Summary of ASPE Expert Panel #1 on
Private Employer
Strategies and Issues
Affecting Health Care Coverage
January 14, 2000
A panel of senior managers responsible for health benefits in their
companies was convened to provide an opportunity to gain understanding and
insights into how employer-based health benefits are being designed, offered,
and purchased. The participating companies represented a broad spectrum of
employers. They varied in terms of numbers of employees, industries, degree of
corporate diversification, single or multiple worksites, and extent of growth
including merger and acquisition activity. The smallest of the participating
firms had approximately 500 workers while the largest had over 50,000. The
employee mix within the companies provided further variation on such dimensions
as age, gender, skill and education levels, degree of ethnic and linguistic
diversity, longevity, and unionization. Some of the multi-divisional firms also
had considerable variability across their operating divisions on the
dimensions. The panel also included health policy consultants and researchers
and staff from ASPE.
The discussion was guided by a series of questions that focused on
strategic considerations related to the decision to offer health benefits; the
nature and structure of the benefits; coverage policies; decision processes
used in benefits planning; and approaches to purchasing of benefits. The issues
covered in the discussion included each of the focal areas as well as some
broader policy considerations raised by the benefits managers or ASPE staff.
The following themes summarize the major issues discussed during the panel
session.
- Many companies are undertaking fundamental reviews of the role and
structure of their employee benefits, including health care coverage.
Employers are re-examining the impact of their benefits on employee recruitment
and retention. Benefits philosophies in general are seen as becoming less
paternalistic and more sensitive to marketplace competition. This shift has led
many companies to challenge how to apportion total compensation between wage
and non-wage benefits to align compensation with corporate performance goals.
This realignment also reflects the extent to which companies are themselves
changing in terms of business lines, mergers and acquisitions, and workforce
composition. The need to differentiate benefits relevant to recruitment from
those related to retention is becoming more apparent as many employers see
growing variability between new hires and their long-term workforces. Cultural
and generational differences between younger and older workers also bring these
concerns into sharper focus. Because worker interests in benefits change over
time, employers are finding they have to adjust their programs to respond to
this evolution in employee “careabouts.” Company views in almost all
instances are much broader than health care coverage, as health benefits are
seen as just one additional consideration to weigh in apportioning the
compensation dollar.
- Customization of benefits is taking on added importance in the
current labor shortage. Participants noted that they feel a growing need to
introduce more flexibility into their benefit packages to respond to a
broadening spectrum of worker and prospective worker wants. The current labor
shortage across the entire skill range of workers highlights the need to
customize what can be offered to workers in order for companies to meet their
manpower requirements. While employers still have to be attentive to both local
and industry benchmarks, they may be able to achieve some competitive advantage
by different configurations of benefits or benefits that are explicitly
targeted to a specific labor pool critical to them (e.g. tuition reimbursement
for companies seeking college age workers). The dichotomy between new workers
who value benefit portability or cash-oriented compensation vs. older workers
interested in long-term disability or retirement illustrates the challenge that
employers face in customization. Health care coverage is one area where these
concerns are particularly evident. Employers that once were strongly committed
to promoting the pooling of employees’ interests in health benefits are
finding that such a philosophy may constrain them from customizing the options
employees are seeking. In some cases this may mean more health coverage product
options from which employees can choose. But it can also mean allowing workers
to trade off health benefits for other benefits or even cash compensation. Some
employers worry that giving employees more control over and responsibility for
where their benefits dollars will go may ultimately raise new concerns about
uniformity and equity.
