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Health Tracking

TRENDS

Corporate Health Care Purchasing Among Fortune 500 Firms

This paper presents findings from a new study of health care purchasing among the largest U.S. corporations. This is the first study to concentrate on the country’s very largest companies: the Fortune 500. It is also uniquely oriented toward the purchasing strategies and practices used by these firms in providing health insurance for their workers. The focus here is not only on the types of benefits purchased by firms, but also on the relationships among firms and their health insurance carriers and health care providers. The companies’ selection of carriers, negotiation of premium rates, and quality management merit further investigation.

Understanding health care purchasing among Fortune 500 employers is important for many reasons. These organizations are central to the country’s economy, and they provide coverage for more than twenty million employees and tens of millions more dependents and retirees.¹ Many Fortune 500 companies are also influential models for other purchasers of health care. Small and medium-size employers, as well as public purchasers, have already adopted some of the methods introduced by their larger counterparts. ² Finally, through their purchasing practices, large companies are driving downstream reform in the health care system.

With the managed care revolution, large employers have become much more discriminating purchasers of health benefits. In this paper we describe three key characteristics of health care purchasing. First, large companies are relying on competitive bidding and associated tactics as the dominant elements in their purchasing strategy. As Robert Galvin of General Electric recently stated, "Rather than working collegially with HMOs, employers have used some of the rough negotiating techniques that they learned through decades of purchasing in brutal, competitive environments." ³ Second, firms have developed explicit strategies to promote the shift to managed care. For most firms this includes a modest reduction in employer contribution that gives employees a financial incentive to move from indemnity to managed care. Third, the average firm has not expended as many resources on the quality dimension of purchasing as on price innovations. While the Fortune 500 firms are collecting large amounts of quality information, only a few have begun using it aggressively in purchasing decisions. Overall, purchasing of health benefits, as observed among the Fortune 500, relies upon many of the same processes used by companies to purchase other inputs into their business.

This study builds directly on our prior studies of corporate health purchasing. From 1994 to 1996 we conducted an in-depth study of health care purchasing practices at fourteen large employers who were front-runners in the move to managed care.⁴ In an earlier report we described how these large firms adapted purchasing strategies from their general procurement for use in health purchasing. ⁵ To discover whether the lessons from this pilot study could be generalized to large companies as a whole, we undertook the comprehensive study reported here.

Data And Methods

 
During the first half of 2000 we conducted a telephone survey of senior health benefits and human resources executives at Fortune 500 companies about their corporate health care purchasing practices. In addition, we obtained corporate demographic and financial information from Compustat, a commercially available database. The primary research instrument consisted of a thirty-five-minute telephone survey targeted toward senior benefits managers in each firm. We conducted supplementary interviews with managers at thirty-two companies as a follow-up to the telephone survey.⁶

Our response rate was 84 percent; we interviewed 408 companies out of 489. Ten Fortune 500 companies had been involved in mergers and acquisitions, so they no longer had unique benefits policies. Rather than selecting a random sample, we conducted the telephone survey with officials at firms in the complete 1999 Fortune 500 list, which consists of the 500 publicly traded U.S.-based firms with the largest 1998 revenues.⁷ In recent years the composition of this list has changed to reflect the continued growth of the service and high-tech sectors.

Surveyed Fortune 500 companies ranged in size from 1,495 to 204,250 employees (median, 16,730). Virtually all full-time employees were reported to be eligible for health benefits, although there was a much wider range in eligibility for the part-time workforce. Overall, only 47 percent of a total reported 2.5 million part-time employees of the Fortune 500 were eligible to receive some form of employer health insurance; in contrast, 99 percent of full-time employees were eligible for health benefits.

We typically interviewed the most senior official responsible for health benefits, supervisors who were responsible for all compensation and benefits including health, or the vice-president of human resources. The titles of these individuals often were Director of Health Benefits, Director of Compensation, or Vice-President of Human Resources.

Measures. Because of the lack of comparable questionnaires, we could not use many questions from other surveys. We did draw upon a small number of questions (for example, on types of health plans and employer contributions) from the Robert-Wood Johnson Foundation’s Employer Health Insurance Survey’s national sample of establishments and from similar surveys of large companies.⁸

To examine changes in coverage over time, we asked respondents about current practices and about those from five years ago (1994). The five-year period was decided upon after extensive pretests. We asked companies to respond for a standard window of time, such as the 1999 calendar year. Since companies differed in open enrollment periods and fiscal years, some of the reported 1999 figures may be for twelve-month periods that extend forward into 2000 or back into 1998. We do not believe that this influences the accuracy of the overall results.

