Summary of ASPE Expert Panel # 2 on
Private Employer
Strategies and Issues
Affecting Health Care Coverage
March 7, 2000
A panel of senior health benefit managers was convened to provide
information and insights into strategic and operational considerations
associated with providing health care coverage to their employees and
dependents. The companies represented on the panel varied in size though all
had more than 3000 employees and most were much larger. The companies were
involved in a variety of industries; most were multi-site including
international contingents; a number of them had workforces concentrated in both
rural and urban areas; and several had been involved with recent merger and
acquisition activity. In some of the companies union influence was very
substantial, but it was non-existent in others. The ratio of retired to active
workers also varied considerably with some companies have relatively few
retirees, while one company had a 3 retirees for every active employee and
another had a 1 to 1 ratio.
The discussions in the second panel meeting covered some of the same
strategic issues addressed in the first panel. But a stronger focus was placed
on operational activities and features of health benefits design,
implementation, and management. The issues are presented in several broad areas
including the general approach used in the benefits purchasing task, key
operational issues, contemporary concerns and challenges, and emerging issues
of interest.
The Purchasing Approach
- The health benefits decision making process involves both
specialized personnel and senior management of firms. The participants
presented a common picture of the division of responsibility for health
benefits decision making. The strategic and tactical planning occurs within the
specialized units responsible for health benefits. This unit is normally part
of a larger employee benefits group that ultimately reports to a senior human
resources executive. The health benefits unit evaluates options, prepares cost
and other analyses, may solicit employee input, compares the company and its
benefits with benchmarks from the industry, and makes recommendations. In large
firms the benefits buying units may be teams that also include cross-functional
specialists from such areas as purchasing, internal audit, and operations while
for small firms the health benefits staff may handle these functions entirely.
The recommendations are typically presented to a standing group of senior
executives, including chief financial officers, that makes final decisions or
may ask for additional information or study. Panelists noted that the health
benefits function is viewed as a specialized one, and thus their influence on
the decisions of senior executives is substantial. This is even true in
companies that are actively engaged in the health care industry. Consultants
play a variety of roles to support and augment the efforts of employee benefits
units, including providing external assessments of options, actuarial
assistance, and data that are useful in benchmarking company benefits and
experience.
- The process for selecting vendors is a multi-stage effort that
occurs over several months. The growth of managed care has led to a
formalization of the process by which employers are engaged in a systematic
purchasing of health benefits. A common approach is to develop bid
specifications from potential suppliers including minimum qualification (e.g.
NCQA accreditation) and performance targets. Next, the benefits unit solicits
proposals from companies/health plans that are interested in being considered
for a contract, and assigns scores to the proponents based on weighted
evaluation criteria. For companies that espouse a “value-based purchasing
program” the criteria and the scoring phase are critical. Contract awards
are made and, in some companies, contribution strategies may be tailored to
promote enrollment in higher scoring plans. The vendor selection process is a
continuous one in that monitoring of plan performance is ongoing to ensure that
performance standards are met and past experience is readily available for use
in the re-bidding cycle. Companies with a geographically dispersed work force
(e.g. sales or service personnel) often rely on one national plan to provide
them with a standard cross-market product that may not include managed care
features such as in-network participation. For employers that have developed
their own self-insured “company plan” — typically a PPO or POS
product — a single third party administrator is commonly chosen to provide
administrative services and support. The company plan is typically offered
along side other products when options are available. One company on the panel
that has a very large work force in a non-urban area actually self-insures and
self-administers its own PPO product.
- Customizing benefits purchasing to local market conditions
presents special challenges for both single market and multi-market firms.
Panelists emphasized the importance of adapting their benefits purchasing
strategies to local market conditions. For multi-market employers it can be a
complex process to try to achieve uniformity in benefits and costs when
delivery systems, prices, and potential contractors vary greatly. Firms often
have to do business with many plans in several markets in which they have few
enrollees, or use a national plan for this purpose. Employers see their ability
to be successful tied to the numbers of lives they have to use for leverage in
negotiation in the relevant local health care markets, so in many markets they
have little influence with their plan contractors. Panelists further noted
differences between working with local and regional health plans with whom they
may have substantial negotiating opportunities, compared to large national
managed care companies that may be more likely to offer only off-the-shelf
products and terms. The extent of competition possible in a local market also
varies, depending on provider and health plan market structure. This obviously
affects a company’s capacity to offer a broad set of options, such as in
rural areas. Employers with sizable workforces in rural markets face other
problems beyond lack of competition. They may have a disproportionate influence
on local providers as the area’s “mega-buyer” that carries with
it additional responsibilities and sensitivities. The lack of options in terms
of physicians and, especially hospitals, may make them more committed to
“supplier development” or provider improvement, leading some to
develop collaborative performance enhancement efforts with local providers. In
some instances, this dominant purchaser role may make self-administering (in
effect, direct contracting) a self-insured network-based plan a reasonable
possibility.
