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Between A Rock And A Hard Place: Understanding The Employer Mind-Set
Large and mid-size employers are "between a rock and hard place" when it comes to health benefits: They are both unable to manage their health care costs effectively or simply get out of offering these benefits entirely. Although there is considerable diversity in how employers approach health care, several goals underlie most of their decisions. It is unlikely that the current round of employer-based health initiatives will succeed at managing rising costs. As a result, employers are likely to become more interested than at any time in the past decade in exiting their roles as providers of health benefits.
EMPLOYERS HAVE LARGELY BEEN INEFFECTIVE and unenthusiastic managers of the health benefits they sponsor.1 Typically, they view health care as a distraction from the core mission of their firms, and they are frustrated. They are "between a rock and a hard place," both unable to manage their health care costs effectively and constrained from getting out of the business of offering health benefits altogether. Employers doubt that the current round of initiatives and policy proposals will ease their situation.2 But finding a way out for employers is complicated and unlikely to happen quickly. Historically, employers have offered health benefits to attract and retain labor. But because health costs have been rising rapidly, employers are now more willing to explore alternative roles for themselves and other ways of offering benefits. Today’s senior managers have more interest in finding solutions to these problems than at any time since the health reform efforts of the Clinton administration. Since the several million firms that offer health benefits neither act nor speak in unison and, in fact, lack a mechanism to do so, it can be difficult to understand what drives them.3 Employers are diverse not just in size but also in their approaches to offering health benefits. Nevertheless, long experience with employers’ efforts to manage health care has led us to conclude that a majority of mid-size and large firms try to satisfy the following goals: (1) control costs without disadvantaging their ability to attract and retain labor; (2) produce immediate results while committing minimal resources; (3) focus on individual responsibility, competition, and market forces; (4) improve the health and productivity of their workforces; and (5) try to find a way out of offering health benefits while limiting burdensome mandates or other government interventions that bar customized solutions for their firms. These goals, particularly the reluctance to commit resources and the short-term focus, fall short of what is required to improve the overall value of the health care available today. However, as employers begin to look at "exit strategies," policy-makers must craft alternatives that demonstrate an understanding of and address enough of these goals to be palatable to employers. In this paper we describe some of the current actions that mid-size and large employers are taking, analyze why these efforts are unlikely to control costs, and address how employers will begin to frame an exit strategy.
Several initiatives have emerged in the past few years that reflect the goals we have outlined above. Although most efforts avoid the travails of the managed care backlash of the 1990s, they still face large obstacles to success. Cost sharing. In keeping with the second goal we outlined above, employers are looking for strategies that help control costs aggressively in the short term. To gain short-term savings, employers are applying the third goal, individual responsibility, by asking enrollees to share a higher portion of their health care costs by picking up a share of the premium or taking on higher deductibles and copayments, or both.4 Although this does result in short-term savings, it is not a sustainable strategy. For several reasons, it fails to address the root causes of the increases in health care costs, such as new technologies, a payment system that encourages the use of health care, and the lack of transparency and accountability. And it comes up against limits, because employees will tolerate only so much strain on their disposable incomes. Furthermore, although consumers might seek fewer services when out-of-pocket costs are higher, they are as likely to avoid needed services as unnecessary ones.5 Avoiding preventive or maintenance care can create greater health problems and costs in the future. Those who share as much as half of the costs with their employers have yet to demonstrate healthier behavior or wiser choices of doctors or hospitals.6 When it comes to containing rising health care costs, few employers have much confidence in cost sharing as a strategy. For example, just 12 percent of employers say that cost sharing is very effective, and only 46 percent think that it is effective.7 Cutting retiree health care benefits. As employers search for other short-term savings (goal 2) and an exit in the long term from sponsoring health benefits (goal 5), cutting retiree health care benefits is another approach. Employers realize that health benefits can make jobs more attractive and increase their ability to attract and retain good labor. Those who dare to drop coverage are typically in sectors where other employers are doing the same. But offering health coverage to retirees has far less payback. As a result, employers find short-term cost savings by curtailing benefits for current retirees, as well as sizable reductions in obligations to current and future retirees. In 2004, only 28 percent of large employers (firms with more than 500 employees) were offering health benefits to retirees under age sixty-five, and just 20 percent were offering coverage to those over age sixty-five.8 According to a recent survey, 63 percent of firms have a cap on their future financial obligations for retiree health benefits in plans offered to Medicare-eligible retirees. As a clear sign of the times, 12 percent of firms say that they had stopped offering subsidized retiree health benefits in 2005 for future retirees, mainly newly hired workers.9 Others are looking for ways to offer access to group rates for retirees, without providing the benefits themselves. Consumer-directed, high-deductible plans. Also in line with goal 3, which emphasizes individual responsibility, more employers are offering so-called consumer-directed health plans, which place higher responsibility on each enrollee. They urge their workforces to manage health care spending and to make informed choices about the use of health care. Twenty-nine percent of employers now provide access to a high-deductible plan, along with a reimbursement mechanism, such as a health savings account (HSA). Another 33 percent plan to add one by 2007.10 People in consumer-driven and high-deductible health plans are more likely than their counterparts in comprehensive plans to say that they consider costs when making decisions about seeking health care. Discretionary spending might be curtailed and thus reduce some costs in the short term. For example, consumers might turn to buying generic drugs more readily or find ways to avoid repetitive imaging studies. Fundamental flaws in the current design of consumer-directed, high-deductible plans will minimize cost savings. While discretionary spending might be curtailed, so might necessary care.11 The distribution of health care spending across populations is dramatically skewed: 25 percent of a population tends to be responsible for 80 percent of total costs.12 Deductibles and health accounts, design features meant to drive consumerism, are frequently wiped out by one hospitalization. The annual out-of-pocket maximum is often exceeded simultaneously, leaving consumers without further incentive to