oversight

Health Insurance: Management Strategies Used by Large Employers to Control Costs

Published by the Government Accountability Office on 1997-05-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 Labor and Human Resources, U.S.
                 Senate


May 1997
                 HEALTH INSURANCE
                 Management Strategies
                 Used by Large
                 Employers to Control
                 Costs




GAO/HEHS-97-71
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-271083

      May 6, 1997

      The Honorable James M. Jeffords
      Chairman, Committee on Labor and
        Human Resources
      United States Senate

      Dear Mr. Chairman:

      At your request, this report examines the strategies of large, innovative purchasers who have
      attempted to stem the rapid escalation in health insurance costs while maintaining or enhancing
      the quality of care for their employees. A better understanding of the strategies and tools
      adopted by such purchasers should assist the Congress in reforming public health insurance
      programs and in identifying potential areas for coordinated approaches by government and
      private sector purchasers.

      As agreed with your office, unless you publicly announce its contents earlier, we plan no further
      distribution of this report until 30 days after its issue date. At that time, we will make copies
      available to interested parties on request.

      If you or your staff have any questions, please call me at (202) 512-7114. Major contributors to
      this report are listed in appendix V.

      Sincerely yours,




      William J. Scanlon
      Director, Health Financing and
        Systems Issues
Executive Summary


                   After several years of double-digit increases in the cost of employee health
Purpose            insurance, the nation’s larger firms, employer coalitions, and even state
                   governments entered the 1990s with an aggressive approach to rein in
                   employee health insurance costs. The recent downturn in health insurance
                   premium growth—in which some large employers actually experienced
                   premium declines—is attributable, at least in part, to some of these efforts.
                   Spending pressures in public programs like Medicare and Medicaid also
                   slowed, though not as markedly as for most private purchasers.

                   A better understanding of the strategies and tools adopted by large,
                   innovative purchasers should assist the Congress in reforming public
                   health insurance programs and in identifying potential areas for
                   coordinated approaches by government and the private sector. For this
                   reason, the Chairman of the Senate Committee on Labor and Human
                   Resources asked GAO to examine the strategies of large purchasers that
                   have attempted to (1) stem the rapid escalation in health insurance costs
                   and, at the same time, (2) maintain or enhance the quality of care for their
                   employees. The sample included 25 private firms, purchasing coalitions,
                   and state governments. (App. I contains details about the sample.)


                   Employers have an important stake in the cost, structure, and quality of
Background         their employee health benefit programs. Private business expenditures for
                   health services—dominated by health insurance premiums for
                   workers—now account for more than 5 percent of total employee
                   compensation compared with about 2 percent in 1970. Clearly, the
                   incentive for constraining the growth in health care costs has intensified
                   over the past few decades. Moreover, employers recognize the pivotal role
                   that health benefits play in attracting and retaining employees and in
                   maintaining productivity. More recently, this mixture of cost and
                   workforce concerns led employers to advocate health care delivery
                   systems with better-integrated care and to play a more active role in
                   managing their health benefit programs.


                   Several dominant themes emerged from GAO’s examination of the health
Results in Brief   benefit purchasing strategies of 25 large purchasers: (1) an emphasis on
                   the delivery of services by better-integrated managed care plans; (2) a
                   focus on measuring and improving the quality of the services provided;
                   (3) a transition to the sharing of costs, responsibility, and information with
                   employees; and (4) a greater reliance on competitive market principles.
                   Large purchasers use their size and/or reputations—which gives them



                   Page 2                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Executive Summary




flexibility—to fashion health care purchasing strategies responsive to their
own needs. Some choose to adopt strategies that respond to specific
differences in the structure of health plans or employee characteristics at
their various locations across the country. Others choose a more uniform
approach at all or most of their key locations. Flexibility with regard to
timing permits some large purchasers to choose between a radical but
quick transformation or the adoption of a more gradual transition.
Strategies are also fashioned to respond to constraints such as unions or
contract rules and strengths like a younger, healthier workforce or market
presence in terms of a large number of employees at a particular location.

The size of a workforce in a specific market can translate into market
leverage. Large purchasers do not hesitate to use their market power to
make demands of potential health insurers or to influence provider
behavior. Among the requirements that a large purchaser can establish are
that health plans justify and substantiate premiums, submit performance
and quality data, and offer broad provider networks. While market
leverage is not necessarily viewed as the most important or only
dimension of a health care purchasing strategy by large purchasers, they
recognize that their size makes a broader range of specific tools available
in formulating their overall strategy.

The specific tools used by large purchasers in implementing their
strategies vary considerably but fall within three broad categories:
(1) health plan evaluation criteria, including techniques to assess
premiums and foster competition among plans; (2) incentives to sway
employee behavior; and (3) overt marketing strategies to influence
employees’ choice of delivery systems and of specific plans. By no means
is there unanimity on the use of evaluation criteria. Many large purchasers
GAO interviewed recognize the shortcomings of the cost, quality, and
access criteria that have been developed so far. Despite their
shortcomings, these criteria are of growing importance: first, they provide
purchasers with data that can be used to persuade often skeptical
employees about the quality of the health plans offered; second, the
criteria require competing health plans to demonstrate to equally skeptical
purchasers that managed care is indeed a cost-effective choice.

Most purchasers are convinced that providing an incentive for employees
to be cost-conscious in their selection of plans and use of health care is a
key component of an effective purchasing strategy. They also recognize
that lower copayments and deductibles coupled with a richer set of
benefits are probably insufficient incentives in terms of achieving



Page 3                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                           Executive Summary




                           significant increases in the number of employees who choose a managed
                           care option. Directly tying the employee’s share of the premium to the cost
                           of a health plan can become a much more powerful incentive for employee
                           choice and insurer behavior when the differences are large enough to
                           affect market share. For the purchasers in GAO’s sample, however,
                           introducing effective and reasonable financial incentives was perhaps the
                           most difficult aspect of implementing a proactive purchasing strategy.
                           Factors that limited purchasers’ flexibility in this regard included unions
                           or the corporate culture’s perspective on employee cost-sharing.



Principal Findings

Purchaser Flexibility Is   Large employers have made dramatic changes in the way they purchase
Key to Evolution of        health insurance. These changes, as well as the variations in the
Effective Health Care      approaches taken, are a testament to the flexibility of the private sector—a
                           characteristic that state governments appear to share. Some large
Purchasing Strategies      employers have ceased to offer a fee-for-service indemnity product or have
                           significantly increased the share of premium for employees who insist on
                           greater freedom in choosing their own doctor, the hallmark of such a
                           health plan. Others have substituted point-of-service (POS) plans that
                           resemble a health maintenance organization (HMO), but also allow access
                           to other providers outside of the HMO network. POS plans are seen by some
                           purchasers as a way to transition employees from the substantially free
                           choice of indemnity coverage to the more restrictive world of HMOs. Most
                           employers have become selective about the HMOs they offer and are
                           focusing greater attention on persuading employees that such health plans
                           are a smart choice. Often employers’ decisions about the type and mix of
                           options are influenced by the differences in the markets where they
                           purchase coverage or in the characteristics of their workforces. An
                           employer’s freedom to change the number and mix of health plans,
                           however, is not without constraint. For example, unions and corporate
                           culture can undermine the consistency among the elements of a firm’s
                           purchasing strategy.


Market Leverage Is a       Size can translate into influence and leverage in the marketplace.
Useful, Though Not         However, the market power of large private sector employers is often
Essential, Component of    exaggerated. While a purchaser may be able to exert leverage over health
                           plans in a few local markets because of a relative concentration of
Market Strategies


                           Page 4                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                           Executive Summary




                           workers, the number of employees and covered lives often masks the
                           geographic fragmentation of the workforce. For example, one firm GAO
                           interviewed has approximately 250,000 employees eligible for benefits
                           who are distributed across 19,000 zip codes. The largest number of
                           employees in any one location is only about 5,000. Such fragmentation was
                           sometimes accentuated by allowing different divisions of a corporation to
                           purchase HMO coverage separately. To enhance their leverage, some firms
                           have formed purchasing coalitions, reduced the number of plans offered,
                           consolidated HMO purchasing at a central office, and relied on their
                           national reputations to attract health plans. In markets with little managed
                           care penetration and a relatively small number of employees, some firms
                           choose not to devote resources to developing an effective purchasing
                           strategy. The number of employees simply does not justify the effort and
                           cost involved. States as purchasers of health care, on the other hand, have
                           substantial buying power. For several years, the California Public
                           Employees’ Retirement System has used the market power of the state and
                           local governments’ almost 1 million covered lives to demand HMO rate
                           reductions.


Purchasing Criteria Used   In the past, many large employers offered a choice between a standard
to Justify and Limit       company indemnity product and a variety of HMOs. Some firms told GAO
Number of HMO Options      that HMOs were selected without any specific criteria or coordination on a
                           company-wide basis. Nor were HMOs held accountable for actually
                           managing care, the presumptive benefit of such a delivery system.
                           Moreover, since employers were not advocating HMOs, choice and quality
                           were not major issues with their employees in selecting participating
                           plans. Today, many large firms have established criteria to help them
                           decide with which HMOs to contract. Generally, the effect of these criteria
                           is to limit the number of HMOs offered. For example, some firms require
                           that an HMO seek accreditation from the National Committee for Quality
                           Assurance and be able to report data on customer satisfaction and service
                           delivery. However, employers suggested that measures of quality are
                           imperfect at best and require some subjective judgment. Most have
                           pointed out the need to develop a consistent set of outcome-oriented
                           measures.

                           For many firms, a key criterion in selecting HMOs is cost. While the debate
                           continues over the degree to which large employers’ contracting decisions
                           are or should be influenced by cost, there is general agreement that
                           enhancing competition is key in a health care system that looks
                           increasingly to managed care to help moderate premium growth. In the



                           Page 5                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                           Executive Summary




                           past, rather than obtaining HMO premiums through marketplace
                           competition, large firms were frequently price takers—that is, they often
                           paid the “sticker price” rather than shopping for a lower or the best price.
                           HMOs practiced shadow pricing, that is, they simply tracked the costs of
                           alternative plans and set the rates slightly lower to retain a competitive
                           edge. Though often less expensive than indemnity coverage, HMOs had
                           little incentive to keep prices down.

                           Today, most firms use a variety of techniques to obtain the best price
                           possible from HMOs. Plans are asked to submit sealed premium bids with
                           the understanding that not all bids will be accepted and that justification
                           of and negotiation over increases is to be expected. Health plan bids are
                           carefully scrutinized and analyzed, sometimes with the assistance of
                           outside consultants. Employers recognize, however, that it is difficult to
                           determine the true cost incurred by managed care plans because of
                           inadequacies in the data currently available from such plans. During
                           negotiations, plans are often informed of their standing relative to
                           competing plans and of the impact of a proposed premium increase on the
                           employee contribution. While purchasers stress that giving employees an
                           incentive to be cost-conscious in selecting a health plan fosters a
                           competitive framework, they do not believe that the resulting competition
                           reduces the importance of or eliminates the need to negotiate.

                           Access objectives, a final criterion used by many purchasers to select
                           HMOs, may actually work at cross-purposes with the goal of selecting the
                           most cost-efficient or highest-quality plans. Employers recognize that very
                           broad networks affording the greatest choice of physicians are generally
                           not the most efficient and may lack the management features that are the
                           purported hallmark of a managed care delivery system. Because of the
                           limited availability of managed care in some markets, particularly rural
                           areas where a managed care option may not even exist, some employers
                           continue to offer indemnity-type products.


Financial Incentives and   Purchasers also phased in or incorporated financial incentives to
Information Used to        encourage employees to transition from high- to lower-cost products.
Advocate HMO Enrollment    Relatively few of the purchasers in GAO’s sample have tied their
                           contribution to a low-cost HMO, requiring the employee to pay the
                           difference for a higher-cost alternative. Most employers fall somewhere in
                           between the adoption of a low-cost formula and one that provides no
                           incentive to be cost-conscious. Whatever the formula, however,
                           purchasers generally now ask employees to contribute more to the cost of



                           Page 6                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                  Executive Summary




                  coverage, particularly for those who choose an indemnity option. On the
                  other hand, a few firms use incentives to encourage employees to enroll in
                  the indemnity plan if demographics suggested a lower use of health care
                  services. Such firms contend that HMOs can be more expensive for healthy
                  workers because under capitation, services must be paid for even if they
                  are never used.

