions either. They are broader societal decisions.”

The trouble is, no one has the authority or the inclination to set up guidelines on what ought to be covered by medical plans. The private sector might prefer to leave the issue to the government, but lawmakers recognize the political risk in overtly rationing health care and are unwilling to assume responsibility. By default, insurance companies and their clients are groping to set their own standards, particularly with respect to controversial new medical procedures. ”We’re all in a quandary,” says Kadar of the Health Insurance Association. ”We’re not going to keep an 85-year-old . . .” He catches himself and adds, ”We’re not going to pay for medical students to do an experiment on someone who is dying.”

The self-insured client is in the same quandary, says Allen DeGraw, account manager at Kwasha Lipton, an employee benefits consulting firm. ”There are so many questions, and the wrong decision can be so damaging to a corporation,” he says. DeGraw is having trouble setting up transplant coverage guidelines for a self-funded corporation precisely because of the lack of national standards for what is medically acceptable treatment — and hence a possible candidate for coverage — as opposed to the still experimental. Worried about protecting the privacy of their employees and maintaining good employee relations, most corporations will discuss the dilemmas they face only if promised anonymity.

Some examples of the ethical quagmires they have run into: An employee of a self-insured company suffered a stroke over a year ago and now needs nurses round the clock. Even though the company’s benefit plan didn’t provide for custodial care, the third-party administrator processing the claim paid the bill. The corporation, a New York-based diversified services company, did not discover this until it switched administrators. ”It’s much easier for the administrator to pay and raise premiums than to force the family to face the tragic situation,” says the new administrator. ”I bet there’s one of those cases in almost every major company in America.” Now the company is trying to decide whether to continue to pay for the employee’s nursing care, which costs about $60,000 a year.

The wife of a man employed by a California high-tech corporation needed one of those expensive liver transplants. The company decided it wouldn’t pay for the operation. So the man began to campaign for local media coverage but, to his employer’s relief, backed away before his story was told in public. He is now trying to raise money through area service clubs. A huge computer company is trying to decide whether to pay for neonatal care for an employee’s premature infant, who died in February after eight months of hospital care costing $2,000 a day. The company’s cap on health benefits is $300,000, and the child’s treatment cost nearly $500,000. While the child was still alive, the parents sent letters and pictures of the infant to the employee benefits manager, apparently to encourage the company to pay the bill.

”Any time a corporation decides whether to cover certain procedures, it’s a form of health care rationing,” says Arthur J. Young, benefits manager at Hewlett-Packard. ”For example, we don’t cover hearing aids, treatment for flat feet, physical exams for children, acupuncture, vitamins except for – pregnancy, sex-change operations, and stomach stapling. But only in the last few years have we had to make decisions on life-threatening issues.” Last year the wife of a Hewlett-Packard employee died shortly after she received a second heart transplant. The company paid for the two procedures, which cost about $70,000 in total; since the patient died so quickly, costs were relatively low. Concerned about setting a precedent, Hewlett-Packard has decided not to finance any more heart, heart-lung, or liver transplants.

Some students of the subject argue that greater company involvement will lead to better health care. Corporations, says Dr. Gertman of the Health Data Institute, can be the employee’s proponent. ”One out of three patients develops complications from the treatment he receives,” Gertman says. ”One out of 11 of those instances results in a disabling or life-threatening complication. One out of 50 of those complications contributed to the patient’s death.”

Companies have an interest in minimizing such complications, Gertman argues, and their economic clout gives them leverage with health care providers. For example, when Chrysler hired Gertman’s firm to analyze its insurance claims, the carmaker discovered it was paying over $1 million on unnecessary hospitalization of patients with lower-back problems. The result: through its bill-paying intermediaries, Chrysler pressed eight hospitals to cut back on admissions of patients whose back problems don’t require surgery, and in fact admissions have been much reduced. Dr. Marvin J. Shapiro, vice president of medical affairs at U.S. Administrators, a third- party administrator, estimates that 20% of medical care is useless and some of that is potentially dangerous. Adds an employee benefits manager: ”We have a responsibility not to pay for things that don’t work or that cause unnecessary suffering for our employees.”