- Relative importance of health benefits varies greatly across
employers and employees. The participants emphasized that health insurance
is not the most important consideration for their companies; and that they
consider it literally to be a “fringe” benefit. It was when health
care costs soared that many of their companies had to devote considerable
resources to this area to try to regain control. They made this point to
underscore that health benefits compete for attention and resources with
several other human resource concerns pertinent to their companies’
success. Moreover, the salience of health benefits for individual workers also
varies greatly, with it being of little concerns to the “immortals”
— young, healthy workers — who rarely even inquire about the nature
of the health benefits at the time of hiring, other than to ask if it is
available. Obviously, health benefits become more significant for workers who
have health problems or those who become long term employees and increase the
likelihood that they will use these benefits. This variation in importance
necessitates customization and tradeoffs among benefit options. “Access to
care” is seen as what employees in general want; but how they choose to
obtain such access varies across many dimensions. Participants did not see
health insurance as playing a significant role as a recruitment device or even
motivator, but it can be a source of employee dissatisfaction. In fact, the
major metrics for monitoring health benefits typically have been “costs
and complaints.” Changes in health benefits and plans are relatively
uneventful if they do not represent significant disruptions in provider
relationships or additional cost participation.
- Educating, informing and supporting workers is becoming more
important. The trend toward customization and benefit flexibility has
converged with such socio-demographic trends such as greater workforce
diversity to make worker communication a much more significant task for
employers. As companies move toward promoting more worker responsibility for
individualizing benefits including cashing out some of them, the consequences
of employee decisions will become more momentous. Electronic communication
advances have helped in this area, but employers struggle with ensuring that
their employees understand the range of choices and rationales for the options
they are making available to workers. For companies in industries and/or
locations where there are large numbers of workers with limited education or
with ethnical and linguistic diversity, simply preparing and disseminating
information is becoming more costly and complex to achieve. The problem is
exacerbated as many companies downsize benefits staff to streamline
administrative operations. The problem can be especially troublesome in health
benefits given the complicated range of options being made available, and the
difficulties in understanding some of the complexities of managed care
products. Promoting greater cost consciousness through cost sharing with
workers was seen as an important feature for successfully managing health
benefits costs. Companies are also trying to create more awareness among their
employees of the extent of company contribution for their health benefit costs.
- Decision processes reflect company structures, cultures,
and priorities. The companies represented on the panel use different
processes for establishing a compensation philosophy, modifying benefit
designs, or evaluating new benefit initiatives. Worker input into the process
varies depending to a large extent on the degree of unionization, but most
companies are monitoring employee interests and satisfaction systematically,
including both regular and special surveys and tracking responses to employee
complaints related to benefits. A company’s general compensation
philosophy is based on direction from executive management and on company
culture and tradition, subject to industry and local market considerations and
constraints. This philosophy may be modified if new priorities emerge in terms
of recruiting in new talent pools or broader strategic aims shift the focus of
recruitment or retention. Human resource units typically play a role in this
repositioning. In terms of health care coverage, employee benefit managers may
identify new benefits or benefit modifications and make proposals related to
them. They conduct cost benefit, cost offset, or payback analyses to accompany
their recommendations. A number of the participating companies have a senior
management team that reviews and approves such proposals. Small companies may
have a less formal and participatory process, in part because they have few
specialized benefit personnel. Decisions are more likely made by the chief
financial and/or chief executive officer. Consultants, as noted below, may play
a role in the process as well either as a source of ideas, data for costing or
comparing scenarios, or external review. Health benefits decision processes are
seen as similar to other decisions, such as pension programs, that affect
nearly all workers.
- Merger and acquisition activity has important
implications for health benefits. Several of the participating companies
commented on the relationship between merger and acquisition activity and
health benefits because it has become an issue of considerable attention for
them. Mergers represent growth and consolidation for some companies, as well as
diversification for some others. From a benefits standpoint, employers that
acquire companies with different benefit packages, products, or premium
contribution strategies have to determine the extent to which these benefits
will be maintained separately or blended into those of the acquiring firm. When
a company diversifies into another industry, it must appraise whether the
benefit structure of the new industry is different enough to justify not
consolidating benefits. In some instances, the differences in benefits may be
maintained permanently, as in the case of a highly diversified corporation with
very different workforces across a portfolio of subsidiaries. Moving to uniform
benefits could adversely affect profitability of the sub-units, or even raise
doubts about the feasibility of the acquisition in the first place. In other
cases, not standardizing benefits may impede integration efforts, and undermine
expected synergies associated with a merger or acquisition. Companies that are
highly active in mergers and acquisitions may devise a specific benefits
strategy that is used by the teams charged with evaluating and implementing
mergers or acquisitions.