                  Because union agreements or corporate culture may impede the use of
                  such financial incentives and because of what purchasers referred to as a
                  constant stream of negative publicity ranging from gag rules to maternity
                  stays, information on the advantages of managed care has assumed even
                  more importance in influencing employee health benefit decisions. Firms
                  have become advocates for managed care by stressing the differences
                  between indemnity and managed care products—no claim forms, better
                  preventive care services, increased continuity and coordination of care,
                  and lower out-of-pocket costs. Before implementing its current managed
                  care strategy, one firm only provided the names and phone numbers of
                  available HMOs. Now this firm provides considerable information to
                  employees on HMOs and, in fact, emphasizes HMOs in its open enrollment
                  literature. During open enrollment, some purchasers now routinely
                  provide comparative information on the managed care plans they offer,
                  including (1) basic information on the network such as size, participating
                  hospitals, and percentage of physicians accepting new patients; (2) the
                  results of customer satisfaction surveys; and (3) data on the delivery of
                  preventive services such as immunization or mammography screening
                  rates. As reflected by the prominence of such data in the information
                  provided to employees, access is the single most important issue for
                  employees.


                  GAO   is making no recommendations in this report.
Recommendations
                  The purchasers in our sample commented on a draft of this report. They
Comments From     generally agreed with our presentation of the information and our
Purchasers        observations. They also provided technical suggestions, which we
                  incorporated where appropriate.




                  Page 7                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Contents



Executive Summary                                                                                       2


Chapter 1                                                                                              10
                         What Is an “Active” Purchasing Strategy?                                      10
Introduction             Active Purchasing Shaped by Employee Perspective                              11
                         Managed Care Comes in Many Varieties                                          12
                         Transition From Payers to Purchasers                                          16
                         Objectives, Scope, and Methodology                                            17

Chapter 2                                                                                              20
                         Flexibility: The Foundation of an Active Purchasing Strategy                  20
Flexibility and          Importance of Market Leverage Often Overstated                                29
Leverage: Attributes
of Large Private and
Public Purchasers
Chapter 3                                                                                              33
                         Tension Between Need for and Adequacy of Evaluation Tools                     33
Purchasers Use           Price: Tools Used to Evaluate Premiums and Enhance                            34
Evaluation Criteria to     Competition
                         Quality: Some Employers Hesitant About Using Quality Criteria                 48
Pursue Price, Quality,   Access: Employers Accommodate Employee Concerns About                         52
and Access Goals           Choice
                         Application of Criteria Varies                                                54

Chapter 4                                                                                              57
                         Evolution in Employee Benefit Options                                         58
Plan Options,            Developing Financial Incentives Poses Challenges for Purchasers               61
Incentives, and          Firms Try Marketing to Overcome Resistance to Managed Care                    70
Marketing Used to
Sway Employee
Behavior
Chapter 5                                                                                              74
                         Advocacy of Managed Care                                                      74
Observations             Competitive Market Principles                                                 74
                         Influencing Employee Behavior                                                 76
                         Common Elements, Yet Diversity of Approaches                                  76




                         Page 8                      GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                        Contents




Appendixes              Appendix I: Characteristics of Purchasers in GAO Sample                      78
                        Appendix II: Background on HEDIS and NCQA Accreditation                      80
                        Appendix III: Summary of Southern California Edison                          82
                          Performance Measures
                        Appendix IV: Changes in HMO Enrollment, Plan Options, and                    83
                          Financial Incentives

Major Contributors to                                                                                86

This Report
Tables                  Table 1.1: Employer-Employee Perspectives on Managed Care                    12
                        Table 4.1: HMO Enrollment for Purchasers in GAO Sample Before                57
                          and After Changing Purchasing Strategy
                        Table 4.2: Health Care Options Available                                     59
                        Table 4.3: Hypothetical Firm-Employee Contribution Options                   62
                        Table 4.4: Financial Incentives Adopted by Purchasers                        63
                        Table I.1: Characteristics of Private Firms                                  78
                        Table I.2: Characteristics of Private Purchasing Coalitions                  79
                        Table I.3: Characteristics of State Government Programs                      79
                        Table II.1: Status of NCQA Accreditation Reviews as of                       81
                          December 1996

Figures                 Figure 1.1: Change in Employer-Sponsored Managed Care                        13
                          Enrollment From 1987 to 1996
                        Figure 1.2: Spectrum of Health Care Plans                                    14


                        Abbreviations

                        BHCAG      Buyers’ Health Care Action Group
                        CalPERS    California Public Employees’ Retirement System
                        HEDIS      Health Plan Employer Data and Information Set
                        HIPC       Health Insurance Plan of California
                        HMO        health maintenance organization
                        IPA        independent practice association
                        NCQA       National Committee for Quality Assurance
                        OSC        organized system of care
                        PBGH       Pacific Business Group on Health
                        PCP        primary care physician
                        POS        point-of-service
                        PPO        preferred provider organization
                        RFP        request for proposal


                        Page 9                     GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 1

Introduction


                       Large private sector purchasers we interviewed suggest that the
                       double-digit increases in the cost of health insurance common just a few
                       years ago have been controlled considerably in the last 2 years—a
                       development they attribute, at least in part, to their more active
                       management of employee health benefit costs. Virtually every study of
                       health care cost trends since 1990 corroborates the dramatic slowdown in
                       health care inflation. For example, surveys of private employers reported
                       1995 increases of 2.1 percent and 1996 increases ranging from 2.5 percent
                       to only .5 percent.1 According to a Peat Marwick survey, health
                       maintenance organization (HMO) premiums experienced the least
                       fluctuation, growing by only four-tenths of a percent in 1995 and followed
                       by a decrease of the same magnitude the next year. It was the second
                       straight year, the survey reported, that the rate of increase in premiums
                       was less than the growth in three key indicators: (1) overall inflation,
                       (2) inflation in the heath care sector, and (3) growth in workers’ earnings.2
                       Moreover, some large purchasers have reported HMO premium decreases
                       for several years. While Medicare and Medicaid have also experienced a
                       slowing of cost growth, these public programs have not been as successful
                       as the private sector in subduing program cost growth. What remains
                       uncertain is whether this tempering of the rate of health care inflation is a
                       short-lived aberration or is due, at least in part, to tangible changes in the
                       way private and some state purchasers shop for and offer health benefits
                       to employees.

                       In order to understand how changes in health benefit purchasing
                       strategies have contributed to cost control, we examined the experience of
                       a group of 25 large health insurance purchasers—private firms, purchasing
                       coalitions, and state governments. Many of these entities have opted for an
                       approach to purchasing that demands more analysis on the part of the
                       buyer. They have developed and applied criteria in a competitive
                       environment to assist them in the selection of health plans. Finally, they
                       have restructured their benefit programs to encourage employees to
                       choose less expensive or more efficient health care options.


                       The approach adopted by some large employers can be characterized as
What Is an “Active”    an “active” purchasing strategy. It is a systematic way of identifying and
Purchasing Strategy?   offering a mix of health care options that meet a purchaser’s expectations

                       1
                        Foster Higgins and KPMG Peat Marwick conduct annual surveys of employer-sponsored health
                       benefits. The former includes both large and small employers from the private and public sectors
                       (more than 10 employees), while the latter focuses on firms with 200 or more workers.
                       2
                        Inflation is measured by the Consumer Price Index.



                       Page 10                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                     Chapter 1
                     Introduction




                     in terms of access, quality, and price. Large purchasers use different terms
                     to describe what is essentially a similar approach. For some, the concept
                     of a “purchasing strategy” is synonymous with “managed care”—a delivery
                     system that some believe has the potential to be more efficient than
                     traditional, noncoordinated indemnity coverage. Others describe their
                     strategies as “managed competition,”3 a blending of the competitive and
                     regulatory approaches that have coexisted for many years in the U.S.
                     health care system. Traditional economic theory suggests that market
                     forces are capable of promoting efficiency and responsiveness. To
                     advocates of this strategy, however, managed competition connotes a
                     needed rationalization of the health care marketplace intended to
                     encourage cost-consciousness on the part of both health plans and
                     employees. Finally, some describe their purchasing strategy as
                     “competitive” or “market-oriented,” that is, harnessing choice among plans
                     vying for market share to promote greater efficiency in the delivery of
                     health care. Whatever the terminology, these purchasing strategies have
                     one point in common—active intervention on the part of buyers to
                     encourage the development and acceptance of more cost-effective health
                     care delivery systems. Two natural attributes of the large purchasers in
                     our sample assisted their transition to active purchasing: (1) the flexibility
                     to adapt their benefit programs to individual markets and other
                     circumstances and (2) the ability to harness the market leverage conveyed
                     by their size.


                     An integral component of an active purchasing strategy is responsiveness
Active Purchasing    to employee concerns about managed care. Benefit managers we
Shaped by Employee   interviewed believe that this delivery system offers the best value for the
Perspective          benefit dollar. They also recognize that workers are generally skeptical
                     about managed care and about the motivation for adopting a benefit
                     management strategy that professes the compatibility between efficiency,


                     3
                      The economist Alain Enthoven proposed “managed competition” as a way of addressing recognized
                     flaws in the health insurance market, a market in which purchasers lack the data necessary to make
                     informed decisions and in which health plans have an incentive to avoid enrolling sicker and more
                     costly individuals. His concept advocates the establishment of sponsors, sometimes referred to as
                     health insurance cooperatives or purchasing coalitions, to act as buying agents for participating firms
                     and individuals in each market area. Just as most large employers do today, the cooperative would
                     enforce the participation rules for both enrollees and health plans. The rules would include guaranteed
                     access, risk-adjustment of premiums, community rating, and standardized benefits/coinsurance.
                     Enrollees would be offered a variety of health plans that compete not only on price but also in terms of
                     quality. Thus, the cooperative would be responsible for distributing standardized quality and outcomes
                     data on participating plans. Enrollees could choose any plan during an annual open season, but to
                     encourage price sensitivity, an employer’s contribution toward premiums would be limited to the cost
                     of the lowest-price health plan. Enthoven and others have refined and rearticulated the concept since
                     it was first introduced in the late 1980s. Without embracing Enthoven’s entire construct, some large
                     purchasers have adopted important elements of his managed competition theory.



                     Page 11                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                   Chapter 1
                                   Introduction




                                   as reflected in lower premiums, and quality. Employees, we were told, are
                                   usually aware of the cost issues underlying employer decisions about
                                   health benefits. Moreover, purchasers cited the constant barrage of
                                   negative publicity as a reinforcer of employee anxiety about managed
                                   care—publicity that one benefit manager described as focusing on single
                                   anecdotes to characterize the total picture. The negative publicity often
                                   suggests that managed care

                               •   promotes efficiency by denying needed services and
                               •   impinges on the doctor-patient relationship.

                                   Table 1.1 characterizes the different viewpoints that sample employers and
                                   their employees bring to the issue of managed care.

Table 1.1: Employer-Employee
Perspectives on Managed Care                      Employer perspective                  Employee perspective
                                   Choice         Choice means choice of a plan or      Choice means “I can continue to
                                                  a delivery system.                    see my current doctor.”
                                   Quality        A delivery system that actually       Quality resides in ability of
                                                  manages care is more likely to        employee to shop freely for the
                                                  result in an efficient and            “best” provider; restrictions
                                                  high-quality product.                 inherent in managed care are a
                                                                                        threat to quality.
                                   Price          Most cost-effective delivery system   Managed care sometimes saves
                                                  may be one that limits choice; low    money by rationing services;
                                                  cost may reflect greater efficiency   employees are skeptical that lower
                                                  rather than poor quality.             cost equates to higher quality.