consider the economics or quality of their health care choices. Moreover, information available to employees to guide their choice of doctors and hospitals is drastically short of what is needed, and what is available exceeds the health literacy level of many consumers. Health promotion and disease management. Many employers try to control their health care costs by helping employees prevent disease and control the diseases they have (goal 4). These efforts attempt to address one of the root causes of rising costs. The belief is that by focusing on prevention, health risk appraisals and disease management will keep health conditions from reaching higher levels of acuity, with attendant higher expense. Although investing in employees’ health arguably should lead to lower spending, this might not be the case. In a recent survey, only 14 percent of employers said that disease management is very effective as a cost containment strategy, and 38 percent believed that it is somewhat effective.13 Why do they feel this way? Prevention pitfalls. Changing lifestyle habits, such as smoking and exercise, is notoriously difficult, with success rates generally in the low teens. In addition, benefits from healthier behavior often occur many years down the road. With an increasingly mobile workforce, employers that invest in such programs might well not see the return. These programs are also expensive. Health risk appraisals with accompanying telephone coaching can cost up to $250 per employee per year. Although this represents a small percentage of overall health care spending, a firm could invest these dollars in research and development or in growing its sales force. A number of peer-reviewed studies claim a 3:1 return on investment from health promotion programs in the short term.14 However, close reading reveals substantial methodological flaws, including the absence of randomization and control groups. Lacking a firm base of evidence, claims of substantial payoff from these programs are questionable. Disease management shortcomings. Disease management programs have had success in certain Medicare populations, but can these findings be extrapolated to an employed population?15 Savings from disease management programs derive largely from avoiding emergency room visits and hospitalizations for people with chronic diseases.16 Employed populations have a lower incidence of chronic disease than the Medicare population. Disease management programs also share many of the shortcomings we have outlined for health promotion programs, including high implementation costs and benefits that might accrue only in the long term, often without any payback to the firm offering the program. A Congressional Budget Office (CBO) review of the research literature was unable to document clear cost savings from disease management programs.17 Health status and productivity. Proponents of disease management argue that the indirect costs from poorly treated diseases are even more burdensome than direct, claims-related costs.18 In this line of reasoning, better-managed diseases result in less absenteeism and more "presenteeism," meaning that employees with better health will be more productive. This should result in more output per employee and improved profitability for a firm. Yet medical care is only one of several contributors to improved performance. The link between individual health status and firms’ profitability is uncertain. For example, worksites characterized by distrust and a lack of cooperation engender decreased productivity and increased absence.19 Improving such relationships might have more direct impact than better medical care will. Similarly, as more processes are automated and employees increasingly work in teams, a firm might gain more economic benefit from further automation or improving employees’ leadership skills than from improving an individual employee’s medical treatment. Health status and health care costs. Unique characteristics of the health care system might also distort the presumed relationship between improved quality, better health, and lower costs. Although reducing the burden of a particular disease might lower disease-specific spending, it is unlikely to lower overall health care costs. Two features of the health care system explain this phenomenon: (1) The supply of services in an area drives much of the regional variation in costs; and (2) health care itself is a "super-good," in which the demand to live without pain and "feel better" is continuous and robust.20 Since an employer’s cost represents a provider’s income, which part of the delivery system will either lose money or down-size as a result of a healthier population? Providers who once concentrated on the complications of diabetes might turn to revenue-producing activities from other, less serious conditions, such as injuries from increased exercise. Innovators and activists. Are employers moving beyond the employee side of the cost equation? Not in great numbers. Many health care experts note that employers have been reluctant to address the majority of the drivers behind rising costs. Most of their efforts avoid challenging directly how providers deliver care. They stay away from larger policy issues, such as caring for the uninsured. And they take little notice of broad implications stemming from the rapid growth of technology. Others are simply not well equipped to take on the challenge.21 Monitoring the supply side. Some large employers actively manage the supply side in health care. They use comparative measures to assess the performance of providers, push providers to report their performance publicly, offer financial rewards to providers, and create incentives for consumers to reinforce improvements in quality and efficiency (goal 3 regarding competition and market forces). As examples we know well, Leapfrog Group and Bridges to Excellence participants have developed comprehensive programs designed to facilitate purchasing health care according to its actual value. These programs aim at employers and other purchasers, as well as the plans through which they secure health care benefits. Although such efforts have had some impact, they are not widely embraced by mainstream employers. The larger and more sophisticated health benefit purchasers are those most actively involved, perhaps because they are large enough to have an impact. With the exception of some proactive business coalitions at the regional level, which represent employers from large to small, others feel that they simply cannot take this on. They might be too small or too closely aligned with providers through service on hospital boards or selling them goods and services. Despite the limited number of employers involved, these efforts have had an impact on health plans and the Centers for Medicare and Medicaid Services (CMS).22 Such work will continue to be vital for sustaining movement toward standardizing measurement, increasing public reporting, and rethinking the payment system. However, it will not replace the need for other approaches. Influencing health care legislation. Employers also play a role in health care legislation, but they tend to be primarily defensive, rather than proactive. They have been most politically engaged when it comes to achieving goal 5, limiting government control, which led to their rejecting the Clinton reform proposals. But as a sign of their continued clout in the health care arena, employers’ support of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) was critical to its passing in 2003. The subsidy it produced for continued drug coverage of retirees represents a major short-term cost saving. Several employer coalitions are actively backing bills that support many of the five goals we have outlined here, including public release of information, changes to HSAs, and acceleration of health information technology initiatives.
