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MARKETWATCHThe Role Of Public Employers In A Changing Health Care Market
Public employers provide health insurance coverage to nearly 16 percent of all U.S. workers. Their reactions to rapidly rising premiums can have an important effect on local markets for health insurance because of their size, their visibility, and their reflection of public policy. However, public employers are constrained in their responses by tight budgets set by elected officials and statutes regarding due process, public input, and public accountability. As insurance markets consolidate and premiums continue to increase, public employers face tough choices regarding employee benefits.
Health insurance premium increases are back in double digits. After several years of low annual growth in the late 1990s, premiums rose 8.3 percent in 2000 and 11 percent in 2001, with 14 percent increases estimated for 2002.1 Data through 2000 suggest that a robust economy and tight labor markets mitigated the impact of these increases on employer-based coverage. However, with the economy now growing very slowly, employers are rethinking their benefit strategies.2 Employers’ responses to premium increases are critical for nearly two-thirds of the U.S. population who receive their insurance coverage through places of employment. Understanding how employers respond is critical to appropriate public policy because their decisions can affect overall costs, quality, and access as well as pressures on public health insurance programs and the uninsured. Public employers are a particularly important subset of employers in this regard. Government entities, including state and local governments, school districts, and public utilities, employ large numbers of people. In 2000 there were 20.7 million government employees, nearly 16 percent of all workers.3 State governments in particular are often among the largest employers in state capitals. Public employers have the potential to be market leaders through their benefit decisions. Their purchasing behavior can reflect existing public values and often signals new directions in public policy. Some state employee plans, such as those in California, Minnesota, and Wisconsin, have also had innovative managed competition programs.4 States have been pioneers in other areas such as risk-adjustment payment systems for public employee programs, health plan report cards, and administrative efficiencies.5 On the other hand, public employers face unique constraints arising from their "publicness" that affect their benefit decisions. These decisions are made in an intensely political context. Public employers generally face fixed budgets set by elected officials who must be cognizant of the impact of their decisions on taxpayers’ pockets. Statutes regarding due process, public input, and public accountability also constrain the content, timing, and process of benefit decisions. The government workforce is often unionized, with union representatives playing legally proscribed roles in employee compensation decisions. There is a rich literature on the coverage decisions of private employers.6 However, relatively few studies have focused on public employers.7 This paper examines how public employers make benefit decisions and how they have altered their decisions in response to rising premiums. We explore changes in the contribution strategies of state and local government employers, the extent of premium cost shifting to employees, and other means used to reduce the impact of rising premiums on public budgets, and we compare these changes with those of private employers.
Data source. This research is based on the Community Tracking Study (CTS), which conducted site visits to twelve U.S. communities between June 2000 and March 2001. The communities were Orange County (California), northern New Jersey, Phoenix, Miami, Seattle, Little Rock, Cleveland, Boston, Lansing, Syracuse, Indianapolis, and Greenville (South Carolina). In contrast to studies of best practices and innovative markets, the twelve CTS communities were randomly selected to provide a representative perspective of national trends.8 CTS site-visit teams used semi-structured interviews with local representatives to capture the changes implemented by large public and private employers of 500 or more employees and small employers with fifty or fewer employees. CTS researchers were prohibited by time constraints from specifically targeting midsize employers, but these employers’ responses to premium increases likely fall within the range of the largest and smallest employers. Survey methods. We interviewed benefit managers of large public and private employers, health benefit consultants, union representatives, leaders of local purchasing coalitions, and health plan marketing executives. To capture the perspective of small employers, we interviewed brokers, chambers of commerce, and leaders of local small-business associations. This study is based on interviews with roughly 170 respondents from all twelve communities. Because of the site-visit design and the variety of respondents interviewed, we cannot estimate the prevalence of changes, as might be feasible with data from an