Developing A Health Care Strategy

Developing a health care strategy for providing employee health and medical care benefits can be viewed as a program for managing risk exposures on a variety of levels. In its most elementary form, managing this risk involves a three-pronged strategy. First, the organization sponsoring the plan must decide what mode of health care delivery system will be used. Second, the organization must decide on the benefits that will be provided through the selected system. Third, the plan sponsor must decide what contractual, financial, or payment arrangement will be negotiated with insurers or providers of medical care. Negotiation of the financial arrangement also includes what level of risk is assumed by the plan sponsor and whether certain types or levels of risk will be shifted to a third party such as an insurer or the providers of the medical care itself. Increasingly, plan sponsors shift some of this risk to ensure that medical providers have a stake in providing cost-effective and quality care. All three of these macro decisions involve many other tiers of decisions at the micro level, which can have a profound impact on the levels of risk assumed and the financial costs assumed by the plan sponsor.

Designing the Plan and Delivery System

Multitiered Decisions

Not only is the plan sponsor selecting one of the delivery systems discussed previously, but the plan sponsor has latitude to select various plan designs offered by alternate delivery systems or to include plan-specific provisions or procedures particular to the employer group. Unless state law requires certain benefits, an employer quite often has flexibility to design its own schedule of benefits, assuming it is of sufficient size to gain this degree of customization by an insurer or managed care company. At times, even state insurance law is not an immovable constraint because certain administrative service financing arrangements exempt plans from state insurance mandates. Limitations on specific coverages, uses of deductibles/copayments, and the systems for case management and precertification can profoundly impact both risk exposure and cost. The delivery system and plan design, its oversight, and financial incentives also can have behavioral impacts on plan participants influencing the utilization of health care services.

Self-Administration, Third-Party Administrators, and Unbundled Services

The decision to purchase an assembled delivery system from an insurer or managed care company, or to directly contract with providers is generally dependent on employer size and the geographical concentrations of an organization's employees. When an employer is of sufficient size, it might want to deal directly with medical providers and eliminate the costs associated with the intermediary insurer. Even if an employer does not want to assume the burden of self-administration, it is not necessary to purchase all medical care management services through a single provider.

An employer can decide to unbundle specific services that might be more effectively performed by separate entities or purchase an integrated set of services or programs through one provider. Moving specific, specialized functions to third-party vendors with specific expertise in one area can sometimes address specific goals. At the very least, an employer should understand the costs of these services if they are left bundled with the insurer and review claims and other reports to evaluate the services' effectiveness and contributions to cost control.

Use of Multiple Plan Offerings and Single or Multiple Administrators

Medical care delivery systems and benefit design are not an "all-or-nothing" decision for many large employers. Though some employers place their entire block of business with a single insurer or managed care company, many other employers have configured a variety of health plan alternatives and give employees the choice of selecting the health plan that best meets their individual needs. This can be accomplished through a simple choice of medical plan options or through a flexible benefit plan. In large part because of limited dollars available to expand benefit programs and a recognition that a diverse workforce may have varying benefit needs, flexible benefit programs proliferated in the 1980s. In a flex plan, employees are allocated a set amount generally in the form of credits or dollars from the employer, which they can "spend" to select the benefits and plan options of their choice or receive those credits in the form of cash if not spent on benefits. Nevertheless, many managed care companies and insurers offer employers an array of multiple plan designs. Price concessions are often offered if an employer agrees to place the entire block of business with a single administrative entity. An employer must balance the price concessions it will receive and assess the effectiveness of the administrative entity at managing health care costs against the loss of competition that occurs when multiple plan offerings through various administrators are eliminated.