                                   These differing perspectives have helped shape the benefit management
                                   strategies adopted by the employers in our sample. Though they remain
                                   convinced that managed care has the potential to deliver higher quality at
                                   a lower price, purchasers understand the employee retention value of
                                   competitive health benefits. They recognize the need to implement
                                   changes in ways that maintain good employee relations, protect their
                                   ability to recruit workers, and enhance productivity. The attempt by
                                   purchasers to respond to concerns about limited choice and poor quality
                                   are evident in (1) the articulation of criteria designed to help evaluate
                                   health plans, (2) the mix of plans actually offered to employees, and
                                   (3) the marketing strategies used to address negative employee
                                   perceptions about managed care.


                                   Because of the different types of managed care plans available to
Managed Care Comes                 employers, managed care is perhaps most clearly defined by its opposite,
in Many Varieties

                                   Page 12                          GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                  Chapter 1
                                  Introduction




                                  traditional indemnity coverage. In contrast with managed care, traditional
                                  indemnity coverage allows a free choice of providers and reimburses
                                  physicians and hospitals with limited or no review of the appropriateness
                                  of the services rendered.4 On the basis of a 1996 survey of health benefits
                                  offered by firms with 200 or more workers, only 3 percent of employees
                                  are enrolled in such a traditional indemnity program. Another 23 percent
                                  are in managed indemnity plans that require precertification for inpatient
                                  services and other forms of utilization controls. And the remaining
                                  three-quarters are enrolled in a variety of managed care plans, including
                                  (1) several different types of HMOs, (2) preferred provider organizations
                                  (PPO), and (3) point-of-service (POS) plans.5 The rise in managed care
                                  enrollment has been swift. Figure 1.1 shows that since the late 1980s,
                                  managed care enrollment has nearly tripled.6


Figure 1.1: Change in
Employer-Sponsored Managed Care
Enrollment From 1987 to 1996
                                              1987                                                                  1996

                                                                         Managed Care




                                                   27%

                                        32%                              Managed Indemnity                                 74%



                                                  41%                                                       23%
                                                                         Traditional Indemnity


                                                                                                                     3%




                                  Despite the variety of managed care plans, most include one or more of
                                  the following common cost-control features: (1) physician and hospital
                                  networks with explicit criteria for inclusion, (2) alternative payment
                                  methods and rates that often shift some financial risk to providers, and



                                  4
                                   Another characteristic of traditional indemnity coverage is its use of the fee-for-service payment
                                  mechanism to reimburse providers. Fee-for-service is also used in PPOs and to some extent in POS
                                  and HMO plans. For example, an HMO may pay fee-for-service for some highly specialized procedures.
                                  5
                                   KPMG Peat Marwick, Health Benefits in 1996 (Vienna, Va.: Oct. 1996).
                                  6
                                   1987 employer survey conducted by the Health Insurance Association of America.
                                  Page 13                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                            Chapter 1
                                            Introduction




                                            (3) utilization controls over hospital and specialist physician services.7 A
                                            managed care plan’s potential for savings depends on the stringency of its
                                            cost-control features. In general, HMOs tend to use more stringent controls
                                            than PPO or POS plans (see fig. 1.2). However, there is variation within the
                                            different types of managed care plans, and as a result, some HMOs have
                                            weaker controls than PPO or POS plans.



Figure 1.2: Spectrum of Health Care Plans




                                            7
                                             For a description of the evolution and use of the term managed care, see Managed Health Care: Effect
                                            on Employers’ Costs Difficult to Measure (GAO/HRD-94-3, Oct. 19, 1993). The traditional distinctions
                                            among managed care plans are becoming outmoded as plans rapidly evolve in response to
                                            marketplace demands. For example, Kaiser, a group-model HMO, now offers a POS product in certain
                                            markets and sometimes contracts with non-Kaiser hospitals. Moreover, the broadening of HMO
                                            provider networks in some markets is contributing to a blurring of the difference between some HMOs
                                            and PPOs.



                                            Page 14                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
    Chapter 1
    Introduction




•   HMO: There are several types of HMOs. Staff- and group-model HMOs are the
    most tightly controlled managed care plans. The former hires physicians
    directly, while the latter contracts with one or more large physician group
    practices. Most physicians serve HMO enrollees exclusively, often
    practicing in clinics owned by the plan. Physicians are either paid a salary
    or a fixed amount per enrollee, a practice referred to as capitation, for
    providing comprehensive health services. A patient’s care, especially
    referrals to specialists and hospitalization, is typically coordinated by a
    primary care physician. A third type of HMO, the independent practice
    association (IPA), consists of networks of individual physicians that also
    serve non-network patients covered by other insurance. Typically, IPAs
    contract with a large number of physicians, and their enrollees represent
    only a small portion of each physician’s practice. As a result, IPAs generally
    have less leverage over physicians’ use of services than do staff or group
    model HMOs. About as many IPA model HMOs reimburse their primary care
    physicians under a fee-for-service payment schedule as use capitation. By
    1996, about 33 percent of insured employees were enrolled in HMOs.8
•   PPO: To compete with and provide an alternative to HMOs, insurers and
    employers began offering PPOs during the early 1980s. PPOs retain many
    elements of indemnity coverage but provide enrollees a financial
    incentive—lower cost-sharing (copayments)—to receive care from a
    network of providers that are normally reimbursed at a discounted
    fee-for-service rate. PPOs vary in the size of their networks and in whether
    they employ a gatekeeper—a physician who controls referrals to
    specialists. By 1996, about 26 percent of insured employees were enrolled
    in PPOs.9
•   POS: POS plans are a hybrid combining features commonly associated with
    HMOs, PPOs, and, in some instances, indemnity coverage. As denoted by the
    term, the condition under which medical services are provided is
    determined by the enrollee each time care is sought. The HMO option often
    includes a gatekeeper. The PPO option has higher cost-sharing but a larger
    network of providers. Some POS plans even have a third option—free
    choice of providers with the employee responsible for paying an even
    larger share of the cost. By 1996, about 16 percent of insured employees
    were enrolled in POS plans.10




    8
     KPMG Peat Marwick, p. 23.
    9
     KPMG Peat Marwick, p. 23.
    10
        KPMG Peat Marwick, p. 23.



    Page 15                         GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                       Chapter 1
                       Introduction




                       Although the United States has had network-based managed care plans
                       since the 1940s,11 much of the growth and development of such plans has
                       occurred more recently. During the 1980s, sharply rising health care costs
                       encouraged rapid HMO enrollment growth and the emergence of new types
                       of managed care plans, including PPOs and POS plans. The most rapid
                       growth in managed care enrollment has been in IPA-model HMOs, PPOs, and
                       POS plans. Enrollment in staff- and group-model HMOs, the managed care
                       plans that most experts consider to have the greatest potential to control
                       cost growth, has been relatively flat since the late 1980s.



                       In the past, large purchasers offered only indemnity coverage—the
Transition From        pinnacle in terms of enrollee freedom of choice—and, at the time, the
Payers to Purchasers   solitary option for firms choosing to provide health insurance as an
                       employee benefit. Several factors contributed to the decision by
                       purchasers to add a managed care option if an HMO was available. First,
                       federal legislation enacted in 1973 required employers who provided
                       health benefits, paid the minimum wage, and had 25 or more workers to
                       offer a federally qualified HMO if one was available in the employer’s
                       geographic area.12 Second, employers in some markets found that HMO
                       costs were somewhat lower than the costs of their traditional indemnity
                       plans. Third, in some markets with higher managed care penetration,
                       workers asked for HMO options. As noted earlier, other types of managed
                       care plans were subsequently developed with employer encouragement as
                       alternatives to HMOs.

                       By the 1980s, some firms offered a dozen or more HMOs, especially in
                       markets like California’s. They believed that offering a large number would
                       contribute to price competition that would in turn stimulate greater
                       efficiency. Purchasers assumed that a broad choice of HMOs would also
                       serve as an inducement for employees to enroll.13 Purchasers in our
                       sample acknowledged, however, that they lacked a systematic approach to
                       or criteria for evaluating and selecting HMOs. Some firms did not even

                       11
                         Kaiser-Permanente, a group-model HMO, began in California, Washington, and Oregon in 1942.
                       12
                         The HMO Act of 1973, P.L. 93-222. To be federally qualified, an HMO was required to provide
                       comprehensive benefits, community-rated premiums, and an annual open enrollment period.
                       Subsequently, these requirements were amended to provide federally qualified HMOs with additional
                       rating flexibility. The HMO requirement was designed to promote the growth of such plans as a way of
                       improving the capacity and efficiency of the health care system. This law was repealed effective
                       October 24, 1995 (see P.L. 100-517, sec. 7(b)).
                       13
                        James C. Robinson, “Health Care Purchasing and Market Changes in California,” Health Affairs, Vol.
                       14, No. 4 (1995), pp. 119-20.



                       Page 16                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                     Chapter 1
                     Introduction




                     coordinate their purchasing, resulting in a lack of consistency across the
                     company. Moreover, since firms were not advocating HMOs, choice and
                     quality were not major issues with their employees in selecting
                     participating plans. Managed care was simply seen as an additional option
                     that saved some money and expanded employees’ choice. The only
                     selection criteria noted during our interviews were price and expressions
                     of employee interest in joining a specific HMO.

                     Between 1970 and 1990, employer expenditures on health benefits climbed
                     from 2 to 5.2 percent of total compensation and was still growing.
                     Moreover, by the late 1980s, employers were experiencing double-digit
                     growth in indemnity premiums. While HMOs in developed markets were
                     somewhat less expensive than indemnity coverage, their premium
                     increases mirrored indemnity cost growth. Because of shadow
                     pricing—the practice of pegging premiums to just below the cost of
                     alternative plans—switching to an HMO might result in initial, one-time
                     savings followed by rapidly growing health care costs in future years,
                     although the premiums would be somewhat lower than those for
                     indemnity coverage. The combination of spiraling indemnity costs coupled
                     with HMO shadow pricing contributed to the widespread belief that a
                     different approach to selecting and offering HMOs was needed. The advent
                     of this active purchasing strategy coincided with a period of increased
                     competition among HMOs for market share.


                     To better understand how large, innovative purchasers have redesigned
Objectives, Scope,   their health benefit strategies to foster cost control, the Chairman, Senate
and Methodology      Committee on Labor and Human Resources, asked us to examine (1) the
                     design features of purchasing strategies that encourage price competition
                     among health plans, (2) the influence of different health care markets on
                     those strategies, (3) the efforts by purchasers to ensure that quality is not
                     sacrificed in order to achieve cost-containment, and (4) the incentives
                     used to encourage enrollment in less expensive or more efficient health
                     care options. We focused on large purchasers because they are credited
                     with helping to slow down the rate of health care inflation and with
                     increasing health plan accountability. Moreover, their experience is
                     frequently cited as an alternative for reforming publicly funded health
                     benefit programs such as Medicare or Medicaid. We believe that a clear
                     and objective understanding of the cost-control strategies of large
                     purchasers will be useful to policymakers in assessing reform proposals.




                     Page 17                      GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 1
Introduction




The Washington Business Group on Health helped us identify large,
innovative purchasers of health care from different sectors of industry.
The firms selected (1) operate in a number of different states and (2) offer
workers a choice of different types of health plans. In addition to firms
recommended by the Washington Business Group, we identified others
through a literature review and made selections with the goal of obtaining
adequate geographic representation. Predicated on earlier work, we also
included a number of recognized private sector purchasing coalitions in
our sample; these coalitions, with the pooled resources of member firms,
have significant purchasing power in some major markets.14 Finally, we
selected several innovative public purchasers—government agencies that
are responsible for managing the health benefits of state employees;
county, municipal, and other public employees; and sometimes other
groups. State purchasers often surpass the private sector in terms of
purchasing leverage and are second only to the federal government in their
ability to influence the evolution of health care delivery in the United
States. Our sample is judgmental and was not intended to be
representative of the health care purchasing activities of large employers,
coalitions, or state governments. However, we believe that the selection
criteria enabled us to capture the experience of a group of purchasers that
has the most direct relevance to policymakers seeking to reform Medicare
or other publicly funded health insurance programs.

