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The employers’ perspective on health care costs and the rise in consumerism
THE AMERICAN JOURNAL OF GASTROENTEROLOGY © 2001 by Am. Coll. of Gastroenterology Published by Elsevier Science Inc.
Vol. 96, No. 8, Suppl., 2001 ISSN 0002-9270/01/$20.00 PII S0002-9270(01)02588-6
WHAT DOES THE IMMEDIATE FUTURE HOLD FOR HEALTH CARE?
The Employers’ Perspective on Health Care Costs and the Rise in Consumerism Howard R. Veit Tillinghast-Towers Perrin, Atlanta, Georgia
INTRODUCTION There are powerful forces that will affect the strategies that employers will use in designing their future role in providing health benefits to employees. These forces include rapidly increasing costs for drugs in their employee health benefits plans, including the cost of treating gastroesophageal reflux disease (GERD), the impact of the Internet on employee attitudes, and the rise of consumerism. For health plans and suppliers to the health industry, these forces will lead the way toward new business models. After a 3-yr period (1995–1997) of relative calm when health care cost inflation remained low, employers are once again awakened to the reality that costs are once again on the rise. This time, their advisors tell them, the increases may go on for many years. Consider, for example, the cost and other effects of Medicare paying for prescription pharmaceuticals. If that were not enough to shake employers into action, several patients’ rights bills currently discussed would increase employers’ legal vulnerability for health care benefits. When employers feel vulnerable, the health care organizations or insurers with whom they usually contract for services are also vulnerable. This means physicians, the second largest cost sector of the health care industry, will also feel the winds of change. Increasingly, specialists and generalists are at the whim of decisions made by employers and payers, and only rarely can they affect these decisions. What, then, are some of the immediate health system responses that will affect the main payer in the system, the employer, and how are employers likely to respond? When Xerox Corporation announced it might move toward a defined contribution approach for employee health care, it was a warning that employers were moving aggressively to protect themselves from both increasing costs and the threat of losing the current legal protection they enjoy under the federal Employee Retirement Income Security Act. But it was more than that. It served as the most recent indication that United States health care systems are in the midst of a wrenching shift of focus from group buyers to individual consumers. The shift may be gradual (and outcry from employees led Xerox to soften its original position— but it has already begun. Newly empowered health care consumers are taking responsibility for their health plan choices. Ultimately, they may force health plans, insurers,
providers, and suppliers, especially pharmaceutical manufacturers, to re-evaluate their business models. Physicians are in the front line of feeling the effects of any important change, whether in medical science or medical economics. For example, at the macrolevel organization, financing and delivery of services will change, whereas at the level of individual physicians the way they diagnose and treat will also be affected, differentially for the specialist gastroenterologist and primary care physician. For example, the need by managed care organizations to save money by influencing physician medication recommendations from prescription GERD medications to over the counter medications likely has important but as yet unknown health effects on individuals and populations. What impacts, if any, will this have on GERD progression to erosive esophagitis to Barrett’s esophagus and beyond? What impacts will it have on quality of life and work absenteeism due to GERD? Will the cost of absenteeism and reduced productivity far outweigh whatever savings accrue from reduced medication budgets? Will changing patient behavior because of increased consumerism change the nature of the physician/patient relationship? For example, will patients be more directive in their demands for specific diagnostic tests like endoscopy for GERD symptoms? If so, the physician bears the brunt of contending with the payer while bearing the ill will of the patient if the insurer refuses to pay.
UNDERSTANDING THE CHANGING EMPLOYER MARKETPLACE The cost dilemmas that employers face are exemplified in Figure 1. Although general inflation has remained low, employer health care costs will rise at two to three times general inflation for the next several years. Employers must either accept trend increases or examine new strategies to address costs. In thinking through their strategies, employers know that prescription medications are trending upwards at a clip of ⱖ15% the past 3 yr and that pharmaceuticals are a key contributor to the cost increases. In addressing costs, employers are asking, “What cost levels and increases are acceptable? What return on investment can my company expect from the ‘investments’ it is making in health benefits
AJG – August, Suppl., 2001
Figure 1. The relationship between employer health benefits costs and general inflation from 1984 projected to 2005.
