The cost of employee health coverage continues to grow faster than inflation,1 putting additional economic pressure on employers and raising critical questions about how best to provide health benefits while ensuring optimal employee health and productivity. As a result, employers have grown increasingly important in benefit design decisions—decisions that ultimately determine beneficiaries' access to medical products and services. At the same time, employers have remained hesitant to pass too many costs to employees, fearing that high out-of-pocket costs will translate into reduced adherence and, ultimately, deteriorating employee health and productivity.
Despite slowing significantly since 2003, premium growth still outpaces inflation and growth in workers' earnings, placing significant strain on employers and on insurers to contain costs while maintaining quality.1 The consequences of this steady growth in premiums have been predictable: the number of employers offering health benefits is steadily declining. According to a 2007 survey from the Kaiser Family Foundation, 3% of companies reported that they would drop health coverage for their employees and another 5% said they would limit coverage within the next year.2
Health plan financial performance has also deteriorated, reflecting the so-called soft phase of the underwriting cycle, adverse selection, and slow enrollment growth.3,4 Today, the relationship between insurers and employers plays a critical role in decisions about benefit design, cost-sharing, and even the coverage of individual products and services. Most benefit design and cost-containment strategies have had limited, if any, impact on hospital costs, which remain the single largest component of overall healthcare costs.1
This present research was conducted to understand the evolving market for health benefits, the respective roles of insurers and employers in benefit design decisions, and the implications for patient access to care. Key questions included:
- Which external and internal factors influence employers' decisions on benefit design? How do they differ from those that affect insurers' decisions?
- How will changes in benefit design affect overall prescription drug utilization and category-specific product utilization?
- What are the successes and barriers to adoption of "innovative" benefit designs?
In addition, the study sought to track and understand key market events, such as changes in employersponsored healthcare benefits and patient out-of-pocket costs, management trends for certain therapeutic categories and products, and developments in benefit design implementation.
In the spring of 2008, the Zitter Group conducted a large national study of the insurer–employer relationship to understand how these 2 stakeholders interact in the creation of healthcare benefit design. The 2-arm study consisted of concurrent web-based quantitative surveys with commercial managed care executives, large employers, and major employer benefits consultants, designed to provide a richly detailed snapshot of trends in employer-sponsored healthcare coverage. Each survey had approximately 80 questions and required 1 hour to complete. Respondents received an honorarium for their participation.
The managed care arm included 102 commercial managed care decision makers from large national and important regional and independent plans. The employer arm included 96 large employers from a variety of industries across the United States and 11 major employee benefits consultants. The Table lists expanded sample demographics.
Participants in both groups reported their healthcare management priorities, perceptions of benefit designs and strategies, and involvement in benefit design decision-making and category/product management. Both groups predominantly answered the same questions to compare responses between groups. Where applicable, data were segmented by industry and company/plan size to provide greater insight.
Despite having varying ideas on specific healthcare benefit design strategies, employers and insurers assign similar weights to the importance of cost, quality, and access when making benefit design decisions. For both groups, the importance assigned to cost is 1.5 times higher in value than healthcare access or healthcare quality (Figure 1). Throughout the survey both groups cited access and quality concerns, but in the current environment of steadily rising cost growth, the importance assigned to cost takes on greater overall significance.
According to the survey results, 64.7% of insurers and 49.5% of employers do not expect slower premium growth rates to be sustainable and, in fact, more than 50% of employers and 75% of insurers report having increased premiums and deductibles during the past 12 months (Figure 2). Cost increases are not restricted to premiums and deductibles. A majority of insurers have also increased cost-sharing for prescription drugs and physician office visits. In addition, 44.1% of insurers and 30.8% of employers have increased patient cost-sharing for inpatient hospital stays. When asked to assess their satisfaction with increased cost-sharing, both groups reported high levels of satisfaction, a view consistent with their stated plans to continue with this strategy (Figure 3).
Both employers and insurers believe that member cost-sharing could be increased in all categories surveyed, without negatively affecting patient outcomes. As illustrated in Figure 4, a majority of stakeholders believe that premiums could be increased up to 30% without reducing demand for necessary healthcare, with similar results found when surveyed about increases in deductibles. Furthermore, Figure 5 indicates that there is ample room to increase member cost-sharing for office visits without reducing necessary demand.
However, not all cost-sharing is created equal. As shown in Figure 6, employers and insurers believe that out-of-pocket costs for prescription drugs will have varying degrees of impact on behavior, depending on the therapeutic category. For example, employers and insurers believe that the member threshold for absorbing out-of-pocket costs without foregoing necessary care is approximately 3 to 4 times higher for cancer care than for hyperlipidemia or depression. Of note, current levels of prescription drug cost-sharing are well below the threshold at which insurers and employers believe patients would forego necessary care for all therapeutic categories. Insurers report an average costsharing level of $27.50 for all prescription drugs, and employers report a level of $25.36. Depending on the therapeutic category, respondents believe that this number may increase to between $50 and $350 before suppressing demand for medically necessary care.
Stakeholder interest in increased cost-sharing is paired with the belief that additional cost-sharing will not have a substantial effect on patient outcomes. Figure 7 shows that a majority of employers and more than two thirds of insurers believe that increasing costsharing for physician visits, inpatient hospitalization, and prescription drugs will not affect patient outcomes; similar sentiment holds for increasing premiums and deductibles.