In total, we visited and collected data on the health benefit management
strategies of 15 firms, 4 coalitions, and 6 state government agencies.15
Appendix I identifies the purchasers we interviewed and their
approximate size in terms of employees eligible for health benefits (in the
case of firms) and covered lives (in the case of the coalitions and state
purchasers). Using a standard interview protocol, we met with the health
benefit manager or other appropriate staff for each purchaser to gain
insights on the evolution of its management strategy. In addition, we
examined pertinent material relating to each purchaser’s health benefit
program, such as requests for proposal, published performance standards,
employee benefit handbooks, annual open enrollment material, and report
cards on HMO performance provided to employees.



14
 Access to Health Insurance: Public and Private Employers’ Experience With Purchasing Cooperatives
(GAO/HEHS-94-142, May 31, 1994).
15
  One of the firms in our sample, Mervyn’s, is a division of another employer we interviewed, Dayton
Hudson. Although they were not formally a part of our sample, we included pertinent information on
the Medicaid purchasing strategies of Arizona and Florida, two state governments that have
incorporated competitive market principals into their programs.



Page 18                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 1
Introduction




We also provided a draft of this report to the purchasers in our sample,
who generally agreed with our presentation of the information and our
observations. They provided us with technical suggestions, which we
incorporated where appropriate. Our review was conducted between
January and December 1996 in accordance with generally accepted
government auditing standards.




Page 19                      GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 2

Flexibility and Leverage: Attributes of Large
Private and Public Purchasers

                    Propelled by the dramatic rise in the cost of providing health coverage, the
                    large firms and state governments in our sample have (1) revamped their
                    benefit programs and (2) placed greater emphasis on managed care in the
                    mix of health plans they offer to employees. While their particular
                    situations varied considerably, these purchasers shared two natural
                    attributes that played a key role in their transformation from passive
                    payers to active purchasers of managed care products: flexibility and
                    leverage. These attributes have served as a foundation for launching
                    benefit management strategies aimed at increasing the accountability of
                    managed care plans for the cost and quality of the services they deliver.

                    Benefit managers we spoke with stressed the value of flexibility in
                    developing and implementing an effective health benefit management
                    strategy. The term flexibility conveys a mix of nimbleness, latitude, and
                    adaptability in that a purchaser is able to (1) incrementally or suddenly
                    change the mix and type of health plan options, (2) create employee
                    incentives within its benefit system, and (3) implement a strategy either
                    uniformly or differently in the various markets in which it operates. In our
                    sample, the private sector demonstrated the broadest flexibility. That
                    flexibility, however, is not without bounds. On the other hand, the state
                    purchasers we interviewed appear to have more flexibility than that
                    normally associated with the public sector, a latitude some have used to
                    fashion innovative health benefit strategies.

                    Leverage is a concept that may be more easily described than flexibility,
                    but in our sample, it was less clearly demonstrated. Also called “market
                    power,” it relates to a purchaser’s ability by virtue of size or reputation to
                    exert anticompetitive pressure on health plans to obtain a desired
                    outcome. Large purchasers can also take advantage of the economies of
                    scale conveyed by their size, a factor that should translate into lower
                    administrative costs for operating their benefit programs. While private
                    firms demonstrated the value of their size, it was not something they were
                    able to exercise on their own in many locations. In contrast, state
                    governments in our sample seldom had to rely on purchasing coalitions to
                    establish or augment their already considerable market power.


                    Purchasers we interviewed believe that flexibility is key to revamping both
Flexibility: The    the way they purchase managed care products and the operation of their
Foundation of an    benefit programs. The variation in the approaches taken reflects the ability
Active Purchasing   of large purchasers to make changes where and when they believe it is
                    appropriate. Such flexibility, however, did not always translate into
Strategy

                    Page 20                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                         Chapter 2
                         Flexibility and Leverage: Attributes of Large
                         Private and Public Purchasers




                         wholesale, dramatic changes. Instead, flexibility allowed firms to make
                         changes that were either incremental or limited by geographic,
                         organizational, and even demographic boundaries. While flexibility is
                         generally assumed to be an inherent private sector trait, the firms in our
                         sample were not always completely free to exercise it. These firms were
                         constrained by a variety of factors, such as labor agreements; paternalistic
                         corporate cultures that limit the extent of employee cost-sharing; or a
                         disinclination to alienate employees skeptical about managed care,
                         especially those plans with a more limited choice of providers.


Flexibility Permits      Many purchasers in our sample have redesigned their health benefit
Dramatic Change, but     programs to encourage employee migration into managed care plans.
Some Purchasers Choose   Some employers made significant changes over relatively short time
                         frames, such as introducing new delivery systems or altering the
Incremental Strategy     components within an existing system, such as incentive structures. In
                         some cases, the purchaser believed rapid change was necessary because
                         of its own poor financial performance or that of its self-funded indemnity
                         plan; others made changes in response to what they viewed as failures in
                         the local health insurance marketplace. Some purchasers, however, chose
                         to implement changes incrementally, recognizing that they could not
                         implement a managed care strategy overnight.

                         In 1989, Southern California Edison abandoned its fee-for-service
                         indemnity health plan and embarked on a well-publicized new strategy
                         involving considerable infrastructure investment. Edison established a PPO
                         wholly owned and managed by the company. Just 6 years later, Edison
                         discontinued the PPO plan and turned over the operation of its network of
                         clinics to a medical group. The PPO was replaced with a self-insured POS
                         option and some HMOs. Several state governments in our sample also made
                         rapid and dramatic changes in their health benefit programs. Both
                         Wisconsin and Missouri adopted a managed competition system in 1983
                         and 1994, respectively. In Wisconsin, the impetus was the imminent
                         bankruptcy of the state’s self-funded indemnity plan; the Missouri change
                         was prompted by a series of deficits in its indemnity option. In both states,
                         the employee contribution for indemnity coverage jumped considerably
                         with the introduction of a contribution formula based on the lowest-cost
                         plan. The result was a dramatic increase in HMO enrollment. Private sector
                         firms we interviewed have also relied on financial incentives to encourage
                         migration to more efficient/lower-cost plans. Over the course of a year,
                         one firm eliminated the subsidy for its indemnity plan, which, along with
                         utilization-based increases, resulted in more than a 250-percent increase in



                         Page 21                            GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 2
Flexibility and Leverage: Attributes of Large
Private and Public Purchasers




the cost of the employee contribution. This change contributed to a
significant drop in the number of employees opting for indemnity coverage
and an increase in HMO enrollment from about 30 percent to 60 percent.
This firm plans to eliminate the indemnity option in 1997 in areas where no
POS plan is available.


The structure of a particular market can also encourage large purchasers
to make dramatic changes. Concern over consolidation, overlap in
networks, and shadow pricing by managed care plans in the Minneapolis
health care market led the Buyers’ Health Care Action Group (BHCAG), a
purchasing coalition, to make a significant change.16 BHCAG decentralized
the management of care for its members by dropping the PPO model
originally offered in 1992 and contracting with 15 individual “care
systems”—groups made up of medical practices, clinics, and hospitals.
Enrollment in the new care systems began in January 1997. With this new
approach, BHCAG members essentially contract directly with providers.
Moreover, for the purposes of the BHCAG contracts only, the primary care
physicians are locked into exclusive arrangements with one care system.
This new approach represents a major change in the administration of
benefits and the focus of control for the actual management of care but
allows the employees of BHCAG firms to continue with their current
providers almost undisturbed. Although the primary reason state health
insurance purchasing agencies have joined private coalitions is to
participate in their quality initiatives, the Minnesota Department of
Employee Relations—the state’s health benefit administrator—is
exploring the possibility with its unions of offering the BHCAG care systems
to state employees by 1999. The state’s consideration of joint purchasing
through BHCAG appears to be motivated by a shared concern over
marketplace consolidation.

While many purchasers in our sample want employees to migrate into
HMOs, some recognized that they could not implement such a dramatic
change overnight. Instead, they chose to make incremental changes to
their health benefit programs. Some of these employers told us that they
viewed POS plans as a bridge between traditional indemnity coverage and
an HMO. (POS plans are essentially HMOs that offer an out-of-network
option.) Employers hope that the POS option will allow employees to
become familiar and comfortable with managed care, leading to eventual
enrollment in an HMO. The incentives—lower copayments, no deductible,
and lower limits on out-of-pocket expenses—are designed to attract
employees to the HMO network while still offering employees the option,

16
  BHCAG has 24 employer members and began joint purchasing in 1992.



Page 22                             GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                              Chapter 2
                              Flexibility and Leverage: Attributes of Large
                              Private and Public Purchasers




                              albeit a more expensive one, of broader physician choice. One firm that
                              implemented a POS option reported that out-of-network services only
                              accounted for about 10 percent of total plan costs. Surveys, we were told,
                              have shown that most firms implementing a POS plan have had a similar
                              experience. A benefit manager suggested that unlimited choice is
                              frequently desired but infrequently used when accompanied by a higher
                              price tag.

                              Some firms are deliberately phasing in their managed care strategy.
                              Avoiding use of the term HMO, one purchaser is slowly introducing what it
                              referred to as the next generation of managed care plan.17 To date, it has
                              only identified nine plans with the potential to meet its criteria for
                              information systems and care management. In many markets, even some
                              with mature HMOs, no such plans are available. Over the long term,
                              however, this purchaser hopes to be able to offer “next-generation” plans
                              to all employees. During the transition, the firm continues to rely on its
                              self-funded PPO as well as existing HMOs to cover the majority of its
                              workers. Another firm has phased in HMOs in four states where such plans
                              already enjoy a relatively high degree of acceptance. This firm plans to add
                              HMOs in other states as managed care capacity in these markets matures.


                              Regardless of the nature or pace of change, the private firms in our sample
                              often use their innate flexibility to advocate specific delivery systems and
                              occasionally even individual health plans that they believe offer the best
                              value. While some avoided any direct endorsement of a plan, they do
                              provide considerably more information about favored plans than about
                              others that they also offer. One firm developed and implemented a
                              substantial internal marketing strategy to dispel what it believed to be
                              myths about managed care and to encourage employees to enroll in one of
                              the available HMOs.


Flexibility Permits           To many of the firms in our sample, flexibility also means being able to
Adaptation to Market          adapt the benefit strategy to market conditions and to treat specific groups
Realities and Other Factors   of employees differently. Such differentiation makes it possible to focus
                              management resources in areas with large concentrations of
                              employees—and where a firm spends a large percentage of its benefit
                              dollars. Differences may also stem from a firm’s decision to manage
                              benefits by division rather than centralizing administrative functions in a
                              single benefit staff. Finally, in some cases, the differentiation takes

                              17
                               See cg. 3 for a more detailed description of what this purchaser refers to as organized systems of
                              care.



                              Page 23                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 2
Flexibility and Leverage: Attributes of Large
Private and Public Purchasers




advantage of a perceived variation in the cost of covering certain
demographic groups.

Market conditions often leave a clearly identifiable mark on the benefit
strategy of a large purchaser. California purchasers told us that currently
there is heightened competition among a large number of undifferentiated
managed care plans with broad overlapping networks. This provider
overlap led one coalition we interviewed to characterize the state’s HMO
products as “commodities.” Convinced that there is excess capacity and
inefficiency in the managed care delivery system, the Pacific Business
Group on Health (PBGH), a coalition of 33 West Coast employers, continues
to pressure HMOs to lower prices and to justify any increases with
demonstrable quality and service improvements. Minnesota, on the other
hand, has experienced considerable market consolidation over the past
several years. Only four plans control over 80 percent of the market.
Managed care plans, we were told, are aggressively buying physician
practices. As described above, this apparent march toward monopoly led
BHCAG to a dramatic turnaround in its purchasing strategy.


