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Consumerism

PERSPECTIVE

Why Employers Need To Rethink How They Buy Health Care

Abstract

 
Employers will continue to have a key role in the U.S. health system. Unfortunately, their purchasing practices have fallen far short of ideal. Large employers can lead the way for smaller companies, but by not routinely using competitive bidding or integrating quality into their specifications, they have sent mixed messages to both health plans and providers. Employers need to either get serious about buying health care as individual companies or explore other options. To purchase effectively, both health care expertise and the sustained commitment of senior leadership are needed. Whether employers can reverse their historical performance and become better purchasers is an open question.

Other than a brief period in the 1990s when managed care was taking hold, few private-sector firms have executed on this promise. A recent survey indicated that 80 percent of large employers lacked confidence in their ability to address cost and quality issues in the health care system.² The Leapfrog Group provides tools to drive value-based purchasing, but only a small portion of employers have used them.³ There has been little examination of the marked gap between what is expected of employers and what they have delivered. In this paper we examine possible explanations for why employers have failed to purchase effectively and explore potential remedies.

Employers’ Purchasing Practices

Top Employers’ Purchasing... Why Employers Underperform Options For Employers NOTES

 
Most employers purchase health care through health plans and pharmacy benefit managers (PBMs), which then contract with doctors, hospitals, and drug companies. Employers use one of two purchasing models: the "industrial purchasing" approach, in which they choose a single, low-cost vendor, or a more consumer-oriented model, in which they present multiple choices to employees.⁴ Ideally, employers communicate what they want to purchase through periodic requests for proposals (RFPs) and assure health plan compliance through contractual agreements. Effective purchasing cannot occur without integrating quality into decision making. Since quality and cost are products of patient-provider interaction, focusing on plans’ ability to provide information at the provider level and offer products that differentiate providers by cost and quality is critical. Preferably, purchasers would provide incentives for health plans to create these products, and providers would receive rewards for delivering care of the highest quality at the best price.

A major gap exists between ideal and actual purchasing practices. Quantitative data are critical to procurement, yet fewer than half of firms perform financial analysis on their health care costs, and fewer than a third use hard-dollar "return-on-investment" calculations in their decision making. Despite employers’ pronouncements that quality and not just cost is what they’re looking for, a minority factor quality information into health plan selection and contracting. Information is critical for informed decision making by consumers, yet just a third of employers supply information about quality at the provider level to employees, and fewer than a quarter make information about price available.⁵ It is not surprising that a recent analysis by a large employer demonstrated that fewer than 20 percent of employees were going to the most-efficient, highest-quality providers.⁶ Periodic RFPs, competitive bidding, and risk-reward contracts are the tools of procurement, yet only a very few employers use these routinely.

There are some examples of successful purchasing models, and most of these have used some form of managed competition or tiering, in which the employer pays the greatest percentage of the cost for the plan or provider that offers the best price and quality.⁷ In these models, employees may choose other plans but will pay more for them. Tiered drug formularies are quite common, but for hospital and physician care, which account for the majority of health care spending, only a handful of employers have adopted managed competition or offered networks tiered by quality and cost.

In the absence of being clear about what their customers want, health plans and providers focus largely on their internal needs and develop offerings that will sell and not disrupt relationships with providers but that won’t drive efficiency or quality. In addition, multiple, inconsistent signals and requests from buyers create confusion and increase the administrative costs of delivering care. The marked inefficiency and variation in quality in today’s system, while not caused by ineffective purchasing, are clearly enabled by it.⁸

Why Employers Underperform

Top Employers’ Purchasing... Why Employers Underperform Options For Employers NOTES

 
Why have successful companies failed to use their procurement expertise in health care? There are several possible reasons.

Costs are not really as important as they seem. Some economists argue that employees, not employers, absorb the impact of higher health costs through slower growth in wages, thereby shielding the company from negative financial consequences.⁹ Since economic theory assumes that managers always work to maximize profits, perhaps the firm’s failure to purchase more effectively reflects the fact that health care costs are not as important as the rhetoric suggests.