employer survey. However, this design does provide more in-depth information than is possible with such a survey. In our interviews we asked about current benefits and about specific changes to benefits over the past two years, such as changes to the contribution strategy, share of premium paid by employees, and the pharmacy benefit. We also asked about changes employers plan to make to their benefit structure or their purchasing process. To provide a vantage perspective, we asked consultants, brokers, and other respondents similar questions about the changes employers are making. The primary focus of this paper is on our interviews with representatives of twenty-five public employers in the twelve CTS sites. Context. The public purchasers in our sample included eight state governments, seven county governments, three public universities, two combined county-city governments, two K–12 school systems, one city government, one public utility, and one combined state government–school system entity. They ranged in size from a 1,300-employee county government to a state government with more than 350,000 covered lives. The communities in which the public purchasers operated had both similarities and differences. Those in our sample uniformly competed for workers in tight labor markets in all skill categories within the generally robust economies of their areas. They were often among the three largest employers in their communities. Respondents from eleven of the twenty-five employers reported strong union influence on benefits. Public employers typically covered a substantial share of the insurance premium, at least for employees. Ten employers offered full coverage for at least one benefit package. By contrast, 31 percent of the private employers surveyed in the 1997 Robert Wood Johnson Foundation (RWJF) Employer Survey paid the full premium for at least employee coverage.9 In Syracuse, where private employers paid an average of 70–75 percent of premiums for employees, public employers paid an average of 90 percent. All but one public employer reported some kind of retiree benefit.
Small changes to copays and deductibles. Like their private counterparts, our public-employer respondents indicated that tight labor markets constrained their responses to rising premiums. Sally Trude and colleagues reported that employers overall (public and private) tinkered with copayments and deductibles and made small changes to benefit structures to avoid having to shift a larger premium share to employees.10 Many employers simply bore the additional costs of higher premiums themselves or reduced nonhealth benefits to bring labor spending to an acceptable level. Tight labor markets had a particularly sizable impact on the benefit decisions of the public employers we interviewed. Virtually every respondent reported that the public wage scales were low relative to private wages, making benefits a very important and visible component of a competitive compensation package. No changes to contribution strategies. No respondents indicated that public employers had made major changes in their contribution strategies, such as moving from a fixed-dollar to a percentage contribution. Although there was interest in some communities in a defined-contribution approach to health benefits, the definition of defined contribution varied. Many benefit consultants described it as a strategy to cash out employees or move them into self-directed health plans. Public employers, on the other hand, were more likely to view it as a vehicle for increasing employees’ share of premiums. None of the public purchasers in our sample had adopted defined-contribution approaches (by either definition) in the previous two years. Tiered pharmacy benefits. The only major change to the benefit structure for public employers was in the drug benefit. Nearly every respondent noted that drug spending had risen dramatically faster than medical spending had. The increases resulted from both rising prices and greater use. In Little Rock the prescription use rate for state employees rose to twice the national average and was even higher for public school employees. As a result of similar increases, most private employers switched or considered switching to a two- or three-tier pharmacy benefit. The lowest tier with the lowest copay (generally $5–$10) is for generic drugs; the middle tier ($15–$25) is for preferred brand-name drugs; and the highest tier ($25–$45) is for non-preferred brand-name drugs. Among public employers, however, the switch to tiered drug benefits was less common. While respondents from six public employers in five communities reported a move to tiered coverage, respondents from five public employers in four communities indicated that they had made no changes. One raised premiums for a separate pharmacy benefit, and seven increased pharmacy copays as a means of controlling drug spending. Increases in drug copays were generally viewed as a successful means of moderating the rate of premium increases. A respondent from the California Public Employees Retirement System (CalPERS) reported that CalPERS held 2002 premium increases to an average 6 percent through increased copays for prescription drugs and office visits.
