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In 1988, Xerox Corp. realized changes had to be made to its health care plans, or the rising costs would devastate the company. By the end of that year a system was designed, partly based on the results of a companywide survey, and in 1989, the revamped system was in place. Instead of fee-for-service health plans, Xerox placed its fortunes with managed care. At the forefront of Xerox's charge into this new frontier was Patricia Nazemetz, now the company's director of total pay, who at the time was director of benefits.

"We knew by 1988 that we had to make some changes, that fee for service would eventually put the company out of business," she said from her office at Xerox's campus-like headquarters in Stamford, Conn.

At the outset, Xerox contracted with more than 150 health care providers managed by six network managers. Since then the number of plans has grown to 230, encompassing the vast majority of Xerox employees. The company's bold venture and success in moving its employees into managed care has served as a model for other employers.

Ms. Nazemetz, 48, joined Xerox in 1979 as benefits operations manager and was the company's director of benefits from 1988 to 1995. From 1995 to 1997 she was director-human resources policy and practice before assuming her present position.

In addition to her work at Xerox, Ms. Nazemetz, is active in managed care as chairwoman of the board of directors for the National Committee for Quality Assurance and is a member of the boards of the Washington Business Group on Health and Kaiser Health Plan of New York.

Ms. Nazemetz discussed the managed health care revolution at Xerox and her hopes for future system changes with Associate Editor Michael Prince.

Why did Xerox decide to aggressively move into managed care at a time when few companies were doing it?

The first impetus to move in that direction was costs. Our costs were moving on the fee-for-service side at a pretty rapid pace. We made some design changes in the early 1980s that encouraged many of our people to move to managed care because of higher costs to employees to stay in fee-for-service plans. And so we decided to build on that platform and thought we would be able to influence it in terms of how care was delivered; we could focus on quality, and manage the costs without sacrificing quality.

Was there any one particular event or one particular anecdote that occurred that made you finally decide to make the decision?

No. I think it's always dangerous to manage on the basis of some particular event or crisis. The corporate drive for quality at Xerox through the 1980s was to figure out what your customers want. And we viewed the employees as customers. We went out and spent a lot of time in both focus groups and then conducted a companywide survey of all our U.S. employees, asking them what they were looking for in health care benefits. The results of that survey reinforced the managed care direction.

What were some of the concerns you had when you started the change?

We were concerned with not being disruptive with our employees. We were trying to allocate the dollars we had for health care in a way that met most of our employees' needs. Like with any benefit change or in any pay program change, it's never desirable to alienate the population or to make them unhappy. So, one of the considerations was to make it an evolutionary change, not a revolutionary one, and to allow people to choose managed care on a voluntary basis. We kept the fee-for-service plans even though they were very expensive.

A great deal of the success comes from the response by Xerox employees who chose the managed care options over the fee-for-service options. What incentives were provided by the company for employees to make that choice?

Well, there have been several. Initially, we simply said we will peg our contribution to the most cost-effective health care option in a given community or environment, and we knew from our experience that was typically HMOs, even though the HMOs were providing a significantly higher level of benefits. It said you get first-dollar coverage, which was a big deal for our employees. And the premium contribution from the employee is either non-existent or is minimal. Or we can have the fee-for-service plan, which is going to cost you more out of pocket in terms of co-pays and deductibles and more out of your paycheck in terms of premium contributions. The employees made those choices. Since then we've added things such as report cards on the plans. We now also require NCQA accreditation for the plans. Now employees have what we think is maybe not adequate information, but certainly significantly more information than they had six or seven years ago about how to choose a health care option.

How important is gathering and disseminating information about health plans to the future of managed care?

I think that gathering information is critical, and being able to provide information to consumers, in this case to our employees and their families, is critical if you're going to have truly informed choice about plans. If the marketplace is going to work -- and we do believe in the marketplace -- it can only work if people know what they are buying and can do value comparisons.

If everything looks equal, you'll wind up picking the cheapest-priced program until you have a bad experience. We're not looking to abandon our employees to a chaotic system, so we think that true information that is valuable at the consumer level is what has to happen if the health system is going to survive in any affordable state.

What are you doing now to provide that?

There are three key pieces of measurement or information that we have been pursuing since the beginning in 1989.

The first is NCQA accreditation. We were the first company to require NCQA accreditation for our plans because that addresses the structure and process of the plan itself that will ultimately deliver a good outcome.

The second is now called HEDIS data. When we started out, we helped to invent the original HEDIS information set. And we worked very aggressively with NCQA, which owns the HEDIS management responsibility, to make sure those measurements continue to be refined.

And the third piece of information is what we called consumer value survey information. We survey our employees, and work with other employers who survey their employees, to find out how people feel about these plans. We think all those are valuable to employees.

