Employer Decision Making Regarding Health Insurance. 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.