Public employers have opportunities and face constraints that are different from those of their private counterparts. These opportunities and constraints affect the ways in which public employers can respond to sizable health insurance premium increases. Political context. Public employers make decisions in a highly visible and political environment. This is particularly true in "sunshine" states such as Florida, where all government decision-making processes must be open to the public. Thus, health plans’ responses to the state’s request for proposals are public documents. This requirement has led to a number of lawsuits requiring the time and resources of state officials. A respondent in Phoenix noted that county employee benefit decisions there had strongly influenced the county supervisor elections. The double-edged sword that this visibility creates for public benefit managers is well illustrated by two plan-purchaser conflicts in Miami. When Blue Cross tried to drop Baptist Hospital from its list of providers available to Miami/Dade County public employees, Dade County’s manager and Miami’s mayor made it clear that they wanted Baptist to stay in the plan.11 Humana was able to benefit from its political visibility in Miami. When Humana failed to pass the request for proposals (RFP) process established by the Miami/Dade County public schools, it successfully maintained its access to school employees by lobbying the elected officials of the school board. Plan and provider appeals to the public have also been made in California. One respondent noted that what used to be private debates between providers and the state are now "going public," because the providers believe that they can fare better with the public than with the public purchaser. This approach may have backfired, however. CalPERS announced in a letter to the California Association of Health Plans on 5 January 2001 that the employer of 1.2 million state workers and dependents would add a "disruption factor" generated by provider-plan disputes to its evaluation of plan performance. In the letter, CalPERS assistant executive officer Allen Feezor promised to publicize the disruption factor in its open-enrollment materials—particularly when it involved "highly publicized threats of disruption."12 Market leadership. Another aspect of public purchasers’ visibility is their potential to affect the broader market through their own benefit decisions. In both Indianapolis and Orange County, respondents reported that large public employers had "raised the bar" on various aspects of the benefit package, influencing both what plans offer private employers and what private employers offer employees. Benefit consultants in Syracuse and Miami noted the market leadership of public employers in those communities. The State of Washington public employees’ program (PEBB) also has an impact in Seattle, with plans competing actively for the benefit package defined by PEBB. Public employers also might consider the impact of their decisions on other players in the health care market in ways that private employers do not. In Little Rock a coalition of state agencies and public school districts decided not to drop QualChoice despite concerns about instability and lack of reserves because the plan had a contract with the University of Arkansas Medical Center (UAMC). Although dropping QualChoice would have meant annual savings of $15 million, the coalition felt that it could not impose the financial hardship it would create for the UAMC. In Northern New Jersey, an area with many health care and pharmaceutical employers, public purchasers are constrained in their ability to make demands on providers for fear of disrupting the financial health of this important employment base. This concern for the impact of purchasing decisions on local markets becomes more notable as employer ownership and control become concentrated. As Trude and colleagues note, the trend toward nationalization of employers frequently results in a centralization of benefit decisions and a lack of involvement with or concern for local market issues (except in communities where the headquarters are located and where the local workforce is substantial).13 Public employers (with the exception of the federal government) by definition are connected to their communities at no more aggregate level than the state. Local government employers and state government employers in state capitals in particular have a larger stake in the activities of local markets. These entities have incentives to be involved in local health care issues over the long term. This may help explain the state of Massachusetts’s use of Health Plan Employer Data and Information Set (HEDIS) report cards and its early support for the Leapfrog initiative. The trend toward regionalization and nationalization of health plans can, however, undermine the local market power of a public employer. Even with 1.2 million lives in California, CalPERS has lost its bargaining leverage as the number of health plans has shrunk and the size of the survivors has grown. For example, nearly 33 percent of CalPERS members are enrolled in Kaiser plans, but only 5 percent of Kaiser members are in CalPERS.14 As a result of its declining market clout, CalPERS is considering dropping the number of contracted plans from seven to five or even moving to one self-funded statewide plan.15 Public accountability. While private employers are accountable to shareholders, public employers are accountable to a variety