- Use of consultants, brokers, and agents is significant, albeit
varied across companies. The participants discussed the roles played by
benefits consultants and insurance brokers and agents. Large firms use benefits
consulting firms to varying degrees and for a variety of purposes. Downsizing
of benefits personnel units has forced a number of firms to rely on outside
consultants for tasks that they are unable or unwilling to hire permanent staff
to handle. Consultants also play useful roles in technical areas like actuarial
services, simulation models to assess options, or in providing companies with
data for use in evaluating or benchmarking of a company’s benefits
experience. Some employers use them to help with design or assessment of new
initiatives, but others are under pressure to control spending on outside
consultants and use them very sparingly. Smaller employers are more likely to
rely quite extensively on brokers and/or agents to aid them in designing
benefits programs; soliciting proposals and bids; negotiating with bidders; and
building in performance guarantees with contractors. In this capacity, the
brokers provide manpower and expertise that is not available within the
company. Some of the panel participants cautioned about whether the value of
broker services may be overstated and/or overpriced.
- The decision to self-insure is very common among large
employers and influenced by several factors. Self-insurance was extensive
among the large employers on the panel with this form of coverage ranging from
50 to 100 percent of their workforce. The smaller companies (under 1000
employees) bought only fully-insured products. The rationales for
self-insurance included 1) maximizing the benefit dollar by improving
efficiency and eliminating insurance company profits and administrative
expenses; 2) ensuring uniformity of benefit package by avoiding state level
benefit mandates; and 3) availing themselves of the protection against
liability. Most panelists shared these views, and particularly emphasized the
importance of the ERISA preemption to the latter two rationales. The large
companies that are not fully self-insured are still buying insured products
from HMOs, in most instances, though there was a general belief that more and
more companies will shift their HMO contracts from fully-insured to ASO
(administrative services only) arrangements in the future. These products get
benefits of network negotiated rates, but companies can avoid some of the costs
layered on fully insured products by the managed care companies. This is likely
to be the case as HMOs increasingly become a regulatory and liability target
and as employers, who seem to be increasingly disenchanted with them, distance
themselves from buying their standard products. Smaller employers are also
likely to seek options for self-insurance in the future, though those
represented on the panel said that they still felt more comfortable with
fully-insured products given the risks and responsibilities of self-insurance.
- There is significant disenchantment with conventional managed care
products. There was a high level of dissatisfaction with the performance of
the managed care industry, especially HMOs, on the panel. Some of the
represented companies have historically been strong supporters of managed care,
aggressive promoters of HMOs, and active participants in NCQA and related
industry-employer initiatives. Others have been less supportive of the economic
model of the HMO and have pursued PPO products including developing their own.
Still others have had managed care strategies that have used a combination of
HMO and PPO products. Several expressed the view that HMOs have “lost
their way” in terms of becoming too concerned about their own
profitability and performance relative to their investors rather than to their
purchaser-customers. As one participant put it, “we do not appreciate the
fact that the HMO companies are raising their rates when their profit margins
are already exceeding our own margins.” Some panelists contended HMOs have
created inappropriate barriers to care and brought much of the current backlash
on themselves. The fractious relationships with providers has been
disappointing and frustrating, and panelists expressed a desire to see
physicians regain more control over decision-making, as represented, some
participants suggested, by the recent decision of United Healthcare to
discontinue certain intrusive utilization management practices.
