With Health Care Costs Skyrocketing, What's an Employer to Do?

THE ANNUAL MANAGED CARE SURVEY With Health Care Costs Skyrocketing, What's an Employer to Do? The latest Deloitte & Touche/Business & Health Employer Health Care Strategy Survey sums up concerns, strategies and plan characteristics from 2001. By John Erb True strategic decisions regarding the architecture of employee sponsored medical benefits programs are quite rare. In the past 25 years, most employers have made only one such decision: the introduction of managed care. Yet, not all of them made even that fundamental change. The majority of America's 2001 workforce remains firmly in the indemnity plan world, either in PPOs or non-network plans. The return of grinding inflation in the cost of health care has prompted the call for a new form of employer-sponsored health insurance, i.e., the "consumer-driven" or "defined contribution" model. The common characteristic of these "new" models is that the mechanism used to lower employer spending is precisely to increase employee spending. At the end of the day, this strategy is no different from that used by most employers today and, to be truthful, no different from the strategy employed 25 years ago. Few employees, whether in managed or non-managed care plans, ever approach annual out-of-pocket maximums of $1,500$2,000. The cost of health care for the average consumer has been largely unchanged since the 1980s, while the cost to the average employer has skyrocketed. Clearly, there is a mandate for employers to change that situation. The next five years will witness significant increases in consumer spending on health care. Whether this will be brought about by defined contribution-like health care plans or by a steady increase in employee contributions and copayments remains to be seen. Most respondents of this year's Employer Health Care Strategy Survey are taking the latter approach. Nonetheless, budgetary constraints are forcing most companies to at least consider how much change is appropriate now and how much can wait for future events to dictate. Health insurers face the same quandary: incremental change or sweeping redesign of their core products? Incrementalists are introducing tiered copayment plans, either by type of service or by provider. Others have championed "benefit banks" and defined contribution schemes. Some have abandoned managed care altogether, while others have employed more sophisticated managed care tools such as disease management, demand management and consumer education. Clearly, all the stakeholders are struggling to produce the "right" answer for employers, providers, insurers and consumers. The fact that no consensus has arisen either within or among these constituencies points to a protracted change in strategic thinking regarding health care financing in the foreseeable future. What are your reasons for offering managed care? 2001 What do you think will be your predominant health plan model in three to five years? Summary Findings This year's respondents projected a 15 percent increase for total medical plan costs (excluding dental) by the close of 2001, bringing the average to $5,001 per employee, and another 15 percent increase in 2002. If this trend continues, 2003 costs could exceed $6,000 per employee. When measured by plan type (HMO, PPO, POS), there was no difference in the predicted trends for 2002 and 2003. As expected, funding arrangements vary by the type of medical plan offered. Three quarters of employers that offer an HMO plan do so on a fully insured basis. By contrast, 92 percent partially or completely self-insure their indemnity plans, and 74 percent do the same with their PPO plans. Employers that offer POS plans were almost evenly split: 46 percent fully insured, while 54 percent partially or completely self-insure. Counting costs Again this year, cost was the No. 1 factor driving the respondents' health care strategy in 2001. It was cited by 79 percent of respondents compared with an average 62 percent in 1999 and 2000. No single cause of rising health care costs was identified by a majority of respondents. Thirty-one percent said rising prescription drug costs had the greatest impact on their medical programs in 2001, down from 36 percent in 2000. Twenty-one percent cited increased utilization of the benefits vs. 18 percent a year earlier. Catastrophic claims, rich plan design and an aging workforce were among the other factors cited. Cost was ranked the most important criteria in the health plan selection, followed by access to network providers and employee/patient satisfaction. National accreditation, such as by NCQA or URAC, ranked least important. The pattern is little changed since the survey first asked the question in 1998. A change of plans Plan design changes were the most common employer strategy for controlling costs. Fifty-two percent of respondents increased deductibles, copayments and coinsurance in 2001 compared to 47 percent in 2000. Only one in five increased employee contributions as a primary strategy, while 15 percent contracted with lower-cost plans or administrators through competitive bidding. Nine percent reported that their primary strategy was assisting employees in becoming better health care consumers, while a mere 2 percent have opted to reduce health plan choices. Indicate your primary strategy for controlling health care costs today (check only one). Three quarters of respondents are not considering any dramatic changes in their approach to purchasing health care benefits. It is interesting to note that only 12 percent of very large employers those with 10,000 or more employees were considering dramatic changes in their purchasing strategies. Smaller employers (those with fewer than 1,000 employees) were much more likely (32 percent) to be considering dramatic changes. Which plans work best? Attitudes regarding managed care as an effective health care delivery system varied greatly. Only 14 percent of respondents believe HMOs are effective and encourage their employees to enroll in these plans. Almost one-third (30 percent) believes HMOs are effective in controlling costs, but they neither encourage nor discourage employees from enrolling. By contrast, 21 percent do not believe that HMOs are effective and do not offer these plans. Thirteen percent believe HMOs were