TAKING ON PUBLIC ENEMY NO. 1 America's CEOs aren't ready to nationalize health care -- yet. Their cure: Get employees to pay more of the bill and persuade Washington to limit doctors' liability.
By William E. Sheeline REPORTER ASSOCIATE Joshua Mendes

(FORTUNE Magazine) – WHAT'S the biggest cost problem for American business between now and the year 2000? As you might guess, 63% of the chief executives recently polled by FORTUNE say that runaway medical bills are one of their top worries. The rest of this crowd -- 35% -- go further and identify this as their greatest headache. Says Anthony Burns, CEO of Ryder System: ''Throughout corporate America, medical cost and quality is the big issue of the 1990s.'' The challenge is to maintain quality while reducing expenses. America's addiction to the best medicine money can buy has produced a health care system without equal; virtually all the CEOs polled -- 95% -- profess themselves satisfied with the care their employees receive. They just don't think they can continue to afford it. America's top bosses have been looking hard at their corporate sickbeds. Nearly half expect to hold annual increases in health care spending to 11% to 15% over the next five years -- slightly slower, on average, than the 13.4% rate that prevailed from 1985 to 1990. Another third even believe they can restrain the rise to single digits. But that still leaves more than a fifth who estimate their costs will climb faster than 15% a year. FORTUNE's latest CEO poll was conducted from May 7 to May 16 by Clark Martire & Bartolomeo, an independent opinion research firm. The respondents, 197 chief executives of FORTUNE 500 and FORTUNE Service 500 companies, remain overwhelmingly opposed to nationalized health care as the cure for this epidemic. What's surprising is that this view is no longer universal. Twenty- four percent now believe that a move toward some kind of nationalized system, financed by taxpayers, is necessary. Even among the 69% who disagree, frustration is growing. Says Joseph Deering, CEO of Tomkins Industries: ''If these horrendous cost increases continue, we will gravitate toward national health care no matter how much we don't like it.'' FOR NOW, cost sharing remains corporate America's weapon of choice in the battle against health care inflation. By sticking employees with steeper premiums and higher deductibles, companies hope to restore some discipline at the point of service. ''My grandfather never went to the doctor without asking, 'How much will it cost?' '' says Eugene Cartledge, CEO of paper and paperboard maker Union Camp. ''Today the words are 'I'm covered.' People have to start negotiating with doctors about the results they hope to get and the price they want to pay.'' To do that for employees, more companies, like Southwestern Bell and Southern California Edison, are turning to managed-care networks. In these, employees who agree to use a designated group of physicians, specialists, and hospitals pay lower out-of-pocket expenses. Unlike members of traditional HMOs, participants who wish to see non-network doctors about a special problem can temporarily opt out of the system -- for a price. The manager of the network, usually an insurance company, holds down costs by securing volume discounts from network doctors and monitoring their performance to discourage unnecessary treatments. At Ryder System this one-two punch has produced dramatic results. During the late 1980s the health care bill for the 30,000 employees of the Miami transportation services company rose more than 20% a year. When the total reached $64 million in 1989, management decided it was time for a change. In July 1990, Ryder began requiring employees to pay for part of their insurance. Last January the company joined a managed-care network. So far its 1991 medical expenses are level with last year but trending slightly downward. CEO Burns expects health care spending this year to fall to about $65 million -- $30 million below what had been projected before the company altered course. Santa Fe Pacific is another recent convert to managed care. Says CEO Robert Krebs: ''Business has to demand greater efficiency in the health care system and reward the lower-cost, high-quality providers.'' Santa Fe employees who stick to the railroad's traditional -- and more costly -- insurance plan now pay a deductible of $500 per person, vs. $150 in most cases before, and face a maximum bill of $3,500. But if they choose a network doctor, the charge is a mere $10 a visit, which the employees pay out of pocket. Other expenses beyond a $1,000-a-year deductible are covered by the company. The program began in January. Since March, Santa Fe's medical expenses, which had been going up at a 25% annual rate for the past two years, have been running 10% below last year's level. Don't employees resist such abrupt changes in their health care plans? No, say the CEOs, not as long as the cost sharing is perceived as fair. Aerospace giant Martin Marietta, which began offering workers a managed-care setup in 1989, requires those who keep traditional insurance coverage to pay a deductible equal to 0.5% of wages and 20% of medical costs up to a limit of 5% of salary. The company pays all expenses above that amount. ''This way those who can afford to pay more, pay more,'' says CEO Norman Augustine. ''Coverage for catastrophic illness should be superb. As to sniffles and scratches, employees are on their own.'' Many bosses also see significant savings from programs that promote preventive medicine. Typically these wellness schemes encourage workers to stop smoking, lose weight, exercise more, and eat healthier foods. They also provide early-detection services, such as free mammograms. THE BIG PROBLEM is that this corporate pharmacopeia of remedies can go only so far: Most of the forces driving up U.S. medical costs are out of business' control. Among FORTUNE's respondents, 79% pointed to soaring liability awards, which in turn raise malpractice insurance charges, as a major reason costs keep climbing. Says John Ong, CEO of B.F. Goodrich: ''Jury awards and malpractice insurance are literally driving doctors out of practice.'' Fifty-nine percent of those polled fingered expensive new technology as a leading cost culprit, while 52% blamed unnecessary medical procedures, such as using sophisticated CT scanners to diagnose a headache. Another 28% of corporate chieftains complained that hospitals were inefficient and suffered, like the medical industry in general, from a keep-up-with-the-Joneses mentality. ''There's too much duplication of specialties and high-priced equipment,'' says Herbert Sklenar, CEO of Vulcan Materials. Then there's excessive paperwork, which was mentioned by 27% of the CEOs as a major-league expense. Union Camp's Gene Cartledge points to an example close to home -- his 87-year-old mother, who recently broke her hip. ''I have a spreadsheet on her bills,'' he says. ''There are 27 payees. We want the very best care, but it's a jungle to weave your way through this.'' By contrast, managed-care networks, in which the doctor usually fills out the forms, can cut both paperwork and paper pushers. Says Tony Burns of Ryder System: ''We've reduced our medical claims department by 100 people.'' America's top CEOs know that the cost excesses of the U.S. health care system are as tangled as the Gordian knot but, unlike it, cannot be eliminated with one swift cut. Their hope is that by hacking away with small measures, their companies can at least buy some time until the nation's political leaders devise a more comprehensive solution.