Finally, certain markets have little managed care or are only beginning to
see its development. Moreover, purchasers believe that some of these
markets are not receptive to the development of HMOs. For example, in
some rural markets, providers, especially hospitals, have actively blocked
the entry of managed care by refusing to contract with such plans. One
purchaser cited the evolution of managed care in Oklahoma City as typical
of emerging HMO markets. Several years ago, this market only offered
purchasers the choice of an inefficient plan that resembled an HMO.
Premiums were high, care was not really managed, and every doctor was
in the plan. The entry of two large managed care plans has introduced
competition, a development that is helping to transform the local market.

For a variety of reasons, purchasers do not offer HMOs at all operating
locations. Thus, some purchasers introduce managed care plans on the
basis of the degree of employee concentration or the extent of HMO
penetration, or both. In certain markets, they have too few employees to
justify the administrative effort. In others, because of the immaturity of the
market, HMOs are more expensive than an indemnity product and are not
offered. Finally, HMOs are often unavailable in rural areas. Even the state
governments in our sample, which generally strive to offer HMOs to all
employees, are unable to do so in some rural markets.




Page 24                            GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 2
Flexibility and Leverage: Attributes of Large
Private and Public Purchasers




A purchaser that adopted extensive quality criteria to screen out
unacceptable plans and to monitor performance told us that the
administrative burden precludes the firm from applying these criteria in
every market where it has employees. Rather, the purchaser focuses its
attention on areas with high concentrations of employees. In such
markets, it (1) monitors HMO performance against published requirements,
(2) works with health plans to build more efficient processes, (3) plans to
produce a report card based on the Health Plan Employer Data and
Information Set (HEDIS) measurements, and (4) analyzes HMO rates by
component. In areas with 500 or fewer employees, we were told, such
extensive monitoring is not economical. In these markets, the firm still
offers HMOs, but relies on the National Committee for Quality Assurance
(NCQA) accreditation as a proxy for health plan quality.

One firm in our sample decentralized management of its benefit program
along internal company lines. We were told that creating a single strategy
for the firm’s separate operating divisions would have been inappropriate
given the potential for disruption that would accompany a centralization
effort. Lack of profitability in one division led to the adoption of an HMO
strategy, but benefit managers were hesitant to adopt this strategy for a
different division that was financially strong. According to benefit
managers, it was not worth disrupting the workforce at the latter division
even if it saved the company money. Consequently, it was possible for
employees working in the same state, but in different divisions, to have
completely different health care options. On the other hand, another firm
is in the process of centralizing responsibility for HMOs in order to
introduce greater consistency across its operating divisions for screening
and selecting such plans.

Employee demographics can also play a role in designing a health benefit
program. Two of the firms in our sample targeted specific coverage
options at their younger, unmarried employees. Believing that these
employees are generally healthy, these firms wanted to encourage the
selection of their self-insured indemnity plan in which the company only
pays for the services used, rather than an HMO with a monthly capitation
rate that must be paid even if the enrollee is never sick. For example, one
firm has an indemnity option called the “Single Person’s Plan”; this option
is free and pays 100 percent of the first $600 of covered medical expenses;
the employee is responsible for the next $500 in expenses before
cost-sharing kicks in. While this option and others are not limited to
younger, single employees, the firm’s intent is to encourage those who do
not fit this demographic profile to select alternative plans.



Page 25                            GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                          Chapter 2
                          Flexibility and Leverage: Attributes of Large
                          Private and Public Purchasers




State Governments Also    Legislatures have frequently given the governing boards and agencies that
Demonstrate Flexibility   purchase health care for state employees and other groups wide latitude in
                          designing and managing the benefit program. The authorizing legislation
                          often provides a general framework but leaves important operational
                          decisions to others. In some states in our sample, employee unions also
                          play an active role in defining benefits, incentives, and how the program
                          actually operates.

                          Many of the state purchasing agencies we visited have the authority to
                          determine the number and type of participating plans and the benefits
                          offered. Moreover, like benefit managers in private firms, they often have
                          the authority to negotiate premiums with participating plans. The
                          legislation establishing the Health Insurance Plan of California (HIPC) is
                          broadly drawn and gives the governing board considerable discretion.18
                          The HIPC board initially considered the possibility of severely limiting the
                          number of plans offered; eventually, the board settled on a strategy of
                          offering a large number of competing health plans. In 1987, Minnesota
                          amended authorizing legislation and gave the agency that manages state
                          employee benefits the power to exclude any health plan from the program.
                          Previously, any licensed carrier had to be offered. In some states, the
                          governing board or agency that manages employee benefits has
                          standardized HMO benefits. HIPC’s governing board actually designed the
                          benefit package.

                          In 1992, Missouri passed legislation creating a new public employer
                          purchasing organization known as the Missouri Consolidated Health Care
                          Plan, with a governing board to manage health benefits for state
                          employees and other government entities. The legislation was prompted
                          by deficits in the state’s self-funded indemnity plan and by a recognition
                          that purchasing leverage was not being maximized under the current
                          approach. We were told that the authorizing legislation gives the governing
                          board significant flexibility to adapt its health care approach to the
                          continual evolution of the health insurance marketplace. After selling its
                          indemnity plan, the board subsequently included the plan’s fee-for-service
                          PPO in a competitive bidding process along with insured HMOs, and
                          instituted a managed competition system. In 1995, the board was also
                          given some negotiating authority with health plans. Flexibility allowed the
                          board to adapt to market conditions in 1995 that resulted in significant
                          reductions in HMO premiums.



                          18
                           As part of 1992 insurance market reforms, California established HIPC—the first
                          government-sponsored voluntary purchasing coalition for small employers.



                          Page 26                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                             Chapter 2
                             Flexibility and Leverage: Attributes of Large
                             Private and Public Purchasers




Flexibility Is Not Without   Looking across our sample, the flexibility of purchasers to develop
Constraints                  wide-ranging variations on a health benefits management strategy is clear;
                             the constraints that helped shape each purchaser’s strategy are less
                             obvious. Several factors, such as concern about the potential disruption of
                             employees’ relationships with their doctors, individual corporate cultures,
                             labor agreements, and the nature of the health care markets in which the
                             firms are located, have limited the degree to which any particular strategy
                             has been implemented.

                             Purchasers recognize that (1) employees do not necessarily share their
                             enthusiasm for managed care and (2) a managed care strategy could be
                             disruptive to employees’ medical care and adversely affect their morale. A
                             variety of approaches have been used to minimize the impact on
                             employees, but in some instances, these approaches may actually be at
                             cross-purposes with the efficiency goal that underlies the adoption of such
                             a strategy. In order to address employee concerns about disturbing
                             existing relationships with physicians, many firms insist that participating
                             HMOs include broad provider networks. At the same time, benefit managers
                             acknowledge that such networks are difficult to manage and are therefore
                             generally less efficient. One firm conducted a “provider disruption
                             analysis” to determine the extent to which employees’ physicians
                             participated in the networks of various HMOs. This firm told us that it
                             ended up contracting with two HMOs that were more expensive but that
                             had also scored well in its analysis.

                             Once a benefit management strategy is adopted, corporate culture and
                             labor contracts may limit a firm’s ability to create incentives for employees
                             to move from indemnity to managed care plans. One of the strongest
                             incentives, requiring employees to pay a portion of the cost of the health
                             plans they select, is essentially unavailable to firms that have a history of
                             paying the full cost of coverage or to firms that face stiff competition for
                             employees. One employer told us that it operates under the paternalistic
                             notion that an employee choosing single coverage should not have to
                             contribute to the cost.19 In other firms, the zero-premium benefits

                             19
                               This same paternalism often does not apply to coverage of dependents. Missouri pays about
                             55 percent of the cost of health benefits for children, but only 28 percent for a spouse and 36 percent
                             of family coverage. These percentages were increased in recent years, utilizing savings realized
                             through the managed competition process adopted for the state employees’ health benefit program.
                             Washington offers free coverage for children in all but the most expensive plans, but the employee
                             must always pay for coverage of a spouse. Xerox has adopted a policy of basing total compensation
                             (benefits and pay) less on family status and more on the employee’s contribution to the business. As a
                             result, it is gradually increasing its allowance for workers choosing employee-only coverage and
                             decreasing the amount for those selecting family coverage. However, the allowance is still so generous
                             that an employee can purchase full family coverage, including prescription drugs, in an efficient HMO
                             with little or no out-of-pocket costs.



                             Page 27                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 2
Flexibility and Leverage: Attributes of Large
Private and Public Purchasers




negotiated by labor unions have a spillover effect on the rest of the
company. One employer told us that it offers benefits free to nonunion
employees so as not to encourage greater unionization of its workforce.

A strong union presence affects not only the cost of health care coverage
to employees but also the pace with which changes can be made. Any
significant changes in the structure of the health benefits for these
purchasers must be included in the collective bargaining process, which
may occur only once every 2 or 3 years. The insistence of unions on
maintaining a free indemnity option has limited the ability of some
purchasers we interviewed, especially those in the private sector, to
implement a uniform managed care strategy for their entire workforce.
However, two firms in our sample, U S WEST and Southern California
Edison, were able to negotiate the substitution of a POS option for more
traditional indemnity-type coverage. In the case of U S WEST, the POS plan
is free. Two state purchasers we interviewed still offer either traditional
indemnity or PPO coverage but have been more successful than the private
sector firms in negotiating labor contracts that require employee
cost-sharing, that is, targeting the state’s contribution to the least
expensive managed care plan. The state of California, on the other hand,
has been discussing a new cost-sharing formula with its unions since the
early 1990s and, as of August 1996, had been unable to reach an agreement
with most bargaining units. We were told that agreement on a new
cost-sharing formula could enhance the leverage of the agency that
manages employee benefits for the state—the California Public Employees
Retirement System (CalPERS)—during negotiations with health plans.20

Characteristics of individual markets can also constrain private firms as
they attempt to implement new health care strategies. Market-based
constraints, in their most basic form, may prevent purchasers from even
offering managed care products. For example, few very rural areas are
served by HMOs. Market characteristics may also dictate the type of
benefits an employer offers. One firm in our sample said that the structure
of benefits first popularized by the automotive industry in the
metropolitan Detroit area makes it difficult to retain employees without
offering first-dollar coverage. That is, most services are provided with no
or minimal copayment or deductible.




20
  Since 1967, other public agencies in the state have been allowed to join CalPERS.



Page 28                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                         Chapter 2
                         Flexibility and Leverage: Attributes of Large
                         Private and Public Purchasers




                         According to the conventional wisdom, large purchasers have a natural
Importance of Market     advantage in the health insurance marketplace. Health plans value their
Leverage Often           business not only for the number of covered lives but also for the prestige
Overstated               that is associated with having a well-known employer as a client. In turn,
                         these two factors allow a health plan to attract more, higher-profile
                         providers, which in turn attracts more business. Some of the private sector
                         purchasers in our sample believe that their size or reputation has been
                         instrumental in obtaining favorable rates from health plans. However,
                         some employers also admit that (1) they do not have leverage in many
                         markets in which they have employees and (2) acting alone, they may not
                         even have a significant amount of leverage in markets where they have
                         large concentrations of employees. Compared with the private sector,
                         some state purchasers we interviewed are second only to the federal
                         government in terms of the number of covered lives in a specific market
                         area.


Several Factors Can      Large private sector employers appear to be taking advantage of their size
Reduce the Leverage of   in purchasing health care coverage in some markets. However, given the
Large Purchasers         size of their payrolls, they generally have less leverage than conventional
                         wisdom would suggest. Factors such as the geographic distribution of
                         employees, large numbers of part-time employees ineligible for benefits,
                         and decentralization of the management of health benefits reduce
                         employer leverage. PepsiCo has approximately 450,000 employees
                         nationwide. Because a large number of them are part-time employees, only
                         about 250,000 are eligible for health benefits. About 170,000 are hourly
                         restaurant workers; they are eligible for a specialized health plan, but few
                         elect to enroll despite the modest contribution required. As a result,
                         PepsiCo only purchases standard health coverage for 85,000 workers.
                         Moreover, benefit-eligible employees are located in all 50 states and
                         distributed across 19,000 zip codes. The firm’s largest concentration of
                         employees in a single state is 5,000, and the next largest concentration is
                         only 2,000, in Southern California. Some firms are organized along product
                         lines or divisions, which purchase health care coverage independently.
                         Different philosophies in the sales and manufacturing divisions of one firm
                         in our sample result in decentralized health care purchasing. Another firm,
                         with some demographic differences among its operating divisions, has
                         decentralized health care administration along divisional lines. Employee
                         demographics led another firm to divide its workforce into separate
                         groups for the purpose of health care purchasing. While such
                         arrangements may demonstrate flexibility, they come at the expense of
                         purchasing power.