of administrative bodies, all of which are ultimately accountable to taxpayers. As a result, public employers are subject to an array of rules about both the content and the process of their decisions. These rules generally restrict the flexibility with which public employers can operate and alter their available responses to premium increases. Purchasing process. Public purchasers have statutory rules about the purchasing process. King County in the Seattle area and the University of California, Irvine, in Orange County are required to issue an RFP to provide coverage every five years. The process for Cuyahoga County in Cleveland is also set by law; the county must either issue an RFP or engage in competitive bidding. The competitive bidding process is so stringent in its specifications that the county uses the RFP process exclusively. As part of the purchasing process, two of the three members of the Board of County Commissioners must vote favorably on any contract that is let. The county is prohibited from participating in group contracting through the Cleveland Health Action Council, a local purchaser coalition. A similar process is used by Miami/Dade schools, which are required by statute to issue an RFP and accept bids from plans. Final contracting decisions are made by the school board with input from the "fringe (benefits) council," which includes several union representatives. Most of the statutes governing public employers’ contracting prohibit switching plans outside the formal contracting process, which occurs every three to five years. The contracting process is also often contentious. Another Miami respondent noted that plans that were not successful often sued, increasing costs for the benefit program. Self-funding laws. Public purchasers face restrictions on self-funding. By law, the Cortland Enlarged School District in Syracuse cannot self-insure without a large reserve requirement. School districts in Little Rock are prohibited from self-insuring, which creates problems for the 147 state agencies, commissions, and boards that are forced to purchase benefits with the school districts. One respondent estimated that the state group could save more than $8 million annually by self-insuring. School districts are also unhappy about the forced combination, because they believe that their employees are lower risks than other public employees are and therefore could pay less for their coverage separately. Other purchasing restrictions. Other purchasing restrictions are imposed on public employers. State regulations require Onondaga County in the Syracuse area to offer multiple options to its employees. The regulations specify how many of each delivery model must be offered. The Cortland Enlarged City School District, also in Syracuse, cannot change retiree benefits without making similar changes in the benefits provided to active employees. Overall impact. The negative impact of these restrictions on the nimbleness of public purchasers is not lost on other purchasers in their markets. A respondent in Syracuse reported that Onandaga County was not invited to join the Central New York Purchasing Coalition because of the complexity of its required purchasing process. A benefit consultant in Miami told us that he would no longer consult with public purchasers, because it "wasn’t worth the hassle." Unionization. Unions often are an important force among public employees. Respondents in all but two sites (Little Rock and Phoenix) noted strong union influence. In Lansing one public employer had eight active unions. In Orange County a respondent from one public employer reported that he had to negotiate benefits with eleven unions. Another Orange County employer noted that 99 percent of its workforce was unionized. Unions were not active in health care issues in all ten sites where major union presence was noted. In Boston, Seattle, and Miami/Dade, however, union representatives sit on the governing boards of state employee benefit bodies. Several respondents in Lansing and Cleveland underscored the importance of union input into benefits negotiation. In general, respondents in communities with active unions believed that the impact of unions was to maintain a richer benefit package than in the private sector and to reduce the employers’ flexibility in making benefit decisions. Budget issues. Public purchasers face fixed budgets that are typically determined through a political process. Politicians involved in the budget-setting process must balance competing claims on public revenues with taxpayers’ resistance to higher taxes. The balancing act becomes more challenging as premiums rise. A respondent from King County (Seattle) worried about how his agency would handle near-term premium increases that exceed budgets reduced by the passage of a recent initiative lowering vehicle registration fees. According to the respondent, the county has no reserves and no willingness to take on the unions in order to increase employees’ share of premiums. The State of Arizona is in a similar budgetary fix. Several years ago the state negotiated favorable five-year contracts with a number of major carriers. The contracts held premium increases to well below actual expenditure increases for state employees. When the contract expires in 2002, state benefit officials expect large premium increases, perhaps as high as 30 percent. The public employee program has not been allowed to build up sufficient budget reserves in anticipation of these large increases, and