There is reason to believe that this is not the case; there is much difficulty and risk in maintaining competitive wage and benefit packages. Health costs change quickly, whereas wage packages are generally stable. Holding the line on wages to balance an unexpected upsurge in health costs can result in a loss of workers. The growth in global outsourcing of labor, driven at least in part by the high cost of health care, can be risky to the firm and requires increased resources devoted to labor issues. Companies are interested in decreasing risk and applying resources to the profit-generating areas of their core business.

Procurement doesn’t work with health care benefits. Competitively bidding raw materials or parts is much easier than sourcing a complicated set of services such as health care. Accurate information about price and quality is scarce in health care, so it is challenging to determine differences among suppliers. A further complication is that the relationship between unit price and overall cost in health care is unpredictable. For example, a small number of catastrophic cases can result in a big increase in the volume of services. Another complication is the number of competing goals. The finance leader wants the lowest cost possible, the human resources department wants to satisfy employees, and the corporate medical director might focus on clinical quality. None of these staffers can fully identify with the preferences of each of the employees for whom they procure health care, which creates distortions between buyer and supplier.

However, firms have purchased other complicated, noncommodity services, including human resource functions, cost-effectively without harm to employee satisfaction. So although purchasing health care is often a firm’s most challenging buy, the fact that it can be done successfully by some implies that it can be done effectively by all.

Organization and staffing fall short. Most benefit managers either are human resource generalists or have training in overall benefits and compensation. The most popular certification program in employee benefits focuses just one of its six core courses on health care.¹⁰ Effective health care purchasing requires a detailed understanding of the Byzantine set of incentives that providers and health plans face. Perhaps because this kind of knowledge is rare, the predominant employer strategy has been to increase employee cost sharing.¹¹ This action, while moderating company costs in the short run, does not address the root causes of health care cost increases, such as the lack of information about provider performance and incentives for improvement, efficiency shortfalls, ineffective technology assessment, and so on, and it will not help the firm in the long run.

For most large employers, very small staffs without expertise in health care are responsible for hundreds of millions of dollars of health care spending. Many large firms address this issue by outsourcing their health care management to benefit consultants. This strategy has been unsatisfactory for several reasons. First, an outside consultant’s recommendations for addressing inefficiencies may be very unpopular with employees. Benefit managers, who are not senior enough to be insulated from employee backlash, are often hesitant to implement such recommendations. Second, consultants develop their own performance criteria rather than using standard approaches, which increases confusion among health plans and providers, raises administrative costs, and results in the inability to compare performance.

Small and midsize employers, which sponsor benefits for the majority of U.S. workers, do not have the resources to employ health care specialists. At best, human resource generalists are responsible for benefits, and they often rely on insurance brokers who are not experts in health care. Small and midsize employers focus exclusively on cost, and this strategy has been proved ineffective at controlling health spending.¹²

Health plans are responsive to their customers, and uncoordinated and ineffective demands from employers make it difficult to develop products that would improve health care value. The products that health plans develop do not change the incentives for providers, which makes it difficult for providers to invest in improving quality.

Short-term business focus and slow-moving health system. Businesses operate at a much faster pace than the health care system. Most companies, whether public or private, work on a quarterly or annual cycle. Effective health care purchasing requires a much longer-term focus. For example, the development of performance measures for health plans took several years, and the time frame looks much longer for measures at the provider level. Many large employers have numerous and small work sites apart from their headquarters, and successful health care management requires community and political engagement in these areas, which is time-consuming.

The long-term commitment necessary to effect change in the health system is at odds with employers’ need to see rapid results. Regulatory changes that would enhance private-sector purchasing usually take a back seat to issues more relevant to firms’ core business, such as tax or trade issues. Also, not being able to show immediate, concrete contributions to the core business or bottom line can put the health care purchasing staff out of the "mainstream." This can result in less ability to get resources, fewer opportunities for promotion, and less personal financial reward.