- Quality measurement and promotion issues still seen as important,
but degree of investment in it is limited. The members of the panel
contended that their disappointment with the managed care industry did not
indicate they had lost interest in or support for activities like measuring
quality and promoting quality improvement as manifested by NCQA accreditation
and HEDIS reporting. But some did acknowledge they are less convinced that
investment in report cards and other consumer choice oriented initiatives are
worth substantial investment. In part, this change of heart reflects
competition for limited benefits resources. But it also seemed to suggest that
employers simply are not convinced that employees will used these sort of data,
in their current form, to make meaningful decisions. One panelists suggested
that they may have overestimated the “appetite” for data of their
employees when, in fact, continuity with their current physician is still by
far the most important consideration in plan selection. For panelists that have
experience with performance reporting initiatives, there was a strong sentiment
that plan-level information is not meaningful given the nature of the choices
consumers are making. Consequently they are investing and/or participating in
initiatives that anchor the data close to the service provider level which
consumers/employees are more likely to relate to at the point at which they are
seeking care.
- The potential for expanded employer liability puts the
“social contract” notion of employer-sponsored health insurance at
risk. The discussion of self-insurance and the significance of the
ERISA preemption triggered an extended and impassioned discussion of the
potential impact of pending legislation that could increase employer exposure
for liability. The panel uniformly painted a bleak scenario if employer
exposure is expanded by virtue of such measures as some form of the
“Patient Bill of Rights” proposal. They contended that this could
have a rapid and dramatic negative effect on employer support for
“tax-preferred benefits.” More specifically, employers fear that
class action lawsuits will cascade down on them and fundamentally reduce the
value of the tax preference to the point where most employers will conclude the
risks exceed the benefits of offering health benefits in their current form.
Thus, the “social contract” whereby employers provide health benefits
to their workers will become unsustainable and new models and methods will have
to be devised. Employers see the potential for serious adversarial
relationships between employers and employees that will impede employers from
being advocates for their workers. Moreover, companies are not prepared to
invest substantially more resources in managing of their health benefits and
they simply cannot assume additional accountability in this area. They will
either drop benefits or, more likely convert from current defined benefits
approaches to some kind of defined contribution strategy. There is precedence
for this move in the pension area, triggered in part by FASB 106, but the
impact on health benefits may be more complex and adverse for employees.
- Future trends are uncertain, but defined contribution strategy is
a real possibility. In the absence of a change in liability status for
employers, future trends suggest that changes will not be dramatic as long as
employers retain reasonable control over costs. Cost participation by workers
is likely to grow, including more use of graduated cost sharing based on the
cost of services to promote greater employee cost consciousness in such areas
as prescription drugs. Participants did not seem nearly as concerned about
rising costs as expanded liability. They also noted that the pace of change in
benefits is typically relatively slow as industry-level changes take time to
spread and for individual firms to adapt to them. Employers clearly would
prefer to keep health insurance as a “fringe” benefit/issue and
generally not try to shape the health care system. A number of panelists shared
the view that policy makers tend to overestimate the relative importance of
health care issues to the typical employer.
If the liability exposure
does increase, then this will almost certainly accelerate a shift to defined
contribution strategies. There are many uncertainties associated with this
scenario since it is unclear what kind of benefit packages employees will have
access to; how much involvement employers will wish to or have to maintain to
influence the market to make products available; and what the actual market for
insurance for workers might be. Some observers, familiar with serious
difficulties in the individual or small group insurance markets, see major
problems if that is the shape of the market that ensues. The threat of a badly
bifurcated market of sick and well consumers presents additional cause for
concern. In a defined contribution environment, employees could lose their
employer as a cost-control advocate as well as a promoter of quality and
measurement data. This might mean diminished purchasing power for the defined
contribution that could lead to employees losing access to care. This would
lead to growing employee disgruntlement and, in a tight labor market, this
would mean employers might have to increase their contributions to sustain
benefit levels. Ultimately, then, this will force employers to more fully
commit to “total compensation packages” that compels workers to
tradeoff health coverage contributions against other benefits and cash
compensation.