As insurance premiums rise, the risk of adverse selection—the phenomenon in which healthier members exit the risk pool—grows. As healthier members exit the risk pool, the per-member costs of those remaining in the pool rise further, which, in turn, leads others to leave the risk pool.5 Both employers and insurers believe that increases in premiums and deductibles of between 0% and 30% will trigger adverse selection. However, the subpopulations in the survey exhibit important differences about the point at which cost-shifting will trigger undesirable consequences for the insurance pool (Figure 8):
- 46.7% of employers and 43.1% of insurers believe that a premium increase of 10% or less will result in adverse selection; 43.9% of employers and 39.2% of insurers believe that an increase in the deductible of 10% or less will have negative consequences
- Roughly comparable percentages of both subpopulations believe that there is more room to increase member/employee costs, by up to 30%, before adverse selection in the insurance risk pool becomes a problem.
Although employers in the survey report greater overall concern than insurers for indirect cost drivers, such as productivity and presenteeism (Figure 9), their ability to manage, or even track, indicators other than direct healthcare and drug costs may impede their ability to optimize overall workforce performance. As a consequence—and given insurers' comparatively more narrow focus on direct cost drivers—healthcare discussions between the 2 groups tend to focus more on costs than on outcomes. Both groups appear to default to various forms of cost-sharing as the only tool that they can agree has any impact on rising healthcare costs.
Both groups are pessimistic about the ability to sustain the recent slowdown in premium growth rates. Payers identify several factors that will challenge their ability to hold premium growth rates down6:
- Consistent with their concerns about rising specialty pharmacy costs, payers express significant concerns about new technologies and their inability to manage their utilization (a factor that has contributed to the growth of biologics overall7)
- An aging population, particularly when accompanied by a significant chronic disease burden, represents another key factor
- Inefficient healthcare delivery systems that insurers feel they have limited ability to improve.
Although employers express more confidence than insurers in the durability of slower premium growth, nearly half of employers believe that the current slowdown cannot be sustained. One employer participant opined that anyone who thinks that the current situation will continue is "indulging in wishful thinking." This implicit acknowledgment of the ineffectiveness of increasing cost-sharing should spur innovation. It appears from this research, however, that this will not be happening in the near-term.
This research also highlights a lack of clear communication between employers and insurers. Insurers believe that employers change benefit designs every 12 to 18 months; employers state they only change them as needed.6 Often programs that focus on improving health outcomes and consequent down-the-line healthcare costs require a longer time frame to show return on investment.8
Working within the short time frame insurers believe employers have set, opportunities for cost-savings from disease management programs or innovative benefit designs intended to improve health outcomes are limited. Both groups acknowledge that there are benefit designs that will improve health outcomes (Figure 7), but insurers do not believe that these costsavings can be realized within the 12- to 18-month deadline set by their customers, and they refrain from presenting or explaining the benefits of more innovative benefit designs to employers. Insurers believe that employers are not receptive to these types of programs.
Employers either are not knowledgeable enough or lack the resources to investigate these options on their own, so they do not push insurers to innovate beyond the traditional healthcare benefit designs. This has created a marketplace in which employers remain confused about innovative options and insurers have limited business reasons to invest in new benefit designs. In the absence of fundamental changes in benefit design, patient cost-sharing becomes, almost by default, a primary point of stakeholder focus.
The survey results suggest few reasons for optimism. In the absence of a strategy widely embraced by insurers and employers, no dramatic changes in benefit design appear on the horizon. Both groups will continue to rely on increasing cost-shifting to patients to keep premium costs to businesses under control.
In addition, given the potential downstream risks associated with continued cost-shifting and an aging population, hospital costs will likely increase. More fundamentally, the word "no" is still too rarely heard in US healthcare, leading to upwardly spiraling costs for technically impressive interventions and yielding only modest benefits or affecting only small populations.
Finally, although the threat of government intervention may yet induce downward pressure on costs, the fundamentals of access, quality, and cost have deteriorated so significantly that it may be too late for government intervention to have an impact.
The US government may be the only party in the healthcare debate with the power to affect meaningful change as well as the only party that cannot afford to sit and wait for a better option. As the number of underinsured and uninsured grows in the United States, policymakers are very aware that the government may eventually have to pick up the tab. This may lead them to make a decision that everyone else will have to live with. The question becomes, is that what we really want? And if not, who will take the first step toward true change?
1. Blue Cross Blue Shield Association. Medical cost reference guide: facts and trends driving healthcare costs, quality and access. 2008. www.bcbs.com/blueresources/mcrg. Accessed September 18, 2008.
2. Kaiser Family Foundation and Health Research and Educational Trust. Employer health benefits: 2007 annual survey. 2007. www.kff.org/insurance/7672/upload/76723.pdf. Accessed September 18, 2008.
3. Grossman JM, Ginsberg PB. As the health insurance underwriting cycle turns: what next? Health Aff (Millwood). 2004;23:91-102.
4. S&P Credit Research. Midyear 2008 US Health Insurance Outlook: In 2008, Managed Care Could Need A Little Care Itself. New York, NY: Standard & Poors; May 27, 2008.
5. Chandler SJ. Adverse selection. Wolfram Demonstrations Project. http://demonstrations.wolfram.com/AdverseSelection/. Accessed September 18, 2008.
6. The Zitter Group. The benefit design index, spring 2008. Data on file at the Zitter Group.
7. The Zitter Group. The managed care injectables index, fall 2007. Data on file at the Zitter Group.
8. Wilson TW. Evaluating ROI in state disease management programs. State Coverage Initiate Issue Brief. 2003;4:1-6.