I think the next level of information has to be down at the individual provider level.

While people will select a plan, the reality is they pick their relationship with their doctors, not a relationship with the health plan. So one of the things that we continue to work on through NCQA and surveys is to try to figure out how to get usable provider-level information and whether that can exist, because that information is ultimately where the consumers will make the decisions.

You mentioned that you have a number of HMO options for employees. Early on, Xerox decided to go with a large number of provider options rather than a few providers. Why was that decision made, and how has it worked out?

One of the things our employees told us was that they wanted choice. The ultimate choice I guess is an unfettered, unmanaged, fee-for-service plan, which we had in place and which was fast becoming unaffordable both to the company and our employees. They also told us affordability was a major factor. So, one way of getting choice is to provide multiple health plan options at a particular level and to really allow people to make the choice and to allow the health plans to compete for the business of the individual consumers.

We though it would do a number of things. First, it would meet our employees' requirement for more choice. Second, it would create some price competition. And most importantly, it would create quality improvement competition. I won't say it's a total success, but it's worked pretty well, and we have moved 85% of our people into managed care on a voluntary basis.

How have the company's employees responded to the changes?

I think they've responded pretty well. We sort of downplayed it. We didn't say this was some revolutionary change. It was fundamental, but it was not viewed by employees as a major change.

One of the things that I viewed as a sign of success was several of the comments we got from our human resources staff the first year was that people aren't even noticing it's there. It's sort of invisible to them. To me that was a sign of success, because we were not looking to create a big ripple that said we're changing your health care.

What problems have you encountered along the way?

There weren't any major obstacles or difficulties. I would say now, 1997, the issues or the concerns and maybe the disappointment is that the plans still don't have what I would view as a truly patient-centric health system. They're still organized around the health plan, costs, managing costs and figuring out how to keep costs under control, but not necessarily how to delight the patient.

And that's the next frontier where we will be focusing our interest in the future. To me there's got to be a next plateau, and I don't think we've determined what that is yet, and my goal is to try to get the health industry to start thinking about that.

What do you think the next frontier will be?

A patient-centered system that focuses on getting the needs of the patient or customer met. Such a plan would keep people in the system well, identify problems early on, take care of their problems from start to finish when they occur and help to manage the overall quality of life. Basically, thinking with the patient at the center.

A colleague of mine calls it putting the patient in the center, not in the middle.

I think what we do with managed care is to put the patient in the middle and have them try to make sense of the system. We need a system that really revolves around them at their core.

I think it means the whole system of providers, individual doctors, hospitals, pharmaceuticals and all the ancillary provider communities have to work as a team with a common focus of helping the patient. And I don't think they're organized in quite that way.

The plans that are out there that figure this out first will ultimately be the market leaders.

How can you or other employers help to bring this about?

I think it's a matter of putting our focus there, just like we put our focus on managed care in the employer community 10 years ago. I think it's putting our focus on patient-centered care, identifying measures that will help to ferret out those types of plans and provide a continuous improvement road map for those plans. Also we have to communicate that information to our employees and help to distinguish the kind of leaders in that field from the others. I think patients will ultimately make that choice.

Whether you're going to a supermarket, or a car dealer, or most importantly for your health care, you want to be considered as the customer, you want to be treated fairly well and you want good results. And most plans that focus on that and are willing to measure it, willing to step in front and commit to that and stand for that, I think won't have a problem getting customers.

How have employees' attitudes toward health care changed over the past 10 years?

There has been lots of focus on the health system. One thing that the Clinton debates in the early 1990s did was to focus Americans on what's right and what's wrong, what's good and what's bad about the health system. I don't think we came to any conclusions, but everybody certainly became pretty aware of health care.

I think people are probably a little bit cynical about the health system. There is a concern that their employers or those who are purchasing health care for them, including insurance companies, are focused only on costs, and I think that's a perception we have to help to change. I think they also feel at times that providers are not interested in their well-being but are interested in continuing to preserve income levels and practice in the way they used to practice.

How will health care benefits at Xerox change in the future?

That's the crystal ball question. I think we will continue to have more choice and more flexibility to really push the envelope a little on letting employees make more decisions, and to try to get better information to help employees to make even better decisions.

Ultimately I think our goal would be to just provide employees with a totally open-ended system, where they could take the dollars that Xerox has available for health care and really apply whatever they felt was appropriate to purchase the health care.

I view our role as evolving to one of providing people with what I would call marketplace intelligence; what's out there, what to look for, how to shop for a health plan or health system. And we provide a significant part of the financing to allow people to purchase their health benefits, but with less control and with less choice-making on the part of the company than today.