- Soliciting employee input is highly important and
accomplished in multiple ways. The panelists emphatically stated they are
systematically soliciting employee input into many facets of their health
benefits programs ranging from input in terms of benefit changes (e.g.
alternative medicine additions), provider networks (e.g. adding new providers
or health plans), service performance (e.g. customer complaints), and overall
satisfaction (e.g. satisfaction surveys). In addition, a number of firms offer
flexible benefits programs that allow employees to do additional customization
of their own total benefits packages. Companies use many different modalities
to share information and solicit input and feedback. Many have direct toll-free
phone line and e-mail access to benefits offices. Others conduct a variety of
employee meetings and focus groups. Most use direct mail campaigns and other
employee newsletters and the like. Some of these activities are necessary to
meet their legal requirements, but most firms see them as part of a broader
education strategy to raise employee awareness of and appreciation for the
benefits that are available to them. Several panels noted that web-based
communication is a key direction they are moving in currently, including the
capacity to facilitate employee direct communication with health plans via this
paperless medium. Health benefits satisfaction surveying has become extensive
in the firms represented on the panel. Surveying is done either by the
employers directly as part of ongoing employee surveys, or through health plans
that are commonly required to use standardized instruments like CAHPS.
- The contribution strategy is a key instrument employed to achieve
human resource goals. The importance of contribution strategies has grown
in part to promote more cost consciousness for their workers, direct/steer
workers to a preferred plan, and, in some instances, to defray the impact of
cost increases. Some firms with influential unions still do not have
contribution requirements for members of the bargaining units. But most of the
participants believe that more cost participation is critical to sensitize
workers to health care costs, and some now have explicit policies in place to
pass along a portion of future price increases. Rising prescription drug prices
have intensified the belief that employees should be made aware of the costs of
services that they are consuming. Some employers are more consciously using
contribution strategies as a steering mechanism than others, but most agree
that this can be a powerful tool used when a firm wants to encourage enrollment
in a preferred plan-such as those with “company plans” or, in other
instances, to chose health plans with demonstrated superior performance. Fixed
dollar employer contributions or percentage of premium contributions for
employees may encourage selection of lowest cost plans. For those employers
that are trying to promote selection of higher performing health plans, the
contribution strategy may be intentionally divorced from the plan premium
— illustrating that “value-based purchasing” does not mean
promoting enrollment in the lowest price plans. These employers are
particularly interested in promoting the enrollment of their most needy
(sickest) employees and dependents in the best performing plans, even if they
may be higher cost plans because employers believe they provide better value.
- For companies that have attempted to “migrate” employees
to preferred products there are several steps to address. Employers on the
panel have now had considerable experience with promoting certain health
benefits options, especially managed care products. The participants offered
some insights into how they have engineered the migration of employees to these
products in the wake of their introduction. Typically, employers embrace a
model of delivery, such as an HMO strategy, that they think will give them more
control and accountability. They then develop a benefit package that either
they will offer directly, or will get bidders to offer and issue requests for
information/proposal. A premium contribution strategy is developed and pricing
for the products is unveiled. Next, employees are subjected to education
campaigns detailing the product options and the rationale for the changes being
made and an open enrollment process is carried out. Subsequent to
implementation, feedback is provided to employees, initially on options chosen
and then later satisfaction survey results are collected across the options and
shared with the workforce. This approach was described in part to contrast it
with a defined contribution strategy that, as discussed below, has a far more
passive approach associated with it.
- Implementation of new products or product designs is a complex but
highly important function for health benefits. In the spirit of discussing
operational features of health benefits coverage, the participants shared
several insights about the importance of implementation of new products and
designs. They underscored how complex this process may be, especially across
diverse workforces in geographically dispersed areas. Some of the panelists
represented firms that had dozens of HMO contracts across several work sites.