for employees? How do cost increases affect overall total rewards for employees?” In this environment, treatments and prescription medications, like those aimed at GERD, are under increasing scrutiny. Unfortunately, few employers and payers are addressing the quality/outcome side as vigorously as cost, and value of their new payment policies remains unknown. Many employers are challenging their traditional approaches to health care and are considering, for example, the establishment of more cost sharing with employees for prescription drugs, such as three-tier benefit plans. In Figure 2, the results of a Towers Perrin cost survey of a sampling of large employers show that for both health maintenance organizations and other types of health insurance coverage the cost burden on employees has increased over the past few years. Often employers are slow to change their health benefits strategies, but some, like Xerox, are considering major changes that will likely cause others to follow. We estimate that between 10% and 15% of Fortune 1000 companies are considering reducing or eliminating their direct involvement in health benefits. These employers want to free themselves from the costs associated with administering those benefits and reduce their vulnerability to legal action. Already, the technology exists to facilitate this transition in the form of online brokers and services— called
Employers, Health Care Costs, and the Rise in Consumerism
S71
aggregators—that provide quotes, seek out best prices, and make comparisons in terms of benefits. In some cases, employers may choose to become aggregators themselves. They will simply give employees access to intra- or extranet sites and create what we call an employee mall. Approximately another 15% of Fortune 1000 employers will play an increasingly active role, in the hope that doing so will contain costs, give them leverage to demand better quality and service, and, in turn, enable them to better manage employee health and productivity. These employers—some of whom have already begun the process— believe that there is real return on investment potential with this proactive strategy. They will provide incentives for workers who choose plans that offer preventive care, disease management, and/or providers who support rapid return to functionality. Figure 3, developed by the consulting firm Towers Perrin, shows the two extreme policy options that employers have available. Those that adopt an active strategy would take employers from where they are today toward increasing levels of involvement in improving employee access to information, directing employee choices through plan selection and employer subsidies, managing demand through wellness and disease management initiatives, influencing health care quality and delivery, improving customer service, and integrating all health-related programs to better manage the overall “health of the workforce.” The consumer focus here would be the emphasis on employees’ responsibility for their health, and ensuring that they have the resources to maintain it. Active employers will begin to act when they understand the costs, where they come from, and how to manage them. These employers will act on both the direct and indirect impacts of costs. Active employers will examine the impact of productivity loss, as exemplified in Figure 4, and establish a very high priority on conditions that contribute to lost employee productivity. A passive strategy would limit and/or gradually reduce the level of employer intervention, focusing first on the basics of plan selection, baseline negotiations with potential insurers, and setting employee contributions. The passive employer would then leave the rest to employees and, possibly, to outside vendors who would manage health plan and provider performance. The consumer focus here rests squarely on the concept of employee empowerment. Xerox, if it follows through with its defined contribution approach, would be an extreme example of the passive employer.
TECHNOLOGY WILL GREATLY AFFECT THE FUTURE DIRECTION OF EMPLOYEE HEALTH BENEFITS Figure 2. The employee portion of health care premiums is increasing (1).
The fact that Internet usage is expected to reach 136 million Americans by 2002 has not been lost on employers. The age of technology frees employers to move either aggressively
S72
Veit
AJG – Vol. 96, No. 8, Suppl., 2001
Figure 3. The passive and active strategies that employers are considering.
toward or quickly away from the management of employee health benefits. For the actively inclined employer, the Internet offers many opportunities to improve the efficiency and cost effectiveness of employee health benefits management. For the passively inclined employer, technology offers employees the tools to become more self-sufficient. Internet technology is rapidly arming consumers with readily accessible, credible health information. The key question that remains for employers is, of course,
will the new consumer-driven health care system be able to bring health care cost increases down to those of general inflation, while delivering the quality and access improvements that consumers demand? Will it stave off national health care? As plans reinvent themselves to respond to these changes, they may find that many of the cost issues are impossible to tame under the current structure. Drug costs, especially those directed toward chronic diseases such as GERD; technology costs; and the demand for new and expensive treatments all may lead us to a new breed of
Figure 4. Impact of productivity loss on employer costs.