Pricing Plan Options and Designing Employer Subsidies

Regardless of whether multiple administrators or a single administrator is used for separate plan offerings, the plan sponsor must look at the pricing of plan options and make decisions regarding the form and amount of employer subsidy provided to employees. An employer offering a flexible benefit program may price various plan options at prevailing market rates, assign all employees an equal credit amount, and allow them to spend the credits as they prefer. Other employers provide a direct subsidy to their medical plans and only show employees the remaining employee costs they will be required to pay. Some employers subsidize family contracts to a greater extent than single coverage. The employer also must decide how to relate the subsidy to each medical plan option. Plan pricing will affect employee selection patterns. Premiums are impacted by the level of deductibles and co-payments that have been included in the front-end plan design. Accordingly, an employer can determine whether plan costs and certain benefits are being borne by those utilizing those particular benefits, or are being spread over the employee group at large.

The Effects of Multiple Plan Offerings on Employee Selection Patterns and Pricing

The offering of multiple benefit offerings can create an exodus of favorable risks from existing offerings and result in price escalations for those who choose to stay with a previously offered plan. In some cases, the offering of a new plan at favorable pricing can cause such dramatic migration out of a plan that the remaining plan will experience a price spiral that causes termination of the plan. This was particularly true in the mid-1980s for many employers who offered traditional indemnity plans. The offering of either a less expensive comprehensive plan or an HMO resulted in those employees with low utilization for major services migrating to the less costly plans, seeking to reduce their expenditures on monthly health care premiums. With this loss of favorable risks, the indemnity plan retained less favorable risks with higher utilization patterns. Because there was a smaller pool of favorable risks in the plan over which to spread plan costs, the premiums charged to those who remained increased. This increase in plan costs resulted in another group of more favorable risks choosing to leave the plan rather than bear the increased costs of the plan. Again costs increased, giving further incentive for favorable risks to migrate from the plan. Ultimately, a cost spiral like this will cause a plan to become prohibitively expensive and result in its demise.

Designing the Underwriting and Financial Arrangements

As indicated in the discussion of alternative financing techniques, an employer can dramatically alter the financial arrangement of its medical benefits program by determining the amount of risk it will accept. The strategic issue is to select a financial arrangement that controls costs and allows management to assume the level of risk that it believes appropriate for its employee group. The financial arrangement selected can have a behavioral impact on both the providers managing care and the insurer or administrator responsible for management of the plan. Increasingly, employers have explored arrangements that shift more risk to health care providers and that promote incentives to provide quality care. Much research is being done on measuring quality of care and developing information systems that can be used to evaluate cost and quality of care.

The financial strategy for a medical benefits program will have multiple tiers. This is particularly true if multiple plan options are available and employees choose between plan offerings. Plan pricing and plan offerings can alter enrollment patterns and affect the effectiveness of a given financial arrangement or risk-management strategy.

Determining cost-effective medical providers and health plans is not an easy exercise. Certain plans will attract employees from certain demographic and geographical constituencies because of plan benefits or the convenience of provider locations. Health care costs are directly correlated with age, in that older individuals tend to need more care and need to access more extensive and thus more expensive care. Likewise, there can be regional differences in the cost of medical care. Sometimes base premium costs or allocated costs per participant are not the best indicator of cost-effective medical care. Analyzing plan costs by adjusting for demographic, geographic, and other variables in the plan population is the best way to evaluate the cost efficiency.

Measuring Performance and Managing the Plan

A final attribute of health care strategy is to create a system of monitoring and measuring the attainment of plan objectives. It is also important to have a system of controls that ensures that the plan is being effectively managed. A well-developed plan design is of little use if a third-party administrator is unable to administer the design as it was intended. A system for auditing plan results, ensuring quality outcomes and reporting utilization is necessary. For this reason, any delegation of responsibilities for health plan management should involve negotiation on the management reporting responsibilities of the administrator and the performance standards it is expected to achieve. Assigning financial penalties or providing rewards associated with these performance standards can be very effective. For instance, with a traditional insured product, a plan sponsor can require claims payment within a certain number of days for a percent of the claims. With a managed care provider operating a staff model HMO, reporting could be required on the telephone systems for contacting PCPs. There could be performance criteria on the amount of time it takes to reach a physician by phone, and scheduling standards for the amount of time between the initial call and an available appointment.