The level of effort involved is often under-appreciated because the success of
new initiatives can be undermined if the implementation process is poorly plans
and executed. They are also reluctant to turn these functions over to outside
consultants because of their lack of familiarity with key systems and employee
relations issues. Examples of implementation activities mentioned by panelists
included the following: 1) testing contractor ability to handle eligibility and
claims processing functions; 2) preparing and carrying out employee
communication initiatives; 3) assessing the effectiveness of interactions with
other vendors, such as in the case of pharmacy or behavioral health care
carveouts; and 4) closely monitoring performance through the open enrollment
period. Such additional efforts are particularly taxing for units that have to
continue to carry out their routine tasks. But failure in these basic functions
may undermine and discredit new product initiatives.
- Employers are pursuing cross-company strategies to
improve negotiating leverage and promote efficient information sharing. At
several points in the discussion, employers alluded to activities they are
undertaking that have led them into collaboration with other purchasers. This
is one means for smaller or widely-dispersed employers with limited or
dissipated leverage to gain more influence with health plans, though none of
the participating employers were actually negotiating rates as part of a group
of employers. A number of their collaborative activities related to sharing
health plan performance information, as well as evaluation templates that
employers may use to assess plans and the proposals they are submitting. In
some instance, formal collaborative vehicles or associations exist. In other
cases cooperation occurs on a more ad hoc basis because employers may be
situated in the same market or may be querying one another on their comparative
experiences with common contractors. In general, the information sharing can be
a positive for employers and for plans, especially if it leads to greater
uniformity in data requests and requirements on plans. It was noted that in
some instances outside consultants have seemed to want promote their own
distinct information requirements, but participants saw these efforts as
largely self-serving and counter-productive. In some of the rural markets,
employers that share similar plans or TPAs were able to monitor provider
performance across groups to aid them in bringing pressure to bear to de-select
or promote improvement of deficient performers.
- Employer attitudes toward managed care reflect support for
managing care, but concern about adequacy of current managing
organizations. The companies represented on the panel are using a variety
of products ranging from indemnity offerings to PPOs to HMOs with varying types
of financing arrangements ranging from fully-funded or totally self-insured and
even self-administered in one instance. They did however, tend to agree that
buying “managed” products was the desired mode of purchasing, where
this is feasible. However, they were equally insistent that not all managed
care products are being managed or being well managed. Some plans have been
unable to move beyond the easy savings and have done too little to reduce
practice variation. Others seem content to engage in “shadow pricing”
or have chosen to start offering looser products that are probably not going to
be able to sustain cost control. Some panelists attributed these shortfalls to
plan failure to invest adequately in information systems, and thus they are not
producing true efficiencies in care delivery. It was also noted that the
consolidation in the industry is likely to produce bigger plans that, in turn,
may become even more difficult to negotiate with and more inflexible in product
customization to local markets. Companies that have their own customized
products-typically PPO or POS-seem unconvinced that established HMOs are
offering products or features that the firms cannot make available in their own
company plans.
- Rapidly rising prescription drug costs is an issue that is
provoking both concern and creative responses among employers. The panel
participants express near universal anxiety regarding rising prescription drugs
costs and related a variety of strategies they are employing to address this
concern. An important distinction was made regarding where strategic decision
making is occurring; it varies depending on plan design and sponsorship. For
fully insured HMO products, responses are crafted by the health plans. If
employers use a carveout contractor, then a pharmacy benefit manager (PBM) is
likely engaged in product redesign activities. When an employer is
self-insured, the decisions about how to address these challenges must be made
internally. The principal responses across all three decision makers have
included benefit and price re-designs including higher out of pocket cost
limits, proportional co-payments (coinsurance), or “triple co-pays.”
These mechanisms are designed to promote more cost consciousness use of lower
cost substitute products. Tighter formularies are being used in some instances
but these may engender provider and employee dissatisfaction. Aggressive
educational programs for employees to promote more discreet use of
pharmaceuticals are seen as another adjunct for encourage more cost
consciousness and to offset some of impact of direct to consumer marketing by
pharmaceutical companies. One large employer with its own PPO product has made
a concerted effort to work with area hospitals and their affiliated physicians
to improve prescribing habits and promote greater cost awareness among
community physicians — with the implied threat that failure to improve
could lead to de-selection from the network. Some of the employers also see the
development of specialized disease management programs as having implications
for both the selection and use of pharmaceutical products, especially because
they may be able to better exploit the benefits of treatment innovations than
convention models of care. Despite the efforts underway, most employers believe
they have not yet found any especially promising responses to this powerful
trend.