Given that current strategies are unlikely to control costs, what will employers do next? Despite the compelling case that their self-interest dictates in becoming vigorously engaged in health care management, it is highly unlikely that this will happen.23 The predominant strategy will be more of the same, with a resulting squeeze on lower-paid employees and an increase in the number of uninsured Americans, all amid loud calls for fundamental reform. Moreover, given growing consensus that the current circumstance is not sustainable, more employers are beginning to call quietly, but with increasing urgency, for an "exit strategy." What exactly do employers mean by "exit strategy"? It is important not to overread this metaphor, since few employers know where an exit would take them. Competition for labor precludes simply dropping health care coverage. Yet central government control and budgeting, the only alternative with proof of concept for controlling costs, clashes with the goal of limiting governmental intrusion. These two basic—and unattainable—alternatives represent another example of the "rock" and the "hard place" between which employers find themselves. Employers are seeking options consistent with their core goals, which ideally will represent a third way. They want sustainable cost control, and they want to withdraw resources from managing health care. But in the end, primarily because employers do not have a deep understanding of health care, they will rely on health plans, other health service companies, and policymakers to step forward and develop products that deliver long-term solutions. These alternatives could by spawned by the private sector, the public sector, or close collaboration between the two. Potential of "consumerism." HSAs and high-deductible plans represent an early form of a private-sector exit strategy. However, they will need substantial improvements to provide a viable way out. Incentives need to persist beyond the deductible. For example, they need to encourage chronically ill patients to maintain their treatments. And they need to stimulate and guide consumers in choosing providers offering care of the highest value. Positioning high-deductible plans as an exit strategy assumes that consumers can drive the health care marketplace. Can consumerism grow, given the high degree of information asymmetry, the frequent involuntary nature of spending, and the fact that expensive decisions are often made under emotional duress? Some talk instead about "managed consumerism," in which high-deductible plans are complemented by active management of the supply side, or the providers of care.24 Depending on how much work managing the supply side entails, this approach, although not a complete exit, might be workable for many employers. Such plans will certainly evolve. For example, some have recently designed changes that encourage the use of preventive services and waive employee payment for medications for chronic disease. But to become a feasible exit option, these offerings also must be acceptable to the general public. With the same deductible and annual maximums for employees with widely varying levels of compensation, lower-paid, ill employees will end up with an unacceptably high proportion of their disposable incomes at risk. The public will likely reject this approach, and the lack of means testing will become a contentious issue. We know from the backlash against managed care in the 1990s that unpopular reform attempts, no matter how promising they seem for the initial several years, end up being rejected. Massachusetts model. The recent Massachusetts reform bill represents a potential model for how the public sector can work closely with employers to develop a solution to a complicated, seemingly intractable problem. Although this statute addresses the uninsured rather than cost control, an individual mandate, accompanied by requirements to release performance information publicly and to begin to pay for health care according to performance, marks a novel attempt to combine traditional public policy approaches with goals and principles that matter to employers. A recent survey showed that more than two-thirds of Massachusetts’ employers favored the legislation.25 IN THE SHORT RUN, EMPLOYERS WILL CONTINUE their current course; they are unlikely to drop coverage precipitously or to become proactive purchasers. Their reluctance to engage fully in health care management, however, will result in disappointing outcomes from the current round of initiatives and a growing consensus that the employer-based system is not sustainable. This will accelerate employers’ efforts to find an "exit" strategy. Realistically, the multifaceted drivers of health care costs will warrant a variety of solutions that draw on the combination of strengths of both the private and public sectors. Policymakers and health care companies that design options that address employers’ goals and concerns will find a receptive employer community and contribute toward badly needed reform.
Bob Galvin (robert.galvin{at}ge.com) is director, Global Health Care, at General Electric Company in Fairfield, Connecticut, and a professor adjunct of medicine at the Yale University School of Medicine in New Haven. Suzanne Delbanco is chief executive officer of the Leapfrog Group in Washington, D.C.
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