The high cost of employee health care benefits appears on most employers’ radar. In fact, roughly 32 percent of total compensation costs are allocated to employee benefits, according to the Society of Human Resource Management.
Newspapers feature headlines similar to the ones that warn: “For 2018, expect steeper health plan premium increases” and “Jump in group plan premiums is projected to be the largest since 2011.” Health insurance companies attribute increasing premiums to rising health care costs.
The traditional response by employers has been to pass along the cost to employees by increasing premiums and deductibles. Unfortunately, this method has had no effect on driving down health care costs.
Employers pay the lion’s share of health insurance premiums, so it stands to reason they can play a role in lowering costs or at least slowing the pace of increases. But what can employers do?
The Denver Metro Chamber of Commerce conducted focus groups with its more than 200 members that included insurers, providers, pharmaceuticals and hospitals. Three key areas were identified as potentially affecting rising health care costs: transparency, reference-based pricing and value-based contracting.
Transparency basically means consumers have access to the cost of services. Transparency in pricing helps consumers make better decisions about their health care. In the current system, though, patients rarely knows the real cost of care until after they’ve received it. Moreover, the price and quality of care varies among providers. Higher price doesn’t always equate to higher quality. The health care industry has responded to this situation, but very slowly.
Reference-based pricing — also known as cost plus pricing — offers self-insured plans a defined benefit structure with reimbursement levels based on various pricing data sets, such as Medicare. For example, let’s say the average charge for a major joint replacement at a hospital is $60,000. The typical network offered by health insurance has contracted for a discount of 20 percent, bringing the cost down to around $48,000. At first glance, the discounted price seems fair until compared to the Medicare price of $9,264. Medicare often reimburses at cost, leaving no margin for the facility and providers. RBP plans address this issue by adding on to Medicare reimbursements to account for the profit margin, which is sometimes more than 100 percent, according to Healthgram. The traditional model with preferred provider networks is discount of off charges. Whatever charges the facility or provider sets, the network then negotiates a contract for discounts that are proprietary and therefore not disclosed.
Value-based contracting offers a system in which part of providers total potential compensation is tied to their performance on cost-efficiency and quality outcome measures. The current model is volume-based. A value-based reimbursement model creates a new paradigm in which care is delivered by an entire coordinated care community sharing in the responsibility — and risk — of outcomes and costs, touching almost every part of health care delivery.
What can employers do? A local group of self-funded employers has created the Employer Health Alliance. The EHA focuses on purchasing value of care rather than volume of care. Its members access a different model for delivery of health care. EHA directly contracts with providers and facilities using cost-plus pricing and provider agreements in which providers share in the risk of delivery of care. As a result, employers are better able to predict health care costs and have informed conversations about health care use. For additional information, visit www.EHA1.org.