- Many employers are giving serious consideration to
defined contribution strategies but remain concerned about the implications of
these approaches. When asked to discuss emerging developments in health
benefits, most of panelists indicated trends depend very much on legislation
and litigation (liability), as discussed in more detail below. There was a
general sense that a “defined contribution” strategy could emerge
even in the absence of major legislative developments, since many employers are
currently giving some thought to the implications of such a conversion. As some
participants noted, if all employers could agree to make such a switch at the
same time — to avoid creating competitive disadvantages for themselves
— this might happen quite quickly, though no one expects this to occur. In
principle, a defined contribution approach could give employers more control
over their future health care cost while providing employees with more
flexibility. But veteran employee benefit managers suggested that this strategy
could disrupt employee relationships, squander the years of effort to employers
have invested in cost containment, and lose the efficiencies associated with
having employer-sponsored health insurance products. For companies that have
had a traditionally paternalistic approach to employee benefits this would be a
major change. In addition, for companies that have been trying to promote a
stronger link between health, health benefits, and productivity, including
reducing disability and absenteeism, this could be a substantial
setback.
Much of the skepticism about the viability of a defined
contribution strategy lies with the lack of development of the market
conditions to support informed employee choice. The panelists pointed to the
dismal state of affairs in the individual insurance market as being indicative
of these shortfalls. Employees are unlikely to have access to a wide choice of
health plan options. Product prices are likely to be higher, confusing to
consumers, and potentially discriminatory against persons with costly
conditions. Meaningful information on plan performance is limited now and would
likely become more meager if large employers could not use their leverage to
extract such data from their contractors. Generally, defined contribution will
lead employers to engage in a pricing strategy of merely setting benchmark
rates or contribution levels on a regional basis. This would be a major step
away from the far more proactive purchasing strategy in which most of the
participants believed they had been making progress. It was noted, however,
that it is possible that new purchasing vehicles and ventures might emerge in a
defined contribution environment, and some panelists are already being
approached by such web-based entrepreneurs. Presumably, the entities would try
to bundle together groups of employees to pool their defined contributions to
negotiate on their behalf with prospective health plans and provider
organizations. Panelists suggested there is no way to know what kind of success
such purchasers might have.
- Employers express great concern about how increased liability for
them could fundamentally alter the way they approach purchasing health
benefits. Just as in the first panel, the participants were eager to weigh
in on the current debate over liability, as partially represented in the
proposed versions of the Patient Bill of Rights. The discussion revolved around
employer liability due to the fact that the panelists uniformly expect to be
seen as exercising “discretionary authority” for decisions about
health benefits. Decisions about plan design, selecting contractors (health
plans) to be offered, or devising their own company plan will all be affected
in the opinions of the panelists. They suggested that if their worst fears are
realized, they will have to step back and develop more restrictions and
explicit exclusions, set up elaborate appeals processes, reduce their
relationships with employees, and ultimately move to defined contributions to
get themselves out of the line of fire. Panelists contended that these
developments will fundamentally alter employer sponsored health insurance as
employers flee from the efforts of trial lawyers to hold them liable and seek
huge judgments against them.
Several companies reported to have
“disaster [contingency] planning” underway to convert to some form of
defined contribution as soon as feasible, if the most onerous legislation
passes. The limitations of this strategy, as discussed above, were reiterated
by the panelists. Employers expect a rapid conversion could result in a high
degree of chaos because the infrastructure is not in place to respond to a
surge of individuals trying to buy on their own behalf. In addition, problems
could be created for providers if employees who now have company-sponsored
health insurance decide they would rather take the defined contribution
designated for health benefits and buy “bass boats” with it rather
than health coverage. Consequently, some employers have even tried to educate
providers to the potentially momentous developments they might face if this
legislation passes. Finally, one panelist noted that such developments are yet
another example of how the federal government seems to be working at
cross-purposes with itself. Just as it tries to promote expanded employer-based
coverage, it is creating power disincentives for employers to maintain such
coverage.