Heavy hitters: How the Fortune 500 pick health plans

Frustrated by managed care's inability to continue reducing costs, Fortune 500s step up the pressure.


Heavy hitters:
How the Fortune 500 pick health plans

Frustrated by managed care's inability to continue reducing costs, Fortune 500s step up the pressure.

By Helen Lippman, Contributing Editor

Jump to:Choose article section... Gatekeeping's double-edged sword Relaxing—or removing—restrictions Is health care a commodity? Squeezing in quality A gentle push

The massive migration to managed care is virtually complete, and it did not deliver on the promise of long-term price control. What will America's corporate giants—the companies that are big enough to set the tone of the entire health care market—do to keep coverage affordable?

A comprehensive new study of Fortune 500 companies finds that many are demanding more of health plans. Request for proposals (RFPs) and frequent rebidding, short-term contracts and performance-based risk sharing are among the most widely used tactics. Many are reducing the number of plans they offer to bolster leverage by bringing more covered lives to fewer bargaining tables. Between 1994 and 1999, a new study of Fortune 500 firms finds, more than nine out of 10 dropped more plans than they added. "We were particularly surprised to find that about a third have just one plan," says James Maxwell, a research director at Boston-based JSI Research & Training Institute and a principal author of the report. (See the image below.)



Corporate Health Care Purchasing Among the Fortune 500, sponsored by The Robert Wood Johnson Foundation's new National Health Care Purchasing Institute, provides the first in-depth look at purchasing practices of the largest players. In late 1999 and early 2000, a team from JSI and the Massachusetts Institute of Technology conducted a telephone survey of benefits managers at the Fortune 500s. The researchers interviewed representatives at more than 400 firms, achieving a remarkable 84 percent response rate.

Inevitably, many coping mechanisms revealed by these corporate leaders will be adopted by many other businesses.

Gatekeeping's double-edged sword

The researchers identified three common elements among firms that have been most successful in keeping premiums low. First is sheer size. Second is the embrace of regionalization, which allows a corporation to select the "best" (read: lowest-cost) plan in each local market. Third is enrolling a large portion of workers in aggressively managed plans. POS plans generally fall into that category, along with HMOs, because their financial structure deters most enrollees from venturing outside the gatekeeper network.

The trouble is that big companies also want to be seen as employers of choice, and blatantly pushing employees into plans with restricted access undermines that image.

Forty percent of benefits managers, for instance, reported a rise in employee complaints that paralleled the growth of managed care.

In response, many prefer more subtle moves: Some adjust premium contributions, making workers who choose higher-cost unrestricted plans pay considerably more, for instance. Others have steadily chipped away at overall employer contributions. Nevertheless, more than four in 10 Fortune 500 employees still have unrestricted coverage, with 11 percent enrolled in indemnity plans and 32 percent in PPOs.

Relaxing—or removing—restrictions

Despite earlier predictions that most employees would end up in HMOs, enrollment in tightly managed plans seems unlikely to swell. It's true that HMOs have the largest share of total enrollment, with 36 percent, and POS plans have another 21 percent, but Maxwell and co-author Peter Temin, an MIT economics professor, point out that migration from indemnity plans to managed care was "largely complete" by 1999. Today, Ralph Kimmich, benefits director at Southwest Airlines, points out, some health plans are easing strict gatekeeping provisions for fear of liability and patient protection legislation.

Employers often worry, too. Some have worked closely with managed care plans to resolve problems that provoke employee complaints—or to redesign or replace restrictive plans with more user-friendly options.

Circuit City, based in Richmond, Va., is a case in point. "Three years ago, we eliminated the primary care gatekeeping model and went straight to a PPO because employees kept telling us they were unable to access the services they needed," says Gary Krueger, director of personnel administration and benefits. "People are happier now," with the vast majority of Circuit City's 23,000 employees and their dependents enrolled.

Did costs go up? "We've been going with the trend or just below it," Krueger reports. There has been one problem, though: When the gatekeeper disappeared, office visits shot up 40 percent.

Rather than restore restrictions, Circuit City recently upped the copay 33 percent—to a still affordable $20 per visit. "We want people to be able to get the care they need," Krueger explains, "but we hope shifting costs will result in more prudent purchasing behavior. Getting them to think twice, to take an aspirin before heading to the doctor for an early morning headache, is the kind of positive behavioral impact we're aiming for."

Is health care a commodity?

Influencing health plans takes a different tack, starting with the use of aggressive purchasing strategies. Between 1994 and 1999, the study shows, two out of three Fortune 500 firms used RFPs to select health carriers in new regions. An equal number used competitive bids to find new managed care plans in existing markets. What's more, 60 percent rebid all or most plans.

The use of RFPs in health care purchasing is fairly new, Maxwell notes—irrelevant in a fee-for-service world and looked on with askance in the early days of managed care. When a benefits manager at a major company tried to institute an RFP process in the early '90s, Maxwell recalls, the board rejected the idea, arguing that health care is not a commodity. Some years later, however, a major purchaser saw its premiums drop after announcing that its business would go out to bid.

Nearly two thirds of the Fortune 500s characterized their relationship with health suppliers as long-term partnerships. Yet more than half use one-year contracts, and nine of 10 use RFPs for some portion of their business. The RFP process, according to Maxwell and Temin, explicitly compares suppliers' products and prices and alerts current vendors that their relationship has no long-term guarantee.

"A very small number of employers are truly partnering," Maxwell observes. "Most are bidding and signing relatively short-term contracts. Some are purchasing health care as if they're buying pencils." Yet many have little desire to switch suppliers. "The process can be quite painful for a company, with significant monetary and human costs," he says.