AJG – August, Suppl., 2001
consumers who are satisfied with service and quality, but very unhappy about the impact on their wallets. There is, however, reason for hope. The biggest players in technology are jumping into health care feet first. Healtheon/WebMD announced an alliance with HNC software for an Internet-based claims processing system that the companies asserted could reduce the cost of processing a claim from $15 to $2. Other systems deliver up to date, interactive protocols to the point of service, thereby reducing many of the costly mistakes attributed to inappropriate care and adverse drug interactions. New alliances with providers and employer emphasis on employee well-being may also go a long way toward effectively managing costs, as well as toward restoring faith in a beleaguered system. Should these things pan out, the Age of Consumerism and Technology may be the era when we finally achieve an optimal blend of cost, quality, and access.
UNDERSTANDING THE INDIVIDUAL CONSUMER WILL BE A MAJOR BUSINESS IMPERATIVE FOR HEALTH PLANS AND SUPPLIERS With at least some and perhaps much of the movement in the employer market pointing toward increased emphasis on the individual consumer, plans and suppliers will have to figure out how to reach past employers to individuals who, until now, have only been a relatively passive purchasing audience. Direct to consumer marketing and selling of prescription drugs is becoming a trend, and this will increase in future years. Many in the older generation might be happy to maintain the status quo, but many others will embrace the change. Nevertheless, health plans and suppliers must begin to understand the nuances of the consumer marketplace in health care. The first step is to recognize that health care consumers are uniquely complex. They have multiple personalities and multiple concerns depending upon where they are in the process. They are shoppers, members who use services, and patients. Sometimes they are all three at once. A shopper and member’s preference for ease of access over quality care can turn quickly to quality at any cost when serious illnesses emerge and the consumer is suddenly a patient. This may be especially true because, under the current system, patients pay only a fraction of what the services actually cost. In the absence of a serious illness, however, when consumers become members plan service becomes paramount. And plans must recognize that member satisfaction is slipping. In 1999, 52% of Americans could only rate their care as fair or poor, a 6% downward shift from the previous year (2). In a number of areas related to plan service, such as review systems or access to care, confidence levels are clearly declining. How will plans retain members in an era of fierce competition focused on individuals? What level of service and what types of services will they need to employ? Plans and suppliers must also understand that consumers
Employers, Health Care Costs, and the Rise in Consumerism
S73
will become shoppers who are willing to look around for the price/service/quality package that best suits them. Today’s financial services industry, particularly stockbrokers, presents an interesting comparison. Until 1975, broker fees were regulated and consistent. Those that invested used one of a few industry names or went by word of mouth. But when broker’s fees were deregulated, Charles Schwab introduced the discount brokerage and significantly expanded investing to a whole new class of consumers. Subsequently, the Internet opened the market even more, and people are demanding and receiving a dazzling array of products and services. Merrill Lynch, which once scoffed at the need to respond to online trading, quickly and publicly changed its tune. How will health plans respond when people can truly comparison shop by weighing plan benefits and price? And health care consumers will have the tools to shop. They will gather their information from a wide range of sources, including electronic media, printed material, and providers. Baby boomers—the largest demographic group— understand their economic power and are driving many of the political and legal challenges to which the industry must respond. In addition, the most savvy among the boomers are the members of plans that can least afford to lose, because they tend to be the healthiest and, therefore, the most profitable group. Finally, plans and suppliers must recognize that physician groups, politicians, the press, and a series of legal challenges are fueling a rampant mistrust of many of the health system’s most prominent stakeholders, including health plans and the pharmaceutical industry. How deep is the current mistrust? What will it take to restore it? How will American consumers make sense of the tension between their expectations of unlimited care as an inalienable right and the impact this will have on what they pay out of pocket? To answer these questions, plans and suppliers must invest some real time and resources in discovering what consumers want. Some of this research will be done through traditional focus groups and surveys. Some of it will leverage Internet technology to track purchasing habits and patterns. Regardless, health system executives should remember that similar consumer research in other industries has led to successful positioning, product development, and company brands—all of which will be crucial to success as employers redefine their roles and as we move into the age of consumerism. Reprint requests and correspondence: Howard Veit, M.B.A., Director and Principal, Tillinghast-Towers Perrin, 1 Atlanta Plaza, 950 East Paces Ferry Road, Atlanta, GA 30326-1119. Received Oct. 6, 2000; accepted Dec. 26, 2000.
