Employee Benefit News

Medical officer warns employers against exchange-only health benefits model

In conjunction with this month’s EBN cover story, “Buyer beware,” which examines consumer readiness for purchasing their own health care coverage via public and private exchanges, Dr. Raymond Fabius, chief medical officer at Truven Health Analytics, penned this guest blog post questioning the wisdom of shifting to the exchange-only model. Read his arguments against moving away from the employer-sponsored health care system, and share your thoughts in the comments. —Kelley M. Butler

Sears Holdings and Darden Restaurants shook up the health care industry recently, when they announced a new approach to providing health care coverage to employees. Under the new plans, employees will be given a fixed sum of money each year to choose their coverage and insurer from an online marketplace.  

The logic behind the approach is simple: By creating a marketplace, employees will be able to comparison shop and insurers will compete harder to get workers to select their plans, ultimately lowering health care costs. Unfortunately, the realities of health care consumerism do not follow simple logic.

Consider the recent health care experiences of Johnson & Johnson, Navistar and PPG — companies that all have found that providing more comprehensive benefit designs to their employee populations have actually helped to reduce overall health care costs. In Johnson & Johnson’s case, after analyzing the cost of treating chronic conditions related to obesity, high blood pressure, high cholesterol and tobacco use among its employee population, implementing a preventive wellness program saved the company $565 per employee per year — between $1.88 and $3.92 for every dollar spent to implement the program. Similarly, Navistar and PPG were able to reduce overall medical costs by increasing their investment in wellness, risk reduction and disease management.

These types of population-specific nuances can get lost when benefits are designed exclusively around short-term cost-cutting. By implementing what amounts to a privatized health care exchange for their employees, Sears and Darden are succumbing to a tempting, but potentially dangerous, assumption that a health care market will behave like a stock market. But health care is not governed by efficient market forces. All available information is not “priced-in” for health care consumers.

In fact, our research on moving employer-sponsored health care coverage onto an exchange-based benefit design shows that there is no short- or long-term financial advantage. Using insurance claims and wage data from 33 large employers with 933,000 employees, we were able to project employer health care costs for 2014-2020 under a number of different exchange-based scenarios, each with varying levels of employer/employee contribution.  

Ultimately, we found that moving employees onto a government-subsidized insurance exchange would increase the financial burden as much as $17,268 per employee per year, which is $9,000 more per employee per year than they currently spend. This estimate was based on the assumption that the employer would make the employee “whole” by providing after-tax wage increases to subsidize the additional costs for employees to purchase insurance through the government insurance exchange. We also modeled a scenario in which the employer did not subsidize the employee’s additional costs at all, which resulted in a cost-shift to employees of more than $16,000 per year.

How can moving employees onto an exchange-based model increase total healthcare costs by thousands of dollars a year? There are several areas where employers can lose efficiency and incur significant unexpected costs if they don’t ask the right questions.

Chief among these is a major loss in purchasing power. By effectively fragmenting employees across a marketplace of insurers, early adopters of consumer-choice plans will lose their chief source of leverage in negotiating bulk discounts with health plans. Employers moving onto an exchange-based design also must evaluate the incremental additional cost of carrier risk, margin and exchange administration fees. Based on our model, the estimated cost of lost purchasing efficiency by moving to an exchange is $2,990 per employee per year on an allowed cost basis including administrative service and margin costs.

The second major driver is a lost opportunity to manage population health and productivity for the long-term. Whereas Johnson & Johnson, Navistar and PPG were able to achieve cost reductions by analyzing and tweaking their benefit design based on the behavioral realities of their employee populations, companies that shift the benefit selection process to their employees lose the kind of aggregate, company-wide analytics that can influence truly effective benefit design. Critical measures such as chronic disease management and its relationship with absenteeism and the impact of wellness programs on population health are incorporated into effective top-down benefit design. When plan choice is left up to workers themselves, will they always choose the most effective plan for managing their unique health care needs?

Beyond these issues, there are still several unknowns surrounding the treatment of private insurance exchanges in accordance with the Patient Protection and Affordable Care Act.  

Still, with its laser focus on short-term cost-reduction, the insurance exchange approach likely will gain followers among employers. Our data show large employers with traditional benefit designs in place spent $10,120 per employee per year on medical and pharmacy payments in 2011.  Without any changes in benefit design, that number is projected to rise 4.9% to $10,615 per employee in 2012 and 5.1% to $11,156 per employee in 2013. Amid the current economic struggles, any new approach that looks like it will decrease that burden while keeping companies compliant with PPACA is tempting.  

As more companies consider following the lead of Sears and Darden, it will be critical for those involved in the benefit design process to carefully evaluate the real-world cost of an exchange-based approach. This involves digging much deeper than bottom-line premiums. Long- and short-term population health, employee productivity and maintenance of chronic disease will be the true metrics against which effective plan design is measured. By focusing on cost alone, we are ignoring an important half of the health care equation: good health.

Raymond Fabius, MD, CPE, FACPE, is chief medical officer at Truven Health Analytics, a provider of healthc are data and analytics solutions and services. He can be reached at raymond.fabius@truvenhealth.com.