Whether US employers like it or not, they are in the health care business. Roughly half of individuals with health insurance are covered through their employers. US employers’ health care costs have increased by 47 percent in the past 10 years, and the annual cost to provide a family with health care coverage has surpassed $22,000. Health care costs are typically the second-highest employer expense after wages and benefits, and employers pay for rising health care costs by decreasing wages and benefits.
Many employers are coping with inflation pressures and labor shortages. To manage these economic conditions and create a more stable business environment, employers can find significant savings in lowering their health care costs. Failure to do so could result in another 50 percent increase in health care costs over the next decade.
Why have employer costs risen so much? The RAND Corporation’s recent hospital price transparency study finds that employer plans pay more than twice what Medicare pays for the exact same services at the exact same hospitals. Prices vary widely, both between states and even within the same geographic region. This variation is not explained by differences in quality or payer mix. For employers seeking to reduce health care expenses, this variation offers significant savings opportunities. In addition, other studies have found that commercial health care prices have risen much faster than has the rate of utilization, illustrating that high prices are the driving factor behind increased employer-sponsored health care spending.
There are two main barriers that have limited employers from purchasing health care benefits effectively. First, the way employers buy health insurance is complex. Employers rely on a variety of third parties to help them purchase employee health care benefits on behalf of their workforce. Unfortunately, most of these stakeholders have misaligned financial incentives. Secondly, most employers have not had access to usable, transparent price and quality information. The lack of such usable information limits employers’ ability to make informed purchasing decisions and monitor prices negotiated on their behalf. These undermining incentives and lack of transparency have resulted in employers paying high prices and plans that favor wide breadth of access against affordability.
To address these barriers, large employers should change how they purchase health care. We discuss three key strategies to accomplish this goal and then discuss policy opportunities related to recent developments in price transparency.
Making Health Care Decisions In-House: Key Strategies
We identified three key strategies that employers should pursue to purchase health care more effectively: realigning financial incentives, improving use of quality and financial data, and implementing innovative benefits designs.
Realign Financial Incentives
Many employers rely on a network of brokers, consultants, and third-party administrators to design and manage their health benefits. Unfortunately, these groups do not always work with the interests of employers in mind. Many benefits consultants and brokers accept commissions from vendor organizations they recommend to their employer clients, in addition to securing a flat fee from employer clients. Commissions may be cash or non-cash (for example, vacations and gifts). Until recently, many brokers and benefit consultants were not required to disclose these financial conflicts of interest. Thus, while employers assumed the recommendations provided were impartial, they may be biased due to inherent conflicts of interest.
To address these misaligned incentives, the Consolidated Appropriations Act (CAA), effective December 27, 2021, requires disclosure of broker commissions and potential conflicts of interest. However, the onus is on employers to assure they do not enter into a contract with a consultant or broker who does not disclose direct and indirect compensation received. In addition to assuring transparency of compensation in these contracts, employers should implement performance guarantees so that their trusted advisers, insurers, and all vendors take financial risk for recommendations or services they are contracted to provide.
Own, Analyze, And Use Quality And Financial Data
To effectively manage their health benefits, employers must require access to and ownership of all relevant quality and financial data. Many insurance companies and third-party administrators that provide data analytic services have asserted in contracts that they own employer data and have refused to provide it to the employer (or to a partner of the employer’s choice) for internal analysis. This lack of information sharing limits the ability of employers to monitor contracts negotiated on their behalf and to ensure their employees are receiving high-quality care.
The CAA addresses this issue by granting employers access to all their plan data. However, the responsibility is on employers to avoid contracts that contain a “gag clause” restricting access to plan cost and quality data. Employers are now required to submit an annual attestation of compliance to the Department of Health and Human Services and the Department of Labor that no gag clause exists within any contracts with their service providers, including third-party administrators, insurance companies, providers/provider networks, and others. Data firmly now belong to employers. We recommend that employers establish an addendum to contracts that contain “gag clauses” to deem those provisions null and void.
Data analyses conducted by vendors that are providing the service are inherently biased, especially if, as we recommend above, performance guarantees exist. Funds currently paid to vendors to provide analyses could be reallocated by employers to neutral third parties to support unbiased assessments.
Importantly, having robust auditing privileges is paramount when partnering with external vendors. Often, vendor agreements intentionally limit employers’ abilities; for example, they require choosing an external auditor from a pre-defined list or pre-approval of an auditor selected. We recommend establishing an agreement addendum making null and void any employer auditing restrictions regarding the selected auditor; or the number, frequency, or breadth of audits conducted. Employers must have unfettered access to conduct due diligence.