effective in controlling costs at one time but are no longer. Three out of five survey respondents indicated that PPO plans offer the most effective approach for managing costs and maintaining quality of care, and one in five named HMO plans. POS plans were cited by 14 percent and indemnity plans by only 3 percent. When compared to last year's responses, PPO plans grew in popularity from 48 to 61 percent, while HMO popularity fell from 31 to 22 percent, and POS popularity fell from 18 to 14 percent. Very large employers with 10,000 or more employees were almost equally split with regard to the effectiveness of PPO (45 percent) and HMO (42 percent) plans. Employers indicated that the top three cost-control features of managed care plans were network discounts (cited by 92 percent), drug formularies and preventive care/wellness. The least significant cost controls were disease management, concurrent review/discharge planning, and provider profiling. Controlling choices Almost half of respondents indicated that mergers and consolidation among insurers and managed care companies have not reduced their range of choices. Roughly a quarter stated that market consolidation has reduced choices and made the remaining vendors less competitive, while 14 percent reported that there is still a satisfactory level of competition despite reduced choices. Slightly more than half of the survey respondents do not foresee a change in the employee's role and influence over health plans. About one quarter believe that employees will be more involved in self-care and care management, but only 2 percent predicted future employee involvement in vendor selection. Three out of four respondents are not considering a health plan that allows employees to customize their coverage. About a third of the respondents use carve-out services, and use is closely related to size of the workforce. For example, only 22 percent of employers with fewer than 1,000 employees carve out one or more components of their medical plan, compared to 77 percent of those with 10,000 or more employees. Employers more likely to carve out pharmacy benefits were the most common carve-out at 25 percent, with mental health/substance abuse second at 17 percent. Prescription drugs Prescription drug costs averaged $600 per employee in 2000 and exceeded $700 in 2001. The most common response to the cost spiral used by 57 percent of employers is increased employee cost sharing via larger copayments, coinsurance and deductibles. Forty-two percent of respondents use a closed drug formulary with benefits for non-formulary drugs, and 38 percent limit the quantity of units allowed. About 34 percent have carved out the management of their pharmacy benefit. Some 28 percent require generic substitution (unchanged from 2000), while only 11 percent require the use of mail order for maintenance drugs. The most common copayment structure for prescription drug benefits has three tiers (48 percent of respondents), followed closely by a two-tier copayment structure (40 percent). The average for third-tier, non-formulary brands is $31. Increasing copayments is by far the most common change being considered for the future, regardless of the plan type. Only 13 percent of respondents are exploring disease management programs with pharmaceutical companies. Medication compliance programs, outcome studies and direct contracting are all at 7 percent or less. Guaranteeing performance Nearly one-third of survey respondents reported they had performance guarantees in effect with all or some of their health plans. As expected, the employer's ability to negotiate performance guarantees is a function of employer size. Where performance guarantees exist, they are most prevalent in PPOs at 22 percent, and less than half as common among HMOs, POS plans and indemnity plans. Monetary penalties for failure to achieve guaranteed performance are common. Employers that self-insure place the vendor's administrative fees at risk, while fully insured employers assess a percentage of their plan's premiums. Fewer respondents imposed standards and penalties for performance related to the quality of service and/or medical care. Standards related to client and member satisfaction were the most common (16 and 15 percent respectively), followed by network access (11 percent), and access to care (9 percent). Over one-third of survey respondents (39 percent) are using or considering using electronic procurement processes (e-RFPs) in selecting a health plan vendor. Three quarters of employers outsource at least one of their health and welfare benefit programs or services, most often Employee Assistance Programs (65 percent), followed by flexible spending account administration (60 percent), COBRA administration (51 percent) and HIPAA administration (48 percent). Click here for the complete Deloitte & Touche/Business & Health Employer Health Care Strategy Survey 2001. John Erb, a consultant on health benefit issues to large public and private sector employers, serves as chief analysist of the Deloitte & Touche survey on Employer Health Care Strategy. He can be reached at jerb@deloitte.com. About the Survey Deloitte & Touche, in conjunction with the Business & Health Institute, conducts an annual survey of the health benefit strategies currently in use by U.S. employers. Data were collected in the fall/winter of 2001 via hardcopy and Web-based questionnaires. The majority of respondents completed the questionnaire after the events of September 11. About 70 percent had 500 or more employees, and the respondents were distributed across all regions and industry groups. The results are not presented as statistically significant or projectable to the entire population of U.S. employers. Rather, the study provides a snapshot of employer concerns, strategies and plan characteristics in 2001. While the results should be viewed as the experiences of the respondents only, they do provide a contemporary view of current benefits approaches among many of the nation's leading public and private sector organizations. Click below for previous Deloitte & Touche/Business & Health surveys: Employers are tied to the inflation track. (January 2001) Can employers halt the price hikes? (December 1999) John Erb. With Health Care Costs Skyrocketing, What's an Employer to Do?. Business and Health 2002;8.