Lack of senior management engagement. Without engagement from senior management, benefit managers will not have the resources they need or the ability to set goals with a longer-term horizon. Since health care is such a large sector of the economy, making providers unhappy could jeopardize sales in the core business. Senior manager support is essential for such decisions.

As with other niche positions, senior leaders look for the right talent and delegate management to those having it. However, oversight of benefit managers is difficult because there are no standard markers of success. Also, health care cost increases seem inevitable and outside the control of a single company. Finally, health care is an area in which decisions are likely to be unpopular with employees, and even senior leaders tend to shy away from those situations. These factors might explain the lack of engagement to date.

Options For Employers

Top Employers’ Purchasing... Why Employers Underperform Options For Employers NOTES

 
There is little reason to believe that current purchasing practices will change. If employers truly want to affect health care costs and quality, senior managers need to make some basic decisions. There are essentially two options.

Stay with the current strategy but get serious about it. There are examples of health care purchasing by employers that drive improvements in the value of health care, but not enough companies have adopted these practices. Effective purchasing by a majority of large employers would lead health plans to develop products that drive provider improvement, and these products would be adopted by midsize and smaller employers. Integrating quality and efficiency specifications into RFPs and contracts would provide powerful support to the actions of many public purchasers. Health cost increases are also affecting Medicare, and the current administrator is driving an agenda that is very consistent with the efforts of innovative large employers. Consistent messages from both the private and public sectors would send a persuasive message to suppliers, and quality and efficiency would be more likely to improve.

To improve purchasing practices, senior leaders would need to either hire health care experts or invest in training for their benefit managers. They would need to educate themselves so they could properly oversee their health care teams, support the tough decisions ahead, and make sure they receive visibility in the company. Individual commitments need to be multiplied to have effect, and while the Leapfrog Group and others have provided employers with roadmaps, tools, and technical guidance, a critical mass has not yet implemented them.

Change the strategy. Business leaders could take a serious look at collective action. Developing a collective purchasing model would offer several advantages: Purchasing strategies would be developed by health care experts; signals to suppliers would be uniform, making it easier for health plans and providers to be customer-focused; collective action would increase employers’ clout; and large employers could affect the health care costs of their dispersed employees. There have been instances of successful collective purchasing by large employers, such as the Pacific Business Group on Health, but these models have not proliferated.

Multiple obstacles stand in the way of group purchasing. These include regulatory hurdles (state mandates and premium taxes, which create an immediate financial disadvantage to self-funded employers), potential antitrust issues, and adverse selection. A major challenge has been large employers’ reluctance to surrender their unique benefit designs and their ability to respond to their employees’ needs.¹³ Paradoxically, group purchasing could be the best way to drive a competitive market. Employers could differentiate themselves by the incentives they give to employees to choose higher-value plans, their prevention and wellness programs, and their skill in managing health and productivity issues.

Collective action could also occur on the policy front. Standardization of performance measures, tort reform, and messages to Congress about changing the provider payment system are a few areas that need a unified employer voice. This requires more than paying dues to national or regional business health care groups. It requires a willingness of senior executives to commit time and political capital to targeted health care areas.

A second new strategy would be to transfer the buying responsibility from employer to employee. Consumer-directed or high-deductible insurance products do just this. With sufficient information, employees would be empowered to be effective buyers since they are spending their own money and need only satisfy themselves, not multiple stakeholders. Daunting challenges must be overcome to make these plans succeed, such as developing and delivering the information consumers need and enabling a population with marginal health literacy to become effective health care buyers, as well as coming to agreement on risk-adjustment methodologies and ways to prevent adverse selection.¹⁴ Despite the challenges, this alternative is gaining traction.¹⁵

Competitive markets rely on informed, activated buyers to achieve improvements in quality and efficiency. Private-sector employers are the key buyers in the health care market, but their purchasing practices fall far short of what’s needed. Successful purchasing will require substantial changes from today’s approach, and senior managers hold the key to making these changes. Several years of sustained growth in health costs have captured the attention of the leaders of U.S. firms. Whether these leaders can dramatically improve the purchasing of health care is an open question. If they do not, sustained cost increases will increasingly pressure company earnings, and employers’ ability to influence the health care system will diminish.