REFERENCES 1. 2000 health care cost survey. New York: Towers Perrin, 2000. 2. 1999 health confidence survey. Washington, DC: The Employee Benefits Research Institute, 1999.
Vol. 96, No. 8, Suppl., 2001 ISSN 0002-9270/01/$20.00 PII S0002-9270(01)02588-6
WHAT DOES THE IMMEDIATE FUTURE HOLD FOR HEALTH CARE?
The Employers’ Perspective on Health Care Costs and the Rise in Consumerism Howard R. Veit Tillinghast-Towers Perrin, Atlanta, Georgia
INTRODUCTION There are powerful forces that will affect the strategies that employers will use in designing their future role in providing health benefits to employees. These forces include rapidly increasing costs for drugs in their employee health benefits plans, including the cost of treating gastroesophageal reflux disease (GERD), the impact of the Internet on employee attitudes, and the rise of consumerism. For health plans and suppliers to the health industry, these forces will lead the way toward new business models. After a 3-yr period (1995–1997) of relative calm when health care cost inflation remained low, employers are once again awakened to the reality that costs are once again on the rise. This time, their advisors tell them, the increases may go on for many years. Consider, for example, the cost and other effects of Medicare paying for prescription pharmaceuticals. If that were not enough to shake employers into action, several patients’ rights bills currently discussed would increase employers’ legal vulnerability for health care benefits. When employers feel vulnerable, the health care organizations or insurers with whom they usually contract for services are also vulnerable. This means physicians, the second largest cost sector of the health care industry, will also feel the winds of change. Increasingly, specialists and generalists are at the whim of decisions made by employers and payers, and only rarely can they affect these decisions. What, then, are some of the immediate health system responses that will affect the main payer in the system, the employer, and how are employers likely to respond? When Xerox Corporation announced it might move toward a defined contribution approach for employee health care, it was a warning that employers were moving aggressively to protect themselves from both increasing costs and the threat of losing the current legal protection they enjoy under the federal Employee Retirement Income Security Act. But it was more than that. It served as the most recent indication that United States health care systems are in the midst of a wrenching shift of focus from group buyers to individual consumers. The shift may be gradual (and outcry from employees led Xerox to soften its original position— but it has already begun. Newly empowered health care consumers are taking responsibility for their health plan choices. Ultimately, they may force health plans, insurers,
providers, and suppliers, especially pharmaceutical manufacturers, to re-evaluate their business models. Physicians are in the front line of feeling the effects of any important change, whether in medical science or medical economics. For example, at the macrolevel organization, financing and delivery of services will change, whereas at the level of individual physicians the way they diagnose and treat will also be affected, differentially for the specialist gastroenterologist and primary care physician. For example, the need by managed care organizations to save money by influencing physician medication recommendations from prescription GERD medications to over the counter medications likely has important but as yet unknown health effects on individuals and populations. What impacts, if any, will this have on GERD progression to erosive esophagitis to Barrett’s esophagus and beyond? What impacts will it have on quality of life and work absenteeism due to GERD? Will the cost of absenteeism and reduced productivity far outweigh whatever savings accrue from reduced medication budgets? Will changing patient behavior because of increased consumerism change the nature of the physician/patient relationship? For example, will patients be more directive in their demands for specific diagnostic tests like endoscopy for GERD symptoms? If so, the physician bears the brunt of contending with the payer while bearing the ill will of the patient if the insurer refuses to pay.
UNDERSTANDING THE CHANGING EMPLOYER MARKETPLACE The cost dilemmas that employers face are exemplified in Figure 1. Although general inflation has remained low, employer health care costs will rise at two to three times general inflation for the next several years. Employers must either accept trend increases or examine new strategies to address costs. In thinking through their strategies, employers know that prescription medications are trending upwards at a clip of ⱖ15% the past 3 yr and that pharmaceuticals are a key contributor to the cost increases. In addressing costs, employers are asking, “What cost levels and increases are acceptable? What return on investment can my company expect from the ‘investments’ it is making in health benefits
AJG – August, Suppl., 2001
Figure 1. The relationship between employer health benefits costs and general inflation from 1984 projected to 2005.