                         Page 29                            GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                          Chapter 2
                          Flexibility and Leverage: Attributes of Large
                          Private and Public Purchasers




Little Consensus on       There was little consensus among benefit managers on the number of
Number of Employees       employees needed in a given market to wield significant buying power.
Needed to Have Leverage   Some firms were confident that they had leverage at least in the state
                          where they were headquartered and often had their largest concentration
                          of employees. One large regional firm in our sample told us that it has
                          employees in every state but only has a significant concentration of
                          employees in about 14 states. In several of these 14 states, the firm has
                          between 7,000 and 17,000 workers and believes it has negotiating leverage.
                          The firm’s benefit manager noted, however, that whether a purchaser is
                          one of the top employers at a location can sometimes be more important
                          than its actual number of employees. Other benefit managers looked to
                          purchasing coalitions to enhance their market power—even where their
                          corporate headquarters were located. In areas where firms had small
                          numbers of employees, the managers admitted that they had little leverage
                          and frequently were price-takers.

                          State purchasers have considerable buying power, and some, like CalPERS,
                          have used their leverage to obtain favorable rates. They are often the
                          largest employer in a state, and their workforce is concentrated in a
                          smaller area, that is, usually within the confines of state boundaries. As a
                          result, they appear to have sufficient negotiating leverage on their own
                          without joining coalitions.21 CalPERS represents about 425,000 employees
                          and nearly 1 million covered lives generally concentrated in the state of
                          California. As noted earlier, PepsiCo, the largest private employer in our
                          sample, had 450,000 employees, but only 85,000 were enrolled in the
                          company’s health benefit program. Since 1994, CalPERS has used its buying
                          power to demand rate reductions and improved data collection from HMOs.
                          Moreover, several states are taking steps that could further enhance their
                          buying power. Thus, Washington and Minnesota are attempting to
                          coordinate the purchase of managed care benefits by different state
                          agencies such as Medicaid.

                          Firms without a major presence in any particular market believe that large
                          purchasers do have significant leverage—leverage that translates into
                          better rates at the expense of smaller buyers. For example, two of
                          California’s largest purchasing groups—PBGH and CalPERS—have seen HMO
                          rates decrease in recent years. The benefit manager from a California firm
                          that had seen rate increases over the same time period suggested that
                          health plans are shifting the cost of these discounts to smaller purchasers.



                          21
                            CalPERS and HIPC are members of the Pacific Business Group on Health, but they only participate in
                          the coalition’s quality initiatives, not in its separate negotiating alliance.



                          Page 30                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                        Chapter 2
                        Flexibility and Leverage: Attributes of Large
                        Private and Public Purchasers




Firms Use Variety of    Faced with limited purchasing power resulting from the geographic
Techniques to Enhance   distribution of employees and other factors, some firms in our sample
Leverage                have sought to enhance their leverage through a variety of techniques such
                        as joining coalitions, relying on their national reputations, and limiting the
                        number of health plans with which they contract.

                        Even in metropolitan areas, the large private sector firms in our sample
                        often constituted only a small percentage of the potential business
                        available to a health plan. As a result, about half of the firms in our sample
                        have joined purchasing coalitions.22 While some BHCAG member firms have
                        fewer than 4,000 employees in the Minneapolis area, the coalition consists
                        of 24 major local employers, including firms with a national reputation
                        such as 3M, Dayton Hudson, and General Mills; the firms represent about
                        400,000 covered lives—15 percent of the metropolitan area market. The
                        PPO product offered to member firms through the end of 1996 attracted
                        100,000 enrollees, giving the coalition considerable market power.
                        Similarly, the minimum number of employees required for a firm to join
                        the PBGH negotiating group is only 2,000.23 Altogether, however, this group
                        represents 18 employers with about 400,000 active employees and
                        dependents. All the members of the negotiating group we interviewed told
                        us that they obtain lower HMO rates by jointly negotiating through the
                        coalition.

                        While coalition administrators believe that there are still significant
                        efficiencies to be gained in the health care market, it is not clear that
                        mature coalitions will continue to achieve rate discounts. For example,
                        after 2 years of rate decreases, 1997 rates for PBGH were flat. To further its
                        purchasing goals, PBGH is looking for ways to strengthen its market power,
                        such as recruiting new member firms or reducing the number of health
                        plans with which it negotiates. This latter tactic could result in more
                        aggressive plan bids because of the potential gain in new enrollees.
                        Several firms in our sample that are not members of a purchasing coalition
                        also cited the benefits of reducing the number of HMOs offered. This tactic
                        not only rewards health plans that bid aggressively but also reduces the
                        administrative cost of managing a benefit program. As with flexibility,
                        maximizing buying power by reducing the number of available plans does
                        not come without a cost. Thus, purchasers may find it difficult to eliminate


                        22
                          One coalition’s executive director noted that even firms that have leverage on their own in a
                        particular location may join a coalition because it provides access to a broader range of data on the
                        local health care market.
                        23
                         Not all PBGH member firms are part of the negotiating group. For the 1997 benefit year, 18 of the
                        coalition’s 32 members participated in the coalition’s joint purchasing initiative.



                        Page 31                                 GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 2
Flexibility and Leverage: Attributes of Large
Private and Public Purchasers




health plans because of the impact on employees. One purchaser noted
that it would like to drop plans with high prices and poor quality, but the
firm’s corporate culture is to not disrupt employees. In some cases,
agreement with unions may be needed to drop a plan.

In areas where no local coalition exists, firms use every means at their
disposal to negotiate favorable rates. Like brand-name products, large
firms frequently have a national reputation. Association with such an
employer can be valuable to a health plan, even when the firm may only
have a few hundred employees in the area. The value of such an
association increases when it is a firm with a national reputation for
innovation in health care purchasing. Benefit managers at PepsiCo, a large
employer with a reputation for focusing on quality issues, told us that the
firm has benefited from its reputation in markets where it only has a small
number of employees. Other approaches used by firms in our sample that
are trying to increase their market power include (1) establishing the
National HMO Purchasing Coalition—an organization of large employers
that have joined forces to buy coverage in markets where they each have
too few employees to possess any leverage, (2) purchasing coverage from
a limited number of insurance carriers that operate nationwide, and
(3) using benefit consultants who also work with other large purchasers.
Because of their relationship with and knowledge of premiums being
quoted to other purchasers, benefit consultants may exert some market
leverage over health plans on behalf of their clients.

Labor contracts or disagreement with what they referred to as the “cost
focus” of some coalitions prevented a number of private sector firms from
joining together with other employers to increase their purchasing
leverage. Citing its labor agreements regarding benefit plan design as an
impediment to joint purchasing, Southern California Edison only
participates in PBGH quality initiatives. Other firms in our sample are more
interested in driving changes in how the managed care industry operates
than in obtaining discounts. For example, Xerox is philosophically
opposed to negotiating discounts because of the potential for cost-shifting.
Several firms told us that such discounts only represent a short-term
phenomenon and that market power would be better used by insisting on
improvements in the way health plans manage care, that is, data
collection, analysis, and reporting. Firms with such views, however, may
still join a purchasing coalition in order to participate in customer
satisfaction surveys or other quality initiatives.




Page 32                            GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3

Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals

                   Flexibility and market leverage are often considered to be natural
                   attributes of the private sector—a foundation that some large purchasers
                   have used effectively in their transformation from passive to active buyers
                   of health benefits. However, flexibility and leverage alone are insufficient
                   to achieve the accountability, increased efficiency, and quality
                   improvements being sought by many large purchasers. For this reason,
                   buyers have turned to a number of additional tools to help achieve their
                   goals.

                   We have grouped these tools into three general categories: (1) health plan
                   evaluation criteria, including techniques to assess premiums and foster
                   competition among health plans; (2) incentives to sway employee
                   behavior; and (3) overt marketing strategies to influence both the choice
                   of delivery systems and of specific plans. This chapter focuses on health
                   plan evaluation criteria; a subsequent chapter looks at how purchasers
                   attempt to persuade an often reluctant workforce that a managed care
                   strategy is also in their best interest.


                   The adoption of a strategy that encourages employees to join managed
Tension Between    care plans contributed to, if not necessitated, the development of health
Need for and       plan evaluation criteria to help select HMOs. Price alone was no longer a
Adequacy of        sufficient criterion given employee reservations about choice and quality.
                   The criteria, though imperfect and still evolving, serve several purposes.
Evaluation Tools   First, they help both employers and employees to compare health plans.
                   Second, the criteria serve as improvement and development goals for the
                   plans themselves. Third, employers use the criteria and the information
                   collected from participating plans to justify their choices to employees.
                   Finally, some employers use the criteria to select plans and/or to limit the
                   number of HMOs offered in a given market.

                   Generally, the HMO evaluation tools developed by the purchasers we
                   interviewed can be grouped into three broad categories: (1) price,
                   (2) health plan quality, and (3) employee access to a choice of physicians.
                   Many purchasers have not only articulated criteria that they expect health
                   plans to meet, they have gone a step further and actually specified their
                   requirements in a request for proposal (RFP) and/or in published
                   “performance measures.” These criteria not only set forth a variety of
                   performance thresholds but also require plans to demonstrate their level
                   of performance by providing reliable data in specified formats. A few
                   purchasers use the data to monitor the health plans with which they
                   contract and impose sanctions if these goals are not met.



                   Page 33                      GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                       Chapter 3
                       Purchasers Use Evaluation Criteria to
                       Pursue Price, Quality, and Access Goals




                       Some purchasers view their health plan evaluation criteria, especially
                       those pertaining to price and quality, as works in progress, that is,
                       rudimentary and imperfect. For example, one firm pointed out that the
                       criteria are too process-oriented, too focused on what is measurable when
                       the most important factors still cannot be quantified. This benefit manager
                       characterized the firm’s standards as “indemnity measures.” Others even
                       categorized some of their criteria as subjective. Furthermore, purchasers
                       recognized that few plans could meet all of the criteria. As a result of these
                       shortcomings, firms told us that they applied the criteria flexibly, using
                       them more as goals than as absolute requirements. As research yields
                       increasingly sophisticated measures of quality and efficiency, these
                       purchasers expected to institute better and more rigorous requirements.


                       In the past, widespread shadow pricing by HMOs had often resulted in
Price: Tools Used to   premiums that bore little relation to actual health plan costs—a fact that,
Evaluate Premiums      according to purchasers we interviewed, HMOs readily acknowledge.
and Enhance            Rather than pursuing efficiency and passing the savings on to purchasers,
                       HMOs competed at the employee level: they offered enrollees richer
Competition            benefits with lower out-of-pocket costs and emphasized types of
                       preventive care that appealed to younger and healthier individuals. In
                       seeking to transform themselves from price-takers into active purchasers
                       of health benefits, the large purchasers we interviewed have adopted a
                       number of tools to encourage health plans to become more efficient and to
                       ensure that savings accrue to the purchaser of health care.

                       Among the tools frequently cited as enhancing price competition at the
                       purchaser level are (1) analyzing and negotiating premiums, (2) using a
                       structured bidding process to solicit premiums, and (3) joining coalitions
                       and eliminating plans to increase leverage. Purchasers told us that these
                       tools have been successful in actually reducing premiums or in
                       constraining premium growth. The variety of ways that large purchasers
                       use and integrate these tools, however, makes it difficult to attribute their
                       recent cost experience to any single tool or combination of tools.
                       Moreover, some purchasers recognize that the context of fierce
                       competition among HMOs for market share and the downturn in costs
                       normally associated with the underwriting cycle clouds the entire issue of
                       HMO pricing. As a result, other factors may be more important
                       determinants of purchasers’ recent cost experience than the specific tools
                       used to enhance health plan competition.




