Employer Decision Making Regarding Health Insurance

Summaries of Meetings Held with Senior Corporate Managers
on Private Employer Strategies and Issues Affecting Health Care Coverage

Conducted and prepared by Mathematica Policy Research, Inc.
for the Office of the Assistant Secretary for Planning and Evaluation
U.S. Department of Health and Human Services

Introduction

Many public policies seek to influence the decisions employers make about whether and how to offer health benefits to their employees. The “outcomes” of such policies can be measured--how many firms offer, how many employees have coverage, etc.--but the process of how employers make decisions is largely unknown. The employer decision-making process is something of a black box--public policy is made and eventually there may be a change, but we do not usually know how effectively the public policy has altered employers’ decisions or whether there are more effective means of influencing them.

ASPE decided to convene two panels of senior corporate managers to discuss how firms make decisions about health benefits. The meetings were held in January and March, 2000 in Washington, D.C. The purpose of the panels was to help the office formulate a more comprehensive view of employer decision-making by posing common questions to a cross- section of knowledgeable people, and to identify issues that we may be able to empirically measure. The long-term goal is to be able to better determine how public policies affect or influence the decisions made by employers and unions regarding health coverage.

ASPE contracted with Mathematica Policy Research, Inc. to organize two facilitated meetings. One meeting focused on the larger “strategic” trends and issues affecting employer health coverage. This meeting addressed global questions such as, “What is the role of the employer in shaping health care markets?” The second meeting focused on the more internal and operational issues of how employers make health benefit decisions. This second meeting addressed questions such as, “At what level of the corporate structure are health benefit decisions made?” Each half- day meeting included 7-9 panelists drawn from the industry as well as 8-10 ASPE participants. The Contractor prepared written summaries of both meetings which follow.

Expert Panel #1 - January 14, 2000

Benefit Philosophy and Structure

1. 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.
2. 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.
3. 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.
4. 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.

Corporate Context for Benefit Decisions

5. 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.
6. 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.
7. 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.

Approaches to Purchasing

8. 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.
9. 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.
10. 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.

Emergent Issues

11. 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.
12. 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.

Expert Panel #2 - March 7, 2000

The Purchasing Approach

1. 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.
2. 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.
3. 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.

Key Operational Issues in Benefits Purchasing

4. 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.
5. 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.
6. 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.
7. 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.

Contemporary Concerns and Challenges for Health Benefits Managers

8. 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.
9. 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.
10. 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.

Emergent Developments

11. 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.
12. 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.