The underlying assumption in this corporate push for more efficient medical care is that less is often more — that conservative medical treatment can be just as effective as extravagant treatment. Walter McClure, president of the Center for Policy Studies, a nonprofit health policy research organization in Minneapolis, notes that the redoubtable Mayo Clinic hospitalizes patients 30% less than the national average, while physicians in the Boston area, where care is also considered excellent, hospitalize more often than the national average for the same kinds of patients. ”Nobody knows which way is clinically superior,” he says. ”While both are clinically acceptable, they are not both financially acceptable, because the most expensive styles cost twice as much on average per person as the most efficient styles.”

McClure says corporations should try to shift from Boston-style to Mayo-style health care, which would reduce costs 20% to 30%. Honeywell in Minneapolis formulated its transplant policy with precisely this goal in mind. It limits transplants to patients who aren’t suffering from any other terminal ailment and who would probably die without the operation. And it covers only those types of transplants that have had reasonable success. Employees who qualify are sent to medical centers that have the best combination of performance and price. Honeywell also negotiates with doctors to set fees in advance on specific procedures that an employee might need, like a coronary bypass operation. Other corporations have simply placed a cap on organ transplant payments. At General Motors the cap comes to $25,000 for the surgery itself — the patient has to pay the rest.

Many corporations have encouraged employees to enroll in health maintenance organizations (HMOs). These prepaid plans offer participants complete health care from the HMOs’ facilities and doctors. HMOs have a huge incentive to limit treatment and avoid costly hospitalization since they must operate within a set fee. Corporations have also negotiated with suppliers that want to become ”preferred provider organizations,” in which doctors and hospitals charge discounted fees in anticipation of quick payment and a stable volume of business.

Such policies have already begun to pay off for some companies: after five years of steady annual increases of around 20% in its medical bill, Honeywell last year reduced its costs to $122 million, below the level for 1983. Insurance companies are also redefining their role and attempting to manage costs through innovative restrictions. Blue Shield of California covers heart transplants only if they are performed at Stanford University Hospital, which is experienced in these procedures. Most Blue Cross and Blue Shield plans limit transplant coverage to facilities offering the best combination of performance and price. Equitable Life, among others, recently created a policy that reimburses for transplants only if the policyholder has paid an extra premium, typically 45 cents per person per month. A few insurers judge some of the expensive new technologies, like heart and liver transplants, experimental and simply refuse to pay for them.

To simplify coverage decisions, insurance companies recently supported legislation in Congress to create a group sponsored by the National Academy of Sciences to assess new medical technologies. The legislation, signed into law last fall, provides $500,000 to be matched by a comparable amount from private pockets. The group will do no clinical testing and will have no regulatory power, but will have a pulpit from which to criticize new medical technologies that it finds are useless, redundant, or potentially dangerous. Several federal agencies and medical associations already evaluate new forms of treatment, but corporations complain that, unlike the proposed group, none of these bodies takes costs into account.

Former Blue Cross & Blue Shield Association president Walter J. McNerney says the new group may make the health care buyer’s job simpler by sparing each company the need to duplicate one another’s research and assessment. Some critics wonder, though, whether anyone will put up the matching $500,000 for a group that won’t do clinical testing. CORPORATIONS shouldn’t expect too much from an outside agency, says Dr. William Schwartz, professor of medicine at Tufts University and co-author of a book on rationing health care. Such agencies can identify useless technology, he says, but they can’t do much about the moral dilemmas.

”Consider a patient with an unusual type of chest pain that leads doctors in an emergency room to believe there’s a 5% chance that he is having a heart attack. If hospitals placed all those patients in intensive care, it would cost $2 million to save one life. Is that too much? How far do you go to save a life? There is no simple, clean bureaucratic answer to those kinds of questions.” Even so, corporations are trying to establish mechanisms to provide the answers. Hewlett-Packard is thinking about setting up something similar to a hospital ethics committee to help it make these vexing choices. The committee would include company officials and outside medical advisers. ”These issues are not even medical,” says Young. ”These are issues of ethics and morals. That’s why we need to establish a mechanism to deal with them.”

And those issues of ethics aren’t going to disappear. As new technologies proliferate and other advances emerge, more companies will have to determine what expensive procedures they’re willing to pay for. And that’s how it should be. A market-oriented system will base decisions on agreements between employees and employers, instead of the dictated solution of government decree. In the free market a worker can leave one employer for another whose medical coverage is more to his liking. As Dr. Marvin Shapiro of U.S. Administrators puts it, ”Whoever bears the risk should make the decision.”

Corporations and employees are being forced to bear the risk, and like it or not, they must make the choices.