                       Page 34                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                           Chapter 3
                           Purchasers Use Evaluation Criteria to
                           Pursue Price, Quality, and Access Goals




Despite Difficulties,      Though cost is sometimes characterized as more transparent than quality,
Purchasers Evaluate        purchasers have had mixed experience in assessing the reasonableness of
Premiums as a Prelude to   capitation payments requested by HMOs. As with quality indicators, some
                           purchasers characterized current premium assessment techniques as
Negotiations               rudimentary. Nonetheless, many view them as an essential prelude to
                           subsequent negotiations. Some approaches are essentially analytical—a
                           process one benefit manager characterized as akin to the delicate and
                           difficult process of peeling back the layers of an onion. Others, however,
                           rely on more subjective indicators, such as a “reading of market
                           conditions” or evaluating the salaries of health plan executives. Often,
                           purchasers seek assistance from consulting firms and actuaries. The
                           purchasers in our sample said they used the following premium
                           assessment techniques either alone or in combination: (1) adjusting for
                           differences among the age and gender of employees (risk adjustment),
                           (2) reviewing plan rate development methodologies, (3) comparing
                           premiums with a standard or benchmark, (4) requesting utilization data
                           from health plans, (5) examining health plan financial indicators, and
                           (6) assessing market conditions.

Risk Adjustment            There can be significant differences in the cost of providing health
                           insurance to different groups of individuals. Risk adjustment looks for
                           demographic, geographic, health status, and other characteristics that can
                           help predict the use of medical services.24 Two common characteristics
                           used by the purchasers in our sample were demographic, that is, age and
                           gender. While the easiest to adjust for, they only partially account for
                           differences in the health expenditures of different groups of employees.
                           Several purchasers told us that they believed other factors might be more
                           important predictors of the use of medical services, such as education
                           level and nature of employment (sitting at a desk versus engaging in
                           physical labor). Consequently, one health benefit manager asserted that it
                           was “inappropriate” to base negotiations on an analysis of workforce
                           demographics. Use of demographics is common, she maintained, not
                           because of its predictive capability but because there are so few other
                           widely accepted analytical tools. This same benefit manager also noted
                           that health plans often do not have the capacity to prove otherwise when
                           an employer asserts that the youth of its workforce justifies a rate
                           reduction.

                           While demographic analysis may not be the most sophisticated means of
                           assessing the risk of a population, when used in conjunction with other

                           24
                            Health Care Reform: Considerations for Risk Adjustment Under Community Rating
                           (GAO/HEHS-94-173, Sept. 22, 1994).



                           Page 35                             GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                         Chapter 3
                         Purchasers Use Evaluation Criteria to
                         Pursue Price, Quality, and Access Goals




                         tools, it can highlight apparent inconsistencies in a health plan’s rate
                         methodology. One firm told us that it has retained a consultant who has
                         extensive data on the costs of delivering care by zip code. This consultant
                         analyzes HMO premiums on the basis of age, gender, and geographic
                         location. No HMO data on the actual utilization of services by enrollees is
                         employed in this assessment. If analysis suggests that premiums are too
                         high, the results are used during negotiations to obtain a reduction. Both
                         PBGH and the Gateway Purchasing Association25 analyzed members’
                         premiums for differences in benefits and risk and found a lack of
                         correlation with the rates actually charged. Thus, some firms with low-risk
                         employees paid higher premiums than those with high-risk employees.
                         Moreover, premiums did not appear to correspond to the volume of
                         business. In short, some prices appeared arbitrary and too high across the
                         board. At the same time, several members of the coalition we interviewed
                         emphasized that PBGH is currently unable to determine the true cost of
                         benefits delivered by contracting HMOs.

Review of Rate-Setting   Several purchasers told us that they either engage consultants and
Methodologies            actuaries to examine health plan rate-setting methodologies or perform
                         the assessment themselves. The Minnesota state government’s focus is on
                         whether the plan’s methodology is sound and accurate and whether any
                         subjective elements are reasonable. For example, Minnesota found that
                         one plan calculated its premium for family coverage by multiplying the
                         single rate by 2.8—a significantly higher ratio than is commonly used. The
                         plan, we were told, was trying to discourage more expensive families from
                         joining. The state has since mandated use of a standard ratio of 2.5 by all
                         plans. When Minnesota officials first began to ask plans to substantiate
                         their rate-setting methodologies, some carriers were not well prepared to
                         do so. This process uncovered significant errors that would have been
                         costly to the state, but plans now do a better job and changes are less
                         prevalent. Like Minnesota, Wisconsin and HIPC reported similar benefits
                         from their reviews of health plan rate-setting methodologies.

Benchmarking             Evaluation of premiums often involves comparison with some standard or
                         reference point. The types of benchmarks used by the purchasers in our
                         sample include (1) indemnity or POS cost experience for which they often
                         have considerable utilization data, (2) trends in health care premiums over
                         several recent years, (3) premiums paid by employers with similar
                         workforce demographics, and (4) rates charged by health plans that are
                         judged as both efficient and of high quality.



                         25
                           Gateway represents 30 St. Louis area firms.



                         Page 36                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3
Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals




The Washington Health Care Authority estimates the per-member-
per-month cost of enrolling all of its employees in the self-funded PPO plan.
This analysis is facilitated by the similarity between PPO benefits and those
that participating HMOs are required to offer. The Washington Health Care
Authority told us that it then asks each HMO to bid using the assumption
that all state employees would be enrolled in the bidder’s plan. Minnesota,
Wisconsin, and the Arizona Medicaid program also develop target
premiums on the basis of the extensive data that managed care plans are
required to submit. A Wisconsin official noted that this process alerts the
state to underpricing by large plans trying to buy market share and
prepares the state for subsequent negotiations if bids appear to be higher
than they need to be. Since BHCAG members paid their self-funded PPO
under a fee-for-service arrangement, they had several years of claims data
to assess the reasonableness of the bids received from 15 so-called care
systems. Purchasers also told us that HMO bids should be lower than their
indemnity costs because such plans are known to attract healthier and
therefore less expensive individuals than options that offer an unfettered
choice of providers.

A different type of benchmark identified by purchasers we interviewed is
reliance on trends in premiums over the past several years. Firms told us
that they tend to challenge large premium increases. On the other hand,
some purchasers are more inclined to go along with a proposed rate
increase if it seems consistent with their recent experience. One firm said
that it had seen some HMO rate increases in the neighborhood of 3 percent,
which it views as reasonable and is willing to pay. On the other hand,
many of the purchasers we interviewed told us that they have experienced
actual HMO premium decreases in certain markets—a fact that may
establish a different expectation.

Some firms told us that in markets where they are not a member of a
coalition, they rely on consultants to tell them how well they are doing.
For example, in return for sharing data on claims, premiums, and quality
indicators, one consultant provides firms feedback on the average and
best rates in a given market, adjusted for workforce demographics. A
benefit manager said that prior to participating in this survey, the firm had
no idea how well it was doing outside of California. Similarly, a coalition
told us that its consultant has a large database on HMO rates that allows the
coalition to compare its bids with the rest of the market. Since the levels
of benefits provided by purchasers differ, such comparisons only provide a
rough, but nonetheless useful, indicator.




Page 37                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                               Chapter 3
                               Purchasers Use Evaluation Criteria to
                               Pursue Price, Quality, and Access Goals




                               In addition to comparing proposed premiums with indemnity costs, trends,
                               and the experience of other firms, purchasers told us that they use the
                               premiums of an HMO that they believe serves as a benchmark in terms of
                               both cost and efficiency. Thus, PBGH told other plans that they had to meet
                               Kaiser’s rates. Similarly, another purchaser noted that many California
                               HMOs see Kaiser as a market trendsetter. Thus, we were told, a rumor in
                               April that Kaiser would drop its rates sent tremors throughout the market.

Health Plan Utilization Data   Many state governments, coalitions, and firms in our sample require HMOs
                               to submit data on the utilization of services by their employees,
                               information also referred to as encounter data. Reflecting a typical
                               viewpoint, one health benefit manager told us that his firm wants to pay a
                               fair rate that can be substantiated by documentation that employees have
                               actually received medical services. Both firms and coalitions noted,
                               however, that the quality of the data submitted by HMOs was often variable.
                               CalPERS told us that staff-model HMOs or those that are claims-driven tend to
                               have better data; on the other hand, larger, more loosely managed plans
                               and those that are heavily capitated have poorer data. The vagueness or
                               incompleteness of the data was attributed to plans simply lacking the
                               information or not wanting to share it. California purchasers also cited the
                               increased use of capitation within HMOs as having a negative impact on the
                               availability of data. One firm said it was close to freezing enrollment in a
                               plan whose move to capitate its hospitals had diminished the integrity of
                               its data. Finally, a HIPC official told us that HIPC had to limit its
                               risk-adjustment methodology to inpatient encounter data because many
                               HMOs could not provide outpatient statistics. However, several plans
                               admitted to HIPC that they even had trouble collecting the inpatient data. A
                               California HMO noted that it is developing an outpatient database that is
                               clinically, rather than claims-oriented. Thus, there may be a disconnect
                               between the type of data systems plans are developing to effectively
                               manage care and the type of data purchasers perceive they need.

                               Some private coalitions have put health plans at financial risk for poor
                               results on performance measures, including the provision of data,
                               customer service, and quality. For example, PBGH has negotiated individual
                               HMO performance targets, and HMOs have agreed to put 2 percent of their
                               premium at risk. Gateway Purchasing Association in St. Louis negotiated a
                               similar arrangement. HIPC currently has the authority to fine a plan if data
                               are turned in late and commented that it would also be helpful if it could
                               penalize plans that submit poor-quality data.26

                               26
                                 Effective in July 1997, HIPC will no longer require HMOs to submit utilization data. Instead, HMOs
                               will be asked to provide audited HEDIS data that in turn will be reported to enrollees beginning with
                               the May 1998 open season.



                               Page 38                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                           Chapter 3
                           Purchasers Use Evaluation Criteria to
                           Pursue Price, Quality, and Access Goals




Financial Indicators       Some purchasers told us that they look at financial indicators on plan
                           profitability, loss ratios, administrative margins, and the salaries of top
                           executives. In some cases, the purchaser’s RFP requires the submission of
                           such data. CalPERS said that it would like to see administrative expenses,
                           including profit, at about 10 to 12 percent. Similarly, its goal is for health
                           plans to spend at least 86 percent of premium revenues on medical
                           care—the so-called loss ratio. Digital also negotiates on the basis of a
                           variety of financial indicators, including plan overhead. A company official
                           told us that when premiums include a 15 to 20 percent charge for
                           administrative costs, it establishes performance goals to reduce this
                           component over time. Finally, purchasers expressed concern about the
                           high salaries of health plan executives; such salaries, along with other
                           financial indicators, suggested to them that more could be done to
                           improve health plan efficiency without adversely affecting quality. An
                           official at HIPC, however, sounded a note of caution about the reliability of
                           plan financial data. He said that HIPC would like to use encounter data to
                           calculate loss ratios but that it is not possible now because the data are
                           simply too “hazy.”

Market Expectations        Assessments of the extent and nature of competition in a given market can
                           also influence the stance that a purchaser takes during premium
                           negotiations. One coalition that characterized competition in its market as
                           “fierce” approached 1996 negotiations with the expectation that further
                           rate concessions were still possible. Moreover, the coalition did not
                           believe that it had reached the point where quality had been adversely
                           affected by premium decreases. A coalition in a different market, however,
                           cited the fact that plans were losing money as a factor that would make
                           additional rate concessions difficult to obtain. Finally, officials at the
                           Missouri Consolidated Health Care Plan, a coalition that represents state
                           employees as well as other local government workers, benefited from
                           what it characterized as a “market-share-buying” temperament among
                           health plans in its 1996 bidding strategy.


