Annual managed care survey: Employers are tied to the inflation track

Health costs are roaring down the track--one hand on the whistle, no hand on the brake--and corporate America can't jump out of the way. The annual "Employer Survey on Managed Care" from Deloitte & Touche and Business & Health describes the dilemma.



Employers are tied to the inflation track

Health costs are roaring down the track—one hand on the whistle, no hand on the brake—and corporate America can't jump out of the way. The annual Employer Survey on Managed Care from Deloitte & Touche and Business & Health describes the dilemma.

By Shelly Reese, Contributing Editor

Jump to:Choose article section... No light in the tunnel Proceeding with caution Rate hikes were worse than expected . . . . . . but employers keep hauling the load No race for change Slight switches in health care strategy Harder to engineer savings Rx costs on the express track Tiered pharmacy benefits are the emergency brake Employers not ready to try new routes Cost sidetracks quality

Like a runaway train, health care costs are careening toward employers—most of whom feel like they're tied to the tracks. Respondents to the annual Employer Survey on Managed Care sponsored by Deloitte & Touche and Business & Health reported steeper-than-expected premium increases in 2000 and predicted even greater financial pain for 2001, yet fewer than one in five are considering any dramatic change in the way they purchase health care benefits.

Collectively the consolidation of health plans, the lack of coverage alternatives, the shortage of qualified workers and employee resistance to change have conspired to "tie employers' hands," says survey director Barbara Adachi, a partner with Deloitte & Touche's Human Capital Advisory Services. "Employers are in a war for talent. Everyone wants to be an employer of choice. This issue of rising premiums is simply lower on the radar screen than some of the other issues employers are facing."

No light in the tunnel

That's not to dismiss employer concerns about the cost of health care. Nearly two thirds say cost is the primary factor driving their health care strategy, and the experience of recent years has justified their concerns. On average, survey respondents reported health care cost increases of 12.4 percent last year, well above the 9 percent they had anticipated. Employers, in turn, have revised their projections for 2001. Respondents to the 1999 survey predicted hikes in the neighborhood of 10 percent for 2001. Respondents to the 2000 survey upped that projection to 12.7 percent and said they expect an increase of 12.5 percent in total cost for 2002 to boot.

No medical coverage model was exempt: Premium increases exceeded expectations for HMO, PPO, POS and indemnity plans alike, ranging from 9.5 to 11.9 percent.

Fearsome as the cost issue may be, employers don't have much wiggle room. On one side they're faced with a health care industry that has undergone tremendous consolidation. Employers can't take their business to lower-cost carriers the way they could just a few years ago, Adachi points out, because many of those carriers aren't in business anymore.

In addition, employers are being forced to craft health care solutions in an environment where "a lot of the challenges they face are largely beyond their control," Adachi says. Indeed, when asked to rank the biggest managed care or administrative challenges facing health care, employers cited disruption in provider networks, turnover in the managed care industry, legislative mandates and grievance resolution—all areas where they have limited clout.

Employers have even less room to negotiate on the employee side of the situation. Rich benefits are less a perk than a prerequisite in a tight labor market, and a sizeable minority—nearly one out five respondents—named employee recruitment and retention as the primary factor influencing their health care policies. Another 11 percent said either market conditions or competition direct their strategies.

Proceeding with caution

Given that nearly one third attributed their strategic direction to either labor or economic conditions, it's not surprising that employers are leaning away from cost-control options that don't sit well with employees. Taken together, only 44 percent have zeroed in on higher employee contributions, cheaper health plans or fewer plan choices to control costs. Instead, the largest number (48 percent) are using plan design changes as their primary strategy.


Rate hikes were worse than expected . . .


. . . but employers keep hauling the load


Prescription drug benefits are the top target for those design changes. Nearly 40 percent of respondents said pharmacy costs are the prime mover of medical spending, up from 34 percent last year. As a result, nine out of 10 are using some sort of pharmacy cost control. Tiered benefits have become the rule, with more than half now employing a tiered copay design and another 23 percent relying on a variation that requires plan members to pay more for nonformulary drugs.

Substantial numbers of employers are trying to lasso drug costs with employee cost sharing (38 percent), a pharmaceutical benefits manager (33 percent) or mandatory generic substitution policy (28 percent). A minority have turned to closed formularies (9 percent), mandatory mail order for maintenance drugs (8 percent) and other initiatives like mail-order programs and purchasing coalitions.