for employees? How do cost increases affect overall total rewards for employees?” In this environment, treatments and prescription medications, like those aimed at GERD, are under increasing scrutiny. Unfortunately, few employers and payers are addressing the quality/outcome side as vigorously as cost, and value of their new payment policies remains unknown. Many employers are challenging their traditional approaches to health care and are considering, for example, the establishment of more cost sharing with employees for prescription drugs, such as three-tier benefit plans. In Figure 2, the results of a Towers Perrin cost survey of a sampling of large employers show that for both health maintenance organizations and other types of health insurance coverage the cost burden on employees has increased over the past few years. Often employers are slow to change their health benefits strategies, but some, like Xerox, are considering major changes that will likely cause others to follow. We estimate that between 10% and 15% of Fortune 1000 companies are considering reducing or eliminating their direct involvement in health benefits. These employers want to free themselves from the costs associated with administering those benefits and reduce their vulnerability to legal action. Already, the technology exists to facilitate this transition in the form of online brokers and services— called
Employers, Health Care Costs, and the Rise in Consumerism
S71
aggregators—that provide quotes, seek out best prices, and make comparisons in terms of benefits. In some cases, employers may choose to become aggregators themselves. They will simply give employees access to intra- or extranet sites and create what we call an employee mall. Approximately another 15% of Fortune 1000 employers will play an increasingly active role, in the hope that doing so will contain costs, give them leverage to demand better quality and service, and, in turn, enable them to better manage employee health and productivity. These employers—some of whom have already begun the process— believe that there is real return on investment potential with this proactive strategy. They will provide incentives for workers who choose plans that offer preventive care, disease management, and/or providers who support rapid return to functionality. Figure 3, developed by the consulting firm Towers Perrin, shows the two extreme policy options that employers have available. Those that adopt an active strategy would take employers from where they are today toward increasing levels of involvement in improving employee access to information, directing employee choices through plan selection and employer subsidies, managing demand through wellness and disease management initiatives, influencing health care quality and delivery, improving customer service, and integrating all health-related programs to better manage the overall “health of the workforce.” The consumer focus here would be the emphasis on employees’ responsibility for their health, and ensuring that they have the resources to maintain it. Active employers will begin to act when they understand the costs, where they come from, and how to manage them. These employers will act on both the direct and indirect impacts of costs. Active employers will examine the impact of productivity loss, as exemplified in Figure 4, and establish a very high priority on conditions that contribute to lost employee productivity. A passive strategy would limit and/or gradually reduce the level of employer intervention, focusing first on the basics of plan selection, baseline negotiations with potential insurers, and setting employee contributions. The passive employer would then leave the rest to employees and, possibly, to outside vendors who would manage health plan and provider performance. The consumer focus here rests squarely on the concept of employee empowerment. Xerox, if it follows through with its defined contribution approach, would be an extreme example of the passive employer.
TECHNOLOGY WILL GREATLY AFFECT THE FUTURE DIRECTION OF EMPLOYEE HEALTH BENEFITS Figure 2. The employee portion of health care premiums is increasing (1).
The fact that Internet usage is expected to reach 136 million Americans by 2002 has not been lost on employers. The age of technology frees employers to move either aggressively
S72
Veit
AJG – Vol. 96, No. 8, Suppl., 2001
Figure 3. The passive and active strategies that employers are considering.
toward or quickly away from the management of employee health benefits. For the actively inclined employer, the Internet offers many opportunities to improve the efficiency and cost effectiveness of employee health benefits management. For the passively inclined employer, technology offers employees the tools to become more self-sufficient. Internet technology is rapidly arming consumers with readily accessible, credible health information. The key question that remains for employers is, of course,
will the new consumer-driven health care system be able to bring health care cost increases down to those of general inflation, while delivering the quality and access improvements that consumers demand? Will it stave off national health care? As plans reinvent themselves to respond to these changes, they may find that many of the cost issues are impossible to tame under the current structure. Drug costs, especially those directed toward chronic diseases such as GERD; technology costs; and the demand for new and expensive treatments all may lead us to a new breed of
Figure 4. Impact of productivity loss on employer costs.