We asked about companies’ purchasing of health "carriers" rather than managed care products or plans. Carriers refer to companies like Aetna, CIGNA, and Kaiser Permanente that provide different services such as health maintenance organization (HMO), preferred provider organization (PPO), and point-of service (POS) plans. The focus on carriers rather than plans reflects this paper’s emphasis on vendor relationships rather than benefit design. To standardize responses, we asked coverage questions about individual rates rather than family or dependent coverage. We felt that the collection of information on the latter, although useful, was too time-consuming for a telephone survey with such high level corporate executives.

To document employee enrollment by plan type, we asked respondents to estimate percentages of covered employees enrolled in four types of health plans: traditional indemnity, PPO, POS, and/or HMO. We asked respondents to estimate the company’s average percentage contribution to health care premiums for its individual (single) employees. We asked the question for both last year and five years ago.

We looked at studies of general purchasing for questions on the use of request-for proposal (RFP) bidding. Since we found no suitable questions, we used our pretest interviews to investigate the different ways in which companies use RFP bidding for health purchasing. We asked about adding new carriers in a region, new managed care products, or other components of health benefits (such as mental health or drug coverage).

Following the management literature, we asked specific questions about quality measurement and management. Many companies define quality broadly, using the term to describe customer service, clinical quality, improvements in provider access, and disease management/wellness programs. We asked about quality as a formal criterion in carrier selection and adapted a question from the Foster Higgins health benefits survey about requirements for National Committee for Quality Assurance (NCQA) accreditation.⁹ We asked about the collection of different types of quality information and its dissemination to employees.¹⁰ We also drafted original questions about the volume of complaints received by the company (as compared with five years ago) and their perception of employees’ satisfaction with health care.

Finally, we asked about the average annual percentage change in premium costs last year and since 1994. Because of concerns about confidentiality and accurate recall in a telephone interview, we did not ask for the actual dollar amount of premiums. Also, it was clear from the pretests that many senior-level human resources and benefits executives would not have been able to estimate average premiums across their company. Based on pretest results, we asked respondents to estimate premium changes within one of five ranges (decline, increase less than 2 percent, increase 2–5 percent, increase 6–8 percent, increase over 8 percent).

Study Results

Top Data And Methods Study Results Conclusions NOTES

 
Competitive bidding. To ease the transition to managed care, large employers adopted new purchasing practices for contracting with health carriers. Competitive bidding is one of the most important of these purchasing practices. Prior to the managed care revolution, the competitive bidding process typically was not used to purchase indemnity coverage. Our results indicate that it is now frequently used among Fortune 500 companies for health carrier selection and management. Competitive bidding refers to the process whereby companies solicit bids from competing carriers to choose the most cost-effective. It also involves an ongoing process of monitoring compliance with performance standards. Companies initiate this process when they formally issue an RFP, an extensive document often formulated with the assistance of consultants.¹¹ It includes specifications for the levels of coverage and particular services to be purchased, and firms also may request detailed provider access and quality data. Carriers may spend many months compiling their responses, which companies evaluate and compare before beginning aggressive in-person price negotiations in which consultants again play a key role.

The bidding process is designed to foster price competition in the selection of carriers and in subsequent contract renewals. Nearly all Fortune 500 employers we surveyed reported using bidding in their health purchasing (Exhibit 1). Firms use bidding to obtain leverage over contracting carriers, attaining the lowest possible price for a given amount of carrier quality. The competitive bidding process is often accompanied by short-term contracts, usually one year in length, between companies and their carriers.¹² The bidding process is used primarily to exert price pressures on carriers, not as a method of replacing them. Fortune 500 companies have also been reducing the number of carriers offered to employees over the past five years. Ninety-three percent reduced the number of contracting carriers; not a single company has added more carriers than it dropped. In our supplementary interviews, corporate executives often suggested that dropping carriers is an effective method of curtailing the rate of premium increases.

Financial incentives. The use of financial incentives was one of the most frequently used methods to encourage employees’ price-sensitivity and the migration to managed care. For both 1994 and 1999, employer contributions largely ranged from 60 percent to 100 percent of premiums; however, there was a general but gradual downward shift in employer premium contributions over time. Specifically, there was a 13 percent drop in companies paying more than 90 percent, and the percentage of companies paying 100 percent was cut in half from 1994 to 1999 (16 percent to 8 percent). Additionally, in 1994 only about 20 percent of firms set contribution levels between 60 and 80 percent; by 1999 almost one third of the sample limited their contributions to this lower range (Exhibit 2).¹³

View larger version (9K): [in this window] [in a new window] EXHIBIT 2 Company Contributions To Health Insurance Coverage, Among Fortune 500 Firms, 1994 And 1999

Use of quality information. The move to managed care led companies to rethink quality as well as price. As shown in Exhibit 3, 83 percent of Fortune 500 firms reported that they considered quality in the selection of health carriers, yet just over half of companies required all of their plans to be NCQA accredited. This is somewhat surprising, since NCQA accreditation has become standard for large carriers throughout the country—more than three-quarters of Americans enrolled in HMOs are in NCQA-reviewed plans.¹⁴