Implement Innovate Benefit Designs
Once employers and their partners have robust pricing and quality data needed to align payment with the value of services provided, employers and insurers should rethink health benefit design. Examples of using price transparency to inform purchasing and policy include the California Public Employees Retirement System plan, which implemented a reference-based pricing program for surgical services; the state of Montana Employees’ plan, which re-negotiated hospital prices as a fixed percentage of Medicare; the Employers’ Forum of Indiana, which encouraged the largest insurer in the state to renegotiate agreements with the highest-price hospitals; and Hoosiers for Affordable Healthcare, which successfully advocated for state legislative policy changes.
Employers should also consider developing a robust tiered network, in which lower tiers have lower cost sharing but more targeted networks, while higher tiers have higher cost sharing and broader networks. Network targeting can be based on both price and quality, with lower-tiered providers consisting of “value” providers with lower-prices and/or higher quality. Tiered networks are associated with sizable reductions in spending and increased use of efficient providers. Tiered benefit design has three main benefits. First, it offers financial relief to employees while maintaining their choice and assuring they receive high-value care. Second, by disincentivizing employees from seeking care at low-quality, high-price providers, the plans achieve immediate and long-term cost savings. Third, these designs create market dynamics for providers to compete on price and quality as they strive to be included in lower tiers to attract patient volume.
To ease implementation of these programs, employers can fix payment as a percentage of the Medicare rate, an approach that tethers prices to an evidence-based payment method and is simple to execute. Employers can benchmark the prices they are currently paying by using a Medicare repricing tool that calculates their current prices as a percentage of what Medicare pays. The National Academy for State Health Policy has developed a first-of-its-kind and freely accessible online Hospital Cost Tool that provides 10 years of hospital cost details, using data from Medicare Cost Reports with attestation of data completeness and accuracy by hospital executives. Importantly, this tool can calculate the minimum commercial payment needed, as a percentage of Medicare, for a hospital to breakeven for more than 4,600 hospitals.
State and federal policy makers can support the development of innovative benefit designs by banning anticompetitive contract language between providers and insurers and capping out-of-network prices as a multiple of Medicare rates. However, because many parts of the country already have low provider competition, benefit design approaches may not be enough, and regulatory options may be appropriate.
New Transparency Data Can Help Employers Make Better Health Care Decisions
A market-oriented approach to health care only works when purchasers have transparent information on price and quality. Many providers, insurance companies, and pharmacy benefit managers have avoided providing price and quality transparency. Insurers obfuscate by providing employers with proprietary designations of “value,” and “total cost of care.” Employers must know the actual negotiated prices, the actual quality ratings per procedure or clinical category, and actual use of services and medications to adequately shop for care. Only observing total cost of care, which is determined by multiplying price by use, has limitations. Total cost could decrease by placing unwarranted barriers to appropriate care that is not evidence-based, while the price of care continues to increase. Thus, monitoring all three metrics is key: price, quality, and use.
Starting on January 1, 2021, federal rule requires hospitals to disclose their charges, negotiated prices, and cash prices. The federal government recently issued the first penalty for noncompliance with this rule. On July 1, 2022, the federal Transparency in Coverage rule, which requires insurers and all group health plans to post their provider in-network negotiated prices and out-of-network allowed prices, went into effect. Early evidence indicates high compliance from large insurance companies.
Prescription medication price transparency in the Transparency in Coverage rule has been delayed. Policy makers should require full transparency of all dollar concessions, including rebates, fees, and discounts made by pharmaceutical companies to any of their partners. These partners include pharmacy benefit managers, insurers, hospitals, physician groups, distributors, wholesalers, and pharmacies.
To leverage these data, we encourage employers, their partners, and policy makers to use Sage Transparency, a recently developed, freely accessible, customizable, web-based tool that provides hospital price, quality, and cost data. The Employers’ Forum of Indiana developed this tool by bringing together five data sources: Rand 4.0 National Hospital Price Transparency Study, National Academy for State Health Policy’s Hospital Cost Tool, Turquoise Health, Quantros/Healthcare Bluebook, and the Centers for Medicare and Medicaid Services Hospital Compare. Sage Transparency allows employers to determine hospital payer mix, quality scores, and pricing benchmarks at the hospital, health system, state, and national levels for more than 4,000 U.S. hospitals. It is updated quarterly and aims to incorporate insurer price files for all providers across the US in the future. The goal is to provide an easy-to-use tool to inform evidence-based market and policy decisions.
Employers have the opportunity to ensure plan assets are spent solely for the benefit of the members and that reasonable prices are paid. Bringing health care decisions in-house can mitigate the two main factors hindering employers’ effectiveness in purchasing health care benefits: a complex health care purchasing ecosystem and information disadvantage. We encourage employers to align incentives, make data-driven decisions, and support sound legislative policy.
All authors are supported by Arnold Ventures. Christopher Whaley is also supported by the National Institute on Aging (K01AG061274), Robert Wood Johnson Foundation. Ge Bai is a visiting scholar at the Congressional Budget Office (CBO). This study has not been subject to CBO’s regular review and editing process. The views expressed here should not be interpreted as the CBO’s.