Such measures may seem like trying to slay a dragon with a butter knife, but that's the best employers can do given double constraints, Adachi insists: "Their hands are tied when it comes to dealing with the industry, and their hands are tied when it comes to employees."

No race for change

Consequently, while employers may be paddling like mad to stay in place, they are portraits of complacency on the surface. More than 83 percent said they plan to continue purchasing health care as they have in the past.


Slight switches in health care strategy


Among the scant 17 percent considering change, seven out of 10 are thinking about a defined contribution arrangement. Would-be trailblazers are far less enthralled by voucher systems—virtual or not—direct- contracting or other arrangements. None of those options gained more than 20 percent support. Overall, respondents who anticipate moving toward a new purchasing model think they will do so during the next five years. Those favoring a virtual voucher system think the move might take slightly longer.

As for the vast majority of the respondent pool, they're happy to let innovators take the lead. For some, like Joseph Mertel, benefits manager for St. Louis County, Minn., innovation just isn't a realistic option. The county, which cradles the city of Duluth, is heavily unionized. Elected commissioners aren't likely to risk alienating union voters by asking county employees, who are covered by 14 different labor contracts, to swallow a new system. Consequently, the county has begun tinkering with plan design changes. Only a year ago, it asked employees to start making copays—$10 for an office visit and $25 for an emergency room visit—and bumped its prescription coverage from $5 per drug to $7 for formulary and $12 for nonformulary drugs. Such gentle nudges are the county's response to three consecutive years of rate increases in excess of 20 percent.


Harder to engineer savings


Nancy Wallace, benefits coordinator for Omaha-based Alegent Health, a network of hospitals with some 7,500 employees, agrees employee perception and resistance are deterrents to change. "In Omaha, we've got 1.7 percent unemployment. We have 600 unfilled positions. We have union activity in the area." Not exactly prime conditions for testing a new benefits structure that would require more legwork for employees and wouldn't safeguard them against rate increases.

For many employers, the need to stay competitive in the job market is the key reason for maintaining the status quo, says Adachi. "Big changes are disruptive to employees," she points out. "Why would you do something that you know is going to have a negative employee reaction and make you stand out?"

There are other obstacles as well. For multistate employers, a radical shift in purchasing would be hugely expensive and constrained by the coverage options available in various markets, points out Barbara Reising, vice president of human resources for Post-Newsweek Stations Inc., a Hartford, Conn.-based media company with 17,000 employees around the country. Coordinating a companywide shift toward some new purchasing arrangement would be more expensive than the current system of incremental changes and plan design adjustments executed on a market-by-market basis.


Rx costs on the express track


Tiered pharmacy benefits are the emergency brake


Employers not ready to try new routes


Employers say they're also confronted with a lack of alternatives. While her primary concerns revolve around recruitment and retention, Wallace is quick to note that employees would have trouble finding coverage if presented with a voucher or cash and left on their own. "Where would the employees go for coverage?" she asks. "I can't see how it would be beneficial to an employee to ask them to purchase health care on their own when you have insurance carriers charging $600 or $700 a month for private coverage," she says. "Why should I send them out into the cold without a coat on when I can provide them with some protection here?"

All that said, Wallace admits the idea of defined contributions is intriguing. Were market conditions different, she might be more receptive to the idea. "If we could move back to five, six, seven years ago when people were a dime a dozen, you might be able to be a bit more creative in your plans," she says.


Cost sidetracks quality


With demographic and labor forecasts offering no reason for employer optimism, Wallace says the only other factor that might drive her to consider major change would be increased exposure to lawsuits. If employees are allowed to sue their employers for directing them to plans that limit their health care choices, then employers, particularly those that are self-insured, may get out of the coverage business, she says. Under that scenario, employers will have to take an all-or-nothing approach to health care. "It will either be the old way," with employers moving back toward traditional indemnity plans, she says, "or something entirely new."

Unless forced into such action, however, employers intend to keep trudging along the same health benefits track. Cost will continue to outweigh access, choice and employee satisfaction in plan selection, as they try their best to dodge the next inflationary bullet train.


Shelly Reese. Annual managed care survey: Employers are tied to the inflation track. Business and Health 2001;1:38.