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HealthNow in push to trim expenses Sets hiring freeze, retirement incentives

HealthNow New York is offering early retirement incentives, freezing nonessential hiring, tightening benefits and scrutinizing vendor contracts in a bid to lower its operating costs and be more competitive.

The Buffalo-based parent of Blue Cross Blue Shield of Western New York said it is trying to reduce the size of its work force and otherwise trim expenses in anticipation of more competition from national rivals and pressure from employers to lower premiums. Chief Executive Alphonso O'Neil-White warned employees of coming belt-tightening in a memo issued two weeks ago that contained broad messages but little details.

"The hard work is not behind us and we must face certain business realities," O'Neil-White wrote. "The market demands change and we must transform the way we do business. It is absolutely necessary for the health of the company and our members."

Layoffs are not planned at this time, but are not being ruled out if costs aren't cut enough by other means, said spokeswoman Karen Merkel-Liberatore. She would not disclose the company's target for reducing either staff or expenses. HealthNow has 2,300 employees in all, including about 1,300 in Buffalo.

"We are looking to reduce staff through early retirement and attrition. We're also looking at other ways to adjust the work force to reduce our administrative costs," she said. "We are hopeful that through these initial steps we will not have to go the route of layoffs because layoffs are always a last resort."

She said the efforts to cut costs are not a one-time step, but a revamping of how the company operates in order to be more competitive. But she also stressed that "we are not doing anything dramatic, nor are we in a panic mode" after three successful years.

The changes would not affect plans for the company's new $86.3 million headquarters in downtown Buffalo, next to the Niagara Thruway. The news also is separate from the company's loss of a federal Medicare claims processing contract, which will lead to 250 layoffs in July at HealthNow facilities in Binghamton and Dallas, Pa.

The moves by HealthNow come as insurers are getting squeezed by tight competition within the industry and by increasing pressure from employers, consumers, doctors and hospitals to provide better coverage and service at a lower cost.

Employers and employees have been facing double-digit premium increases for at least six years -- including an average of about 10 percent for 2006. Experts say businesses and consumers can't take much more without dropping coverage, and employers are demanding lower-cost options as they shop around.

"We have heard the message from our members that health care premiums and health care costs must be lowered," Merkel-Liberatore said.

At the same time, HealthNow executives expect to see new competition locally from large national players like WellPoint, UnitedHealth Group, Aetna and Cigna Corp. They would be joining a competitive local market also served by Independent Health Association and Univera Healthcare.

"If we cannot successfully compete on pricing and service excellence, we cannot move the company forward," O'Neill-White said in his memo. "Our competition has expanded to include major national companies, and we must be positioned to meet them head-on."

The two key factors that are used to set plan prices are medical expenses for members and administrative or overhead costs. Currently, the company spends 91 cents of every premium dollar on medical claims, with most of the rest on administrative costs.

That's already pretty efficient -- state regulations require administrative costs to be less than 12 cents of every premium dollar. But since the company has only "limited control" over medical costs, "we must be aggressive in controlling administrative expenses" further, O'Neill-White said.

In its first move, employees who have worked for HealthNow for at least 10 years and will be at least 52 years old on March 31, 2006, will be eligible for unspecified early retirement incentives. There are about 130 qualifying employees who will be notified in the coming days, and HealthNow executives anticipate about 70 will accept.

Secondly, the company is not filling open positions "unless absolutely necessary," Merkel-Liberatore said. The company normally has about 90 to 95 people leave per year. And where positions are essential, officials are trying to fill them from within unless they need to recruit someone with expertise from outside, she added. Seven people were hired from outside the company last month.

The company is also changing benefits for its own employees, raising co-pays for some services and for prescription drugs, and instituting co-pays in some cases where there were none before. Merkel-Liberatore said the changes would affect all employees from top to bottom.

Finally, officials have called on all employees to examine outside vendor contracts and spending to make sure "they are getting the products and services at the best possible price," Merkel-Liberatore said.

However, she said there has been no discussion or consideration yet about whether to reduce some of the company's significant marketing, advertising and community support spending, or executives' salaries.

For example, according to the company's 2004 regulatory filing with state officials, HealthNow that year paid: $380,472 to the Buffalo Bills; $210,896 to public relations and advertising firm Arnold Worldwide; $179,704 to HSBC Arena; $145,638 to the Buffalo Philharmonic Orchestra; $80,000 to the Irish Classical Theatre; $25,000 each to Shea's Performing Arts Center, the Theatre of Youth Company, a Rochester television station, and the Strong Museum in Rochester; and $60,000 to the Buffalo Club and three country clubs.

And its 10 most highly-paid officers received a total of $6.87 million in salary and benefits in 2004. That includes $1.24 million for O'Neill-White, $1 million for former Executive Vice President James Cardone, $991,552 for Executive Vice President Cheryl Howe, and $730,000 for Stephen G. Jepson, senior vice president and former chief operating officer of Blue Cross Blue Shield of Western New York.

"We are very proud that we support the communities where we live and work," Merkel-Liberatore said. "We do not plan to withdraw our support of the community organizations that need us."

As for salaries, she said HealthNow's pay is comparable to those at other organizations of its size, both for-profit and nonprofit. Cuts have not been discussed or considered, she added.

"We do have to compete for our leadership talent on a national level, both in the for-profit and the not-for-profit world," she said.


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