Reducing Employer Health Costs

Americans are anxious about the economy and for good reason. Most workers’ wages have not kept pace with inflation over the past 18 months. American families are being increasingly squeezed with over 70% of Americans reporting they have cut back on spending in the last six months.

Employers are also facing headwinds with rising supply costs and uncertain economic forecasts, tempering their ability to both increase wages and remain profitable. Compounding this problem for employers and workers are projections of much higher premiums for employer-sponsored health coverage.

While on paper employers pay a substantial portion of the costs of health coverage provided to employees, this expense is a form of employee compensation. Economists agree that employees bear the burden through reduced wages, ultimately paying the full cost of the coverage.

Employers compete for employees by offering a compensation package, which includes wages, benefits like health insurance and retirement, and ancillary features such as flexibility to work from home. A recent survey found that over 90% of employers viewed health benefits as a very important offering for employees.

Since employees want higher wages and employers want to pay higher wages to attract or retain good employees, both have an interest in lowering the costs of health coverage. Lower costs for the company-sponsored health plan would permit employers to increase employee wages while maintaining profitability.

Historically, many employers have sought to reduce health plan costs by shifting more of the cost to employees, through high deductible health plans and increasing out-of-pocket costs (deductibles and copayments). High deductible health plans can result in modest savings as employees become somewhat more sensitive to the cost of health care and reduce their use of certain services.

But many employers don’t want to further increase deductibles or copayments. While health savings accounts are part of smart benefit redesign, there are other important tools available as well. The key to smart benefit redesign lies in the significant variation in prices and quality across health care providers, particularly hospitals.

One peculiar aspect of health care markets is the lack of convergence to a price for a particular service. For example, a recent Blue Cross Blue Shield report found that prices for a knee replacement in Dallas, Texas ranged from $16,772 to $61,585. Another unusual aspect of health care markets is that higher prices do not generally represent better quality.

These variations in prices and quality mean that significant savings can be achieved by migrating services away from high-priced hospitals to lower-priced facilities. For these savings to emerge in employer health plans, two steps must happen. First, employers need to know prices charged by facilities. Second, employers need to redesign their health plans to align coverage with lower priced, but high-quality providers.

Two Trump administration rules, which have been supported by the Biden Administration, were intended to provide the necessary price information. On January 1, 2021, a rule took effect requiring hospitals to post price information. On July 1, 2022, an additional rule took effect requiring insurers and health plans to post price information. Additionally, the 2021 Consolidated Appropriations Act is intended to give employers visibility into brokers’ fees and claims data, empowering them to understand their plan’s health care spending and the incentives of those selling them coverage. In a 2019 report for the Galen Institute, I detailed how these price transparency efforts could lower health care prices through improved consumer and employer shopping and benefit redesign.

So far, compliance with the rules—particularly by hospitals—has been low. An August 2022 compliance report by PatientRightsAdvocate.org found that only 16% of hospitals were in compliance. Many insurers have provided massive data files that are extremely difficult for researchers to digest. The government can and should take steps to encourage more useful and timely reporting of price information, including additional enforcement activities. Even so, the emerging data and public reports of price variation—such as a large study by the RAND corporation—clearly distinguish high-price hospitals from low-price ones and provide adequate, actionable information for many employer plans.

What can employers do? For one, they can exclude outrageously priced hospitals from their networks. For example, 32BJ SEIU—the property service workers union that provides coverage to roughly 200,000 members and their families in the greater New York area—dropped New York-Presbyterian from its network because of such outrageous prices. This decision contributed to about $100 million in savings for the plan, helping the union to boost member wages by the largest amount in its history and give its members $3,000 bonuses.

Another option for employers is to implement reference-based payment designs. Under this design, plan members may receive services from any provider, but the plan caps the amount of the payment. This provides the plan member with an incentive to comparison shop. This strategy has been shown to significantly increase consumer shopping—leading to large savings without any negative effect on the quality of care received. Moreover, the increased shopping puts pressure on high-price hospitals to lower their insurance-negotiated prices, with average price reductions of 20 percent.

With the increased availability of price information, entrepreneurs are working to develop strategies—including direct contracting and reference-based pricing—to best position employers to pursue smart cost savings in their plans. Yet, despite the potential for significant plan savings, most plans have failed to implement such strategies.

The best explanation that I have received for inaction relates to problems with companies’ human resources (HR) departments. HR departments seem overly risk averse to change benefit design, and it’s easier for them to renew with the same insurer, same broker, and the same plan year after year. But, with inflation at a 40-year high and employee demands for higher wages to keep up with rising prices, pressure to reduce company health costs is acute. There are innovative options available to lower health costs and the businesses that take them will gain a competitive advantage. It may start with not accepting the HR recommendation.