Editor's Notes

 
Bob Galvin (robert.galvin{at}corporate.ge.com) is director, Global Health Care, for the General Electric Company in Fairfield, Connecticut. He is also a professor adjunct of medicine at Yale University in New Haven, Connecticut. Suzanne Delbanco is chief executive officer of the Leapfrog Group in Washington, D.C.

The authors thank Peter Lee for his contributions.

NOTES

Top Employers’ Purchasing... Why Employers Underperform Options For Employers NOTES

 

1. M.E. Porter and E.O. Teisberg, "Redefining Competition in Health Care," Harvard Business Review 82, no. 6 (2004): 64–76, 136; and I. Fraser and P. McNamara, "Employers: Quality Takers or Quality Makers?" Medical Care Research and Review 57, no. 2 Supp. (2000): 33–52.[Abstract/Free Full Text]
2. Watson Wyatt Worldwide, "Managing Health Care Costs in a New Era," Tenth Annual National Business Group on Health/Watson Wyatt Survey Report (Washington: Watson Wyatt Worldwide, 2005).
3. R.S. Galvin et al., "Has the Leapfrog Group Had an Impact on the Health Care Market?" Health Affairs 24, no. 1 (2005): 228–233.[Abstract/Free Full Text]
4. J. Maxwell, P. Temin, and C. Watts, "Corporate Health Care Purchasing among Fortune 500 Firms," Health Affairs 20, no. 3 (2001): 181–188.[Free Full Text]
5. Wyatt, "Managing Health Care Costs."
6. F.B. de Brantes, "Defect Rate in Health Care Purchasing" (Unpublished internal study, General Electric Corporation, 2005).
7. J.B. Christianson and R. Feldman. "Evolution in the Buyers Health Care Action Group Purchasing Initiative," Health Affairs 21, no. 1 (2002): 76–88[Abstract/Free Full Text]; and A.C. Enthoven and B. Talbott, "Stanford University’s Experience with Managed Competition," Health Affairs 23, no. 6 (2004): 136–140.[Abstract/Free Full Text]
8. E.S. Fisher et al., "The Implications of Regional Variations in Medicare Spending, Part 2: Health Outcomes and Satisfaction with Care," Annals of Internal Medicine 138, no. 4 (2003): 288–298.[Abstract/Free Full Text]
9. M.V. Pauly, "Making a Case for Employer-Enforced Individual Mandates," Health Affairs 13, no. 2 (1994): 21–33.
10. See International Foundation, "CEBS Designation Eight-Course Curriculum Model," www.ifebp.org/cebs/cebs.asp?cebsus (23 August 2005).
11. Wyatt, "Managing Health Care Costs."
12. R. Galvin and A. Milstein. "Large Employers’ New Strategies in Health Care," New England Journal of Medicine 347, no. 12 (2002): 939–942.[Free Full Text]
13. A.C. Enthoven, "Employment-based Health Insurance Is Failing: Now What?" Health Affairs, 28 May 2005, content.healthaffairs.org/cgi/content/abstract/hlthaff.w3.237 (23 August 2005).
14. Institute of Medicine, Health Literacy: A Prescription to End Confusion (Washington: National Academies Press, April 2004).
15. J. Nolin and J. Killackey, "Redirecting Health Care Spending: Consumer-Directed Health Care," Nursing Economics 22, no. 5 (2004): 251–253, 257, 227.[Medline]

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