Large employers have been leaders in quality measurement. The vast majority of companies routinely collected information about health care quality, including NCQA status, the results of Health Plan Employer Data and Information Set (HEDIS) measures, and data on customer satisfaction. These quality measurements focused more on employee satisfaction and customer service than on clinical quality (Exhibit 3). Data from consultants were collected by a large majority of firms, and more than half reported the use of consumer satisfaction surveys and HEDIS measures. A much smaller percentage of companies disseminated quality and customer satisfaction data to their employees. This relatively low rate of dissemination is important. Although employees are asked to bear increasing responsibilities in the selection and financing of their health benefits, they often lack adequate information to guide their decision making.

While most companies currently emphasize data collection over quality management, we discovered a few exceptions in our supplementary interviews. For example, Circuit City and Merrill Lynch are now purchasing separate medical and disease management services from a specialized organization. In Minnesota, employers in the Buyers Health Care Action Group (BHCAG) have riskadjusted their premiums to encourage providers to treat rather than select against employees with chronic diseases. GTE and GM reward superior quality performance among carriers through a strategy to increase their employer premium contributions for those that meet benchmark standards. Although our study and a few others have documented innovative quality management activities among large companies, these innovations are still being pursued by only a small minority.

Employee satisfaction. Employee satisfaction is an important indicator of the quality of health carriers and providers. One way to gauge this is the number of complaints made to the employer.¹⁵ Forty percent of health benefit managers reported receiving more complaints about health care coverage in 1999 than they did five years ago, another 40 percent reported the same number, and only 20 percent reported fewer. Among the most common complaints were breadth/depth of coverage (including prescription drugs), premium cost sharing and copayments, access to physicians (referrals), and delays in claims processing. In our supplementary interviews, companies often made a distinction between the volume of complaints and what they believed to be the overall level of employee satisfaction with health benefits and the quality of their care. Most respondents maintained that the average level of satisfaction was relatively high despite what they perceived to be a vocalminority of dissatisfied workers.

Changing premium costs. Consistent with other studies, the companies in our sample experienced relatively modest premium increases over the past five years, with half reporting 2–5 percent average annual increases (Exhibit 4).¹⁶ Only 5 percent of firms reported that their average annual premiums had declined. This was followed by much larger increases in premiums during the past year: More than 60 percent of firms reported increases exceeding 6 percent in 1999. In our interviews most corporate managers viewed cost control as the dominant challenge facing them in future health purchasing. They regarded the early gains from moving to managed care as being largely exhausted.

Top Data And Methods Study Results Conclusions NOTES

At the same time, most Fortune 500 companies are relying on complex bidding processes to select health carriers and negotiate the most favorable prices. Prior to the widespread transition to managed care, the RFP bidding process was not typically used in health purchasing. Our results confirm that it has now become the dominant approach to vendor selection and management for health care. This particular aspect of health purchasing strongly resembles companies’ methods of contracting for other goods and services, outside the domain of health benefits.

Commitment to quality in carrier selection and management remains a less well developed component of companies’ purchasing. The study documents relatively widespread awareness of quality measurement among the Fortune 500, with companies reporting the routine collection of large amounts of quality related data. This is in contrast to the results of a 1997 KPMG survey reported by Jon Gabel and colleagues, which found much less knowledge and use of quality information by medium and large companies.¹⁸ The growing collection of quality data by large companies may lead to the expansion of clinical quality improvement activities in the future.

The current system’s emphasis on price over quality will certainly shape the future of both employer-based health insurance and the health care system. Having exhausted the gains from moving employees into managed care, most of these companies once more face double-digit inflation in premiums. Respondents in our study report few alternative methods of cost containment, with the exception of shifting an even greater share of premiums onto employees. However, cost shifting may intensify conflicts with employees, many of whom are already distrustful of their companies’ managed care strategies. Some employees in low-wage industries simply cannot afford rising premiums and are increasingly declining coverage.

The reliance on tough negotiating techniques and associated competitive bidding processes has also intensified the conflicts between large corporations and their health carriers. While maintaining relatively stable relationships with carriers, many Fortune 500 companies are also exerting strong price pressure on them. Carriers have responded by cutting their fees to hospitals and doctors, although they have not necessarily increased efficiency in the delivery system through comprehensive care management. It is unclear whether carriers can continue to cut providers’ fees without compromising the quality of care. Carriers have also responded to these price pressures by cutting unprofitable lines of business and seeking premium rate hikes where possible.¹⁹

From the perspective of both employers and the health care delivery system, the current health purchasing system is unsustainable and perhaps even undesirable. A number of employers are experimenting with new programs that are designed to reduce the costs of health care and make managed care more acceptable to employees and their families. It is unclear whether a dominant new purchasing paradigm will emerge from these experiments. Whatever direction the nation’s largest employers take, their new purchasing practices will continue to exert a powerful influence over other private and public purchasers as well as the health care system.

