Employer Decision Making Regarding Health Insurance. Emergent Developments

05/01/2000

  1. 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.

  2. 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.