AJG – August, Suppl., 2001
consumers who are satisfied with service and quality, but very unhappy about the impact on their wallets. There is, however, reason for hope. The biggest players in technology are jumping into health care feet first. Healtheon/WebMD announced an alliance with HNC software for an Internet-based claims processing system that the companies asserted could reduce the cost of processing a claim from $15 to $2. Other systems deliver up to date, interactive protocols to the point of service, thereby reducing many of the costly mistakes attributed to inappropriate care and adverse drug interactions. New alliances with providers and employer emphasis on employee well-being may also go a long way toward effectively managing costs, as well as toward restoring faith in a beleaguered system. Should these things pan out, the Age of Consumerism and Technology may be the era when we finally achieve an optimal blend of cost, quality, and access.
UNDERSTANDING THE INDIVIDUAL CONSUMER WILL BE A MAJOR BUSINESS IMPERATIVE FOR HEALTH PLANS AND SUPPLIERS With at least some and perhaps much of the movement in the employer market pointing toward increased emphasis on the individual consumer, plans and suppliers will have to figure out how to reach past employers to individuals who, until now, have only been a relatively passive purchasing audience. Direct to consumer marketing and selling of prescription drugs is becoming a trend, and this will increase in future years. Many in the older generation might be happy to maintain the status quo, but many others will embrace the change. Nevertheless, health plans and suppliers must begin to understand the nuances of the consumer marketplace in health care. The first step is to recognize that health care consumers are uniquely complex. They have multiple personalities and multiple concerns depending upon where they are in the process. They are shoppers, members who use services, and patients. Sometimes they are all three at once. A shopper and member’s preference for ease of access over quality care can turn quickly to quality at any cost when serious illnesses emerge and the consumer is suddenly a patient. This may be especially true because, under the current system, patients pay only a fraction of what the services actually cost. In the absence of a serious illness, however, when consumers become members plan service becomes paramount. And plans must recognize that member satisfaction is slipping. In 1999, 52% of Americans could only rate their care as fair or poor, a 6% downward shift from the previous year (2). In a number of areas related to plan service, such as review systems or access to care, confidence levels are clearly declining. How will plans retain members in an era of fierce competition focused on individuals? What level of service and what types of services will they need to employ? Plans and suppliers must also understand that consumers
Employers, Health Care Costs, and the Rise in Consumerism
S73
will become shoppers who are willing to look around for the price/service/quality package that best suits them. Today’s financial services industry, particularly stockbrokers, presents an interesting comparison. Until 1975, broker fees were regulated and consistent. Those that invested used one of a few industry names or went by word of mouth. But when broker’s fees were deregulated, Charles Schwab introduced the discount brokerage and significantly expanded investing to a whole new class of consumers. Subsequently, the Internet opened the market even more, and people are demanding and receiving a dazzling array of products and services. Merrill Lynch, which once scoffed at the need to respond to online trading, quickly and publicly changed its tune. How will health plans respond when people can truly comparison shop by weighing plan benefits and price? And health care consumers will have the tools to shop. They will gather their information from a wide range of sources, including electronic media, printed material, and providers. Baby boomers—the largest demographic group— understand their economic power and are driving many of the political and legal challenges to which the industry must respond. In addition, the most savvy among the boomers are the members of plans that can least afford to lose, because they tend to be the healthiest and, therefore, the most profitable group. Finally, plans and suppliers must recognize that physician groups, politicians, the press, and a series of legal challenges are fueling a rampant mistrust of many of the health system’s most prominent stakeholders, including health plans and the pharmaceutical industry. How deep is the current mistrust? What will it take to restore it? How will American consumers make sense of the tension between their expectations of unlimited care as an inalienable right and the impact this will have on what they pay out of pocket? To answer these questions, plans and suppliers must invest some real time and resources in discovering what consumers want. Some of this research will be done through traditional focus groups and surveys. Some of it will leverage Internet technology to track purchasing habits and patterns. Regardless, health system executives should remember that similar consumer research in other industries has led to successful positioning, product development, and company brands—all of which will be crucial to success as employers redefine their roles and as we move into the age of consumerism. Reprint requests and correspondence: Howard Veit, M.B.A., Director and Principal, Tillinghast-Towers Perrin, 1 Atlanta Plaza, 950 East Paces Ferry Road, Atlanta, GA 30326-1119. Received Oct. 6, 2000; accepted Dec. 26, 2000.
REFERENCES 1. 2000 health care cost survey. New York: Towers Perrin, 2000. 2. 1999 health confidence survey. Washington, DC: The Employee Benefits Research Institute, 1999.