Editor's Notes

 
James Maxwell is director of health policy and management research at John Snow Inc. (JSI) Research and Training Institute in Boston. Peter Temin is the Elisha Gray II Professor of Economics at the Massachusetts Institute of Technology (MIT), having been a full professor in the Economics Department at MIT since 1970. Corey Watts has worked at JSI Research and Training as the project manager of this study of corporate health care purchasing. She recently relocated to JSI’s office in Denver, Colorado.

This work was made possible by funding from the Robert Wood Johnson Foundation(RWJF) through its program on Health Care Financing and Organization (HCFO). The authors thank Forrest Briscoe for all of his work on the survey and for his useful comments on earlier versions of this paper. They thank Eugenie Coakley for her statistical assistance; Rachel Kohn and Stephen Lemuth for their management of the survey; and the dedicated team of interviewers at JSI: Bob Hickey, Marianne Lee, Katherine McGrath, Cindy Meng, Deb Picciuto, and Jennifer Eckerman. They acknowledge the generosity of all of the busy executives who donated their time and experience to the study. Finally, they thank two anonymous reviewers.

NOTES

Top Data And Methods Study Results Conclusions NOTES

 

1. Fortune (26 April 1999).
2. M.S. Marquis and S.H. Long, "Trends in Managed Care and Managed Competition, 1993–1997," Health Affairs (Nov/Dec 1999): 75–88.
3. R.S. Galvin, "An Employer’s View of the U.S. Health Care Market," Health Affairs (Nov/Dec 1999): 166–170.
4. J. Maxwell et al., "Managed Competition in Practice: ‘Value Purchasing’ by Fourteen Employers," Health Affairs (May/June 1998): 216–226. For this study, we interviewed twenty-five senior benefits managers at these companies, nine consultants who worked with them on a long-term basis, forty-nine officials at seventeen regional and national health carriers, and eight officials from six business coalitions in which the firms participated.
5. J. Maxwell, F. Briscoe, and P. Temin, "Corporate Health Care Purchasing and the Revised Social Contract with Workers," Business and Society (September 2000): 281–303.
6. We pre-tested several different versions of the survey with more than seventy companies in the Fortune 501–1,000 companies, and with eighteen of the largest privately owned U.S. companies. We also conducted more than a dozen two-hour interviews with corporate managers before administering the survey, to help with the survey design and wording.
7. Fortune (26 April 1999).
8. 1997 Robert Wood Johnson Foundation Health Insurance Survey/Questionnaire (Washington: RAND, December 1996).
9. A. Foster Higgins and Company Inc./William M. Mercer survey of health benefits, 1997.
10. Similar questions may be found in Creating a Line of Sight: From Benefits to Business Results, Fourth Annual Survey Report on Purchasing Value in Health Care, 1999 (Washington: Watson Wyatt Worldwide/WBGH, 1999).
11. From 1999 to 2000 case studies were conducted of Atlanta, Dallas, and Detroit area purchasers and the carriers from which they primarily purchased. We interviewed several senior officials at these plans who were able to describe the typical purchasing process to us.
12. P. Temin and J. Maxwell, "Corporate Contracting for Health Care" (submitted to Journal of Law and Economics).
13. We were unable to assess whether Fortune 500 employers were shifting an even greater percentage of premiums for dependent coverage to employees, as other studies have reported.
14. "NCQA Timeline," <www.ncqa.org/pages/about/timeline.htm> (6 March 2001).
15. A.O. Hirshman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge, Mass.: Harvard University Press, September 1972).
16. There have been a number of recent studies tracking changes in health premiums and costs, whose findings are consistent with ours. See, for example, C. Hogan, P.B. Ginsburg, and J.R. Gabel, "Tracking Health Care Costs: Inflation Returns," Health Affairs (Nov/Dec 2000): 217–223; and J. Gabel et al., "Job-Based Health Insurance in 2000: Premiums Rise Sharply while Coverage Grows," Health Affairs (Sep/Oct 2000): 144–151.
17. T.C. Buchmueller and P.J. Feldstein, "Consumers’ Sensitivity to Health Plan Premiums: Evidence from a Natural Experiment in California," Health Affairs (Spring 1996): 143–151.
18. J.R. Gabel, K.A. Hunt, and K. Hurst, "When Employers Choose Health Plans; Do NCQA Accreditation and HEDIS Data Count?" (New York: Commonwealth Fund, September 1998). Only about a third of surveyed companies were familiar with NCQA accreditation, and just 11 percent rated it as "very important" in the selection of HMOs. A minimal 5 percent rated HEDIS "very important."
19. Hogan et al., "Tracking Health Care Costs."

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