Negotiations Seen as       The extent to which purchasers in our sample—from both the private and
Essential to Controlling   public sectors—rely on negotiations to supplement structured bidding or a
Growth in HMO Premiums     managed competition framework suggests that these approaches are
                           either insufficient by themselves or that purchasers lack confidence in
                           them as cost-containment tools. In fact, one state that added negotiation
                           several years after it adopted a managed competition system now
                           emphasizes that negotiation is a critical component of a competitive
                           framework. Only one firm we interviewed characterized itself as a



                           Page 39                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                               Chapter 3
                               Purchasers Use Evaluation Criteria to
                               Pursue Price, Quality, and Access Goals




                               “price-taker,” rejecting negotiation with health plans because the process
                               simply extracts a discount while shifting costs to other purchasers.

                               During our interviews, we observed two basic strategies for negotiating
                               with health plans. The primary emphasis of purchasers appears to be
                               either market leverage or analysis of premiums. The two approaches,
                               however, are not mutually exclusive. In markets where they believe they
                               have sufficient size, purchasers may rely more on their leverage, while in
                               others, they may see analysis as more appropriate. And, at times, the
                               distinction between the two strategies is blurred as firms or coalitions
                               adapt to market context or other circumstances. Regardless of the strategy
                               used, purchasers (1) approach the negotiating table with a shared
                               skepticism about health plan premiums and (2) often resort to similar
                               tactics during their face-to-face meetings with health plans.

Skepticism: Foundation for     Purchasers told us that they generally approach HMO premiums with
Negotiations                   skepticism—an attitude reinforced by past shadow pricing. One coalition
                               told us that HMO pricing was still irrational. The benefit manager at another
                               firm said that the pricing process appeared to be arbitrary—it looked as if
                               plans decided what rates they wanted to charge and then backed in the
                               costs to justify them. A few purchasers noted that the frequency with
                               which errors are detected has not convinced them that HMO rate-setting
                               methodologies are sound. Several years of premium decreases for some
                               purchasers have probably reinforced skepticism about the actual basis for
                               HMO rates, especially since these same purchasers do not believe that the
                               quality of care has been adversely affected. The analysis conducted by
                               both PBGH and the Gateway Purchasing Association noted earlier lends
                               support to this general skepticism over the fairness of HMO rate-setting
                               methodologies.

Negotiation: Continuum         Perhaps the most publicized advocate of the use of market power is
Ranging From Market Power to   CalPERS. CalPERS began to exert its market power when it sought a zero
Analysis                       increase in premiums for the 1992 contract year. Citing the state’s
                               worsening fiscal crisis, it asked HMOs to freeze rates and benefits at the
                               1991 levels. When Kaiser refused to accede to this strategy, CalPERS froze
                               new enrollment for 8 months, sending a powerful message to California
                               HMOs about the seriousness of its negotiating demands.


                               Starting with the 1994 contract year, CalPERS adopted an even bolder tactic:
                               each year it has publicly announced, in advance of negotiations, that it was
                               seeking a specific percentage reduction in premiums. And during three
                               consecutive negotiating sessions with HMOs, CalPERS has achieved premium



                               Page 40                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3
Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals




reductions. An official at another coalition noted that CalPERS has a “huge
hammer” when it negotiates with health plans—for many, CalPERS is their
largest single customer. For example, about one-third of CalPERS enrollees
are in Kaiser, and CalPERS’ members represent about 7 percent of Kaiser
enrollment in California, a statistic few private purchasers can rival.

The PBGH Executive Director also characterized the coalition’s current
approach to negotiations as one based on the use of market leverage—the
size of the purchasing pool—to rein in prices. Like CalPERS, PBGH has
threatened sanctions when plans appeared reluctant to offer rate
concessions, a tactic one firm characterized as essential in shaping the
outcome of negotiations. After 2 years of HMO premium decreases,
however, the coalition was unable to gain further concessions in 1996,
though that was clearly its intent. According to member firms, the
coalition is now considering options to enhance its leverage—including
expanding its membership and eliminating some health plans. The
National HMO Purchasing Coalition has pursued an exclusionary policy
from the outset. A coalition official attributed its success in obtaining
several years of rate reductions not to analysis but to the policy of telling
bidders up front that it only intends to contract with two to four HMOs in
each market. Firms we interviewed criticized some purchasers as too
focused on price. However, officials at PBGH, CalPERS, and Gateway
Purchasing Association are convinced that continued pressure on HMOs to
lower prices and to justify any increases will force plans to become more
efficient, encouraging competition based on quality rather than on price.
As one coalition director explained, “plans won’t focus on quality if
employers are not tough on price. Nothing breeds innovation like
necessity.”

For some large or influential purchasers, it is difficult to isolate the role of
analysis from the context in which negotiations occur—a large purchaser
whose business is important to a health plan asking informed questions
about proposed premiums. As demonstrated by Gateway and PBGH,
analysis of HMO premiums can be a powerful negotiating tool. Though
PBGH, as it is currently configured, appears to have exhausted its market
power, the coalition’s initial negotiating success may have relied more on
its finding that differences in member premiums were not always
correlated to firm size or risk pool.

Some purchasers we interviewed are motivated less by a concern over
price concessions and more by a desire for fair and reasonable premiums
that accurately reflect the utilization of their employees. And these same



Page 41                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                Chapter 3
                                Purchasers Use Evaluation Criteria to
                                Pursue Price, Quality, and Access Goals




                                purchasers are convinced that in the long run an emphasis on quality will
                                do more to restrain cost increases than a short-range focus on prices.
                                These purchasers generally rely on the analytical approaches outlined
                                earlier in this chapter. For example, Minnesota uses the negotiating
                                process to go over the results of its actuarial analysis of health plan bids.
                                During these meetings, it may seek additional information and, where
                                appropriate, ask for reasonable changes to the rates. Similarly, Wisconsin
                                meets with plan representatives if its analysis suggests that proposed
                                premiums are higher or lower than the target estimated by its actuary.27
                                The target is developed on the basis of a review of plan-specific
                                demographic, charge, and utilization data. The state asks all plans to
                                submit a “best-and-final” offer. Finally, a number of purchasers appear to
                                combine the use of market power—albeit on a different level compared
                                with CalPERS—with reliance on analytical tools. For example, HIPC not only
                                looks at health plan rate-setting methodologies and utilization data, it also
                                asks health plans whether the proposed rate is commensurate with HIPC’s
                                importance to their group of clients in the small-group market.

Feedback Provides Opportunity   Regardless of the emphasis placed on market leverage versus analysis,
for Plans to Reconsider Bids    many purchasers use a common set of tactics during negotiations. In
                                general, negotiations are an opportunity to provide feedback to health
                                plans on their respective bids. The objective is not to disclose the
                                premiums of competitors but rather to give each plan an opportunity to
                                reconsider its initial bid in the context of additional information.

                                Thus, Gateway Purchasing Association tells plans in general terms how
                                they are positioned relative to the competition—high, low, or in the
                                middle. Similarly, HIPC meets individually with health plans and gives them
                                an overall evaluation of where their bids fall in relation to others in a
                                specific market area. For example, during 1993 negotiations, HIPC informed
                                one plan that its premiums were 40-percent higher than the lowest-priced
                                competitor. Though it did not tell health plans that they were too
                                expensive or that they had to reduce their prices, one-third of the plans
                                lowered their premiums after these meetings. Providing feedback,
                                however, does not guarantee that a plan will change its bid. For example,
                                BHCAG told us about one Minneapolis plan that bid high in order to test
                                community loyalty to its hospital. The plan believed this bid was worth the
                                risk because it was already at capacity and BHCAG only represented about
                                5 percent of its business.


                                27
                                  A premium lower than the actuary’s estimated target can alert the state to underpricing by a plan
                                trying to buy market share. Unrealistically low premiums can give way to very large increases in
                                subsequent years.



                                Page 42                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                            Chapter 3
                            Purchasers Use Evaluation Criteria to
                            Pursue Price, Quality, and Access Goals




                            Purchasers commented that they also found it useful to provide feedback
                            on the possible employee reaction to price increases. Thus, HIPC conducted
                            an analysis of enrollees who changed plans during open season. During
                            negotiations, it pointed out that 41 percent of enrollees changed health
                            plans because of price and that one plan lost 16 percent of its enrollment
                            after it raised prices 8 percent. Another coalition said it often sees price
                            reductions after informing plans that their bids will result in employees
                            having to pay more than they would for plans offered by competitors.

                            Some purchasers suggested that it is a mistake to accept the first price
                            proposed by any health plan: asking for a second or even a third bid is just
                            common sense. One benefit manager told us that had the firm not asked
                            for best-and-final offers, it would have left about $500,000 on the table.
                            Another health benefit manager acknowledged that some, but not all,
                            plans “game the system” by bidding high initially in expectation of
                            lowering the bid during negotiations. The executive director of one
                            purchasing coalition emphasized the importance of arranging a one-on-one
                            meeting with a key decisionmaker at each plan in order to ensure that the
                            plan understands its competitive position. Using this and other techniques,
                            this director said that the coalition is able to move rates down from initial
                            bids. We were told, however, that it is critical not to let a plan lower its bid
                            once negotiations are completed. Plans should be forced to live with the
                            consequences of their decision on premiums until the next round of
                            bidding and negotiations. Finally, in accepting best-and-final offers, one
                            purchaser told us that it will only accept new bids from the same plan that
                            are lower than the initial offer.


Bidding Used to Structure   Many of the purchasers we interviewed are now using some form of
Health Plan Competition     bidding to select health plans and to help determine HMO capitation
                            payments. Bidding is often used in conjunction with evaluation and
                            negotiation. Plans are invited to submit sealed bids according to rules set
                            forth in an RFP. The RFP also stipulates requirements for a plan to be
                            considered qualified to bid. Generally, the purchasing coalitions and state
                            governments in our sample re-solicit bids annually or on some other
                            regular basis; individual firms, on the other hand, may use a bidding
                            process to make their initial plan selections but not periodically rebid
                            contracts unless a problem arises, such as employee complaints or
                            dramatic price increases.28


                            28
                              One firm that is playing an instrumental role in establishing a new purchasing coalition told us that
                            no matter how good relations are with the contracting HMOs, soliciting bids every several years helps
                            to restrain premium growth.



                            Page 43                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                            Chapter 3
                            Purchasers Use Evaluation Criteria to
                            Pursue Price, Quality, and Access Goals




                            The underlying assumption of a bidding process is that competition among
                            plans for market share will result in premiums that reflect costs plus a
                            normal rate of profit. There is, however, no single, patented design for
                            competitive bidding, and research does not indicate which attributes
                            would clearly constitute the best system. In fact, competitive bidding is
                            commonly associated with commodities whose costs and quality are
                            easier to evaluate than the delivery of health care.

Consensus on Key Features   Although there is potential for considerable variation in the design of a
                            bidding system, the purchasers in our sample cited the following general
                            features as critical to eliciting more competitive bids: (1) standardized
                            benefits, (2) employee incentives, (3) negotiation, and (4) flexibility.

                            Standardized Benefits. State governments and purchasing coalitions
                            standardized benefits in the late 1980s and early 1990s, which contributed
                            to their ability to undertake a rough comparison of premiums from
                            competing HMOs.29 In fact, benefits standardization may be a precondition
                            to collective purchasing by private coalitions.30 A second major advantage
                            of standardization is that it constrains the ability of plans to compete or
                            avoid risk on the basis of the benefits they offer. Some purchasers in our
                            sample may lack the market power—that is, a sufficient number of
                            employees in an area—to insist that all competing HMOs offer the same or
                            roughly similar benefit packages. Another factor that may inhibit
                            standardization for some firms is mandated state benefits that result in
                            variations in covered services from state to state.

                            Employee Incentives. Purchasers understand that providing a financial
                            incentive for employees to be cost-conscious in their selection of health
                            plans can be a powerful inducement for greater competition among HMOs.
                            As discussed in the next chapter, however, purchasers vary in the extent
                            to which they have implemented effective incentives. Only a few
                            purchasers have adopted what some consider to be the most effective
                            employee incentive—tying the employer contribution to the lowest-