the respondent with whom we spoke was unsure how the program’s budget would deal with the expected shortfall. In Boston the Group Insurance Commission, which administers benefits for Massachusetts state employees, has filed a request to raise employees’ premium contribution from 15 percent to 20 percent or 25 percent several times. The request has so far been defeated by the legislature each year under heavy lobbying from state employees. Joint purchasing. The possibility of various public employers jointly purchasing health care benefits is among the opportunities available to public employers. We found evidence of joint purchasing in three of our communities. The New York Health Insurance Trust includes twenty-four employers, all of which are school districts, and all but one school district in Onandaga County participates. In Arkansas 147 state agencies, commissions, and boards combine with 317 school districts statewide to jointly purchase health insurance.16 CalPERS purchases health benefits for 1.2 million lives in 1,300 public agencies and school districts. Joint purchasing efforts can increase the market power of the collective. However, several respondents noted that the increased market power is often overshadowed by increased administrative complexity, particularly when the unions representing workers in the various agencies lobby for distinct benefit packages. These combinations provide important purchasing efficiencies for programs covering public employees. We saw no evidence, however, of efforts to combine public employees with other public programs. In Lansing a respondent with the state government indicated an interest in exploring joint drug purchasing with the Medicaid program in that state.
Employers, both public and private, made few changes to their health benefit offerings over the past two years. While premium increases for the past year averaged 11 percent, employers were constrained by tight labor markets and enabled by a robust economy to absorb much of the increase with only modest changes to cost sharing and drug benefits. This situation is likely to change. Most respondents in all twelve CTS communities predicted average future premium increases at or above 2001 levels. These increases will come at a time when the economy has weakened substantially, leaving employers with less revenue and workers with fewer choices. Employers, both public and private, may no longer be willing or able to maintain benefits over the next two years. In many of our markets, public purchasers are among the largest employers. In some, they are regarded as market leaders, with their benefit decisions affecting the behavior of plans and other employers. Thus, the responses of public purchasers to continued premium increases may have important spillover effects on private stakeholders. Changes in benefit design that induce employees to switch providers or greatly alter their utilization patterns can have a major impact on struggling health care systems. To the extent that private employers adopt public employers’ benefit designs, this impact will be magnified. Because public employers, unlike large national employers, have long-term connections to local communities, they often consider the potential impact of their decisions on local health care systems. This understanding of a policy leadership role creates an opportunity for public employers to make purposeful decisions with intended effects. The need for social accountability creates important constraints for public employers. Operating within a statutory framework of restrictions on contracting form, process, and content, they do not have the flexibility of their private counterparts. Public employers cannot quickly or easily make changes that would allow them to mitigate the impact of premium changes on public budgets and public employees. The importance of health benefits and the relatively greater presence of active unions among public workers further restrict the choices open to their employers. Public employers will need to periodically assess the balance between market flexibility and public accountability to assure that taxpayers are not paying too high a price for control. On the other side of the budget issue, policymakers must recognize the impact of their fiscal choices on public employees’ compensation. Budget cutbacks that prevent public employers from adequately compensating workers will hamper their ability to attract and retain capable workers. Public purchasers play an important, if constrained, role in local health care markets. If health insurance premiums continue to rise in an atmosphere of constrained public budgets, public employers may be pressured to find ways of using their potential influence more aggressively.
Carolyn Watts is a professor at the University of Washington, Department of Health Services, in Seattle. Jon Christianson is a professor and holds the James A. Hamilton Chair at the University of Minnesota, Carlson School of Management. Lance Heineccius is an independent health services consultant in the Puget Sound area. Sally Trude is a senior health researcher at the Center for Studying Health System Change in Washington, D.C. This research was conducted at the Center for Studying Health Systems Change and funded exclusively by the Robert Wood Johnson Foundation. The authors thank Paul Ginsburg, Cara Lesser, and Aaron Katz for many helpful comments.
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Data And Methods
Responses To Rising Premiums