Putting a portion of administrative fees at risk based on plan performance is another common tactic, used by seven in 10 of the Fortune 500s. An equal number offer a mix of self-insured and fully insured products. Despite the relief from state mandates that self-insuring affords, just one in four firms do so exclusively. The use of HMOs as regional, fully insured products makes them difficult to manage.

Fifty-eight percent of the Fortune 500s contract with plans both nationally and regionally, and 13 percent only purchase regionally. The remaining 29 percent contract only with national carriers. Given the survey's finding that regional purchasing is a key cost saver, they might be wise to reconsider.

Squeezing in quality

Health care quality may not be first on many employers' minds. But Margaret O'Kane, president of the National Committee for Quality Assurance, asserts, "The employer community is sending a message that quality really matters."

More than half of firms surveyed require their plans to have NCQA accreditation, and considerably more use quality criteria in carrier selection. (See the image below.)



When asked what's the most useful source of quality information, though, fewer than one in 10 points to accreditation, and half as many look to NCQA's Health Plan Employer Data and Information Set (HEDIS) measures. Consultants, identified by more than half of those surveyed, top the list. Consumer satisfaction follows, singled out by nearly one in five companies.

Customer service is the most widely used "quality" requirement in Fortune 500 contracts. More than 60 percent have requirements for provider access as well. In contrast, only a third insist on annual improvements in clinical quality or disseminate quality information to their employees.

Clearly, attention to quality has a way to go. "The biggest companies are collecting the data and incorporating it into their contracting and bidding processes and setting standards for access and customer service," Maxwell and Temin report. "Others have not caught on to the importance of doing the same with clinical care."

"The key question," according to Kevin B. Piper, director of the National Health Care Purchasing Institute, "is whether the business community will reduce costs by compromising the quality of care or devise innovative solutions that improve quality while also lowering costs."

Employers' willingness to pay more for quality largely depends on how they understand the connection between overall health and productivity. With firms increasingly likely to rely on total-compensation strategies that factor in health benefits, direct medical costs and indirect costs like absenteeism, disability and productivity loss, that connection would seem to be firmly established. Yet many benefits managers are unconvinced.

As for health benefits' value in boosting productivity, employers rate it an average of 4.3 on a scale of one to seven. Compare that to the five-plus rating they give health benefits' value in attracting and retaining employees. While some employers are convinced good health positively affects worker output, Maxwell says, others think all they need is basic coverage to be competitive.

Employers truly interested in the quality of care their health plans provide might look to General Motors as a model. The country's largest private health care purchaser, with 1.25 million lives, GM contracts with more than 130 HMOs alone, explains Bruce Bradley, director for managed care plans. "And we use a very extensive data collection effort on quality measures."

Among the measures reviewed are NCQA accreditation, HEDIS, CAHPS (Consumer Assessment of Health Plans) and responses to the company's widely respected request for information that addresses clinical and preventive care. GM uses a complex point system based on these findings as well as financial performance measures and comparisons with national vs. local benchmarks. Site visit findings may be factored in as well. Then, says Bradley, "we weigh them all and rank plans all across the country from best to worst."

A gentle push

General Motors categorizes health plans in a range from benchmark to poor, with four levels in between. GM gives employees and retirees "report cards" and, as an incentive to switch to the best-performing plans, sets smaller employer contributions for joining the better plans.

Quality information alone won't steer workers toward the best care, Bradley asserts. A combination of data and money is needed.

"We've seen massive movement from poorest to best," he says. That's not surprising, considering the differentials. The employee contribution for family coverage in an indemnity plan ($70 a month) is double the $35 cost for a benchmark HMO with a benefits package that's nearly 25 percent richer. As quality scores drop, contributions rise—in large increments. Family coverage in a plan with a fair rating, for instance, costs an employee $173 a month.

The pricing strategy mirrors Bradley's preference for HMOs. "The evidence is unequivocal," he says. "Good HMOs easily outperform an indemnity plan. And poor-performing HMOs are nothing more than a reflection of the indemnity world."

GM's report cards, coupled with its incentives, do more than boost the quality of care its workers receive. The automaker also distributes the quality reports to the plans and to other purchasers. That often leads to better service for all enrollees as high-scoring plans strive to maintain their level of care and low scorers face pressure to improve. GM eventually drops poor performers. Half the companies surveyed have done the same.

Few Fortune 500s tie employee contribution to quality ratings, though: A mere 7 percent have adopted the practice. But three times as many Fortune 100 firms use it.

Many corporate leaders cannot set prices based on quality because they don't have sophisticated quality data. Most use a cost basis instead. One Fortune 500 firm in four has a flat-dollar system, typically using its lowest-priced plan to set the premium contribution and leaving those who opt for richer benefits to pay the difference. Two out of three use percentages instead, equally divided between a flat rate and a range of percentages. The aim of most pricing strategies is to limit employer contributions and hand workers the burden for the choices they make.

Diminishing employer contributions nudge workers into lower-priced plans as well. But overall, the decline doesn't amount to much. From 1994 to 1999, the share of premiums Fortune 500s paid dropped an average of 2.5 percentage points, to just under 83 percent. But the averages "mask a great deal of variation and movement among individual firms," Maxwell and Temin emphasize.

During that five-year period, for example, the portion of corporate leaders picking up the total tab shrank from one in four to less than one in 10. Meanwhile, the ratio of Fortune 500s paying less than 80 percent of the premium increased from one in five to nearly one in three.

What's next? Even the benefits managers at these corporate giants aren't sure. Discouraged by managed care's inability to slow rapidly escalating health care costs and perhaps stuck in the midst of a slow economy, they're scrambling—like employers everywhere—for solutions.


Helen Lippman. Heavy hitters: How the Fortune 500 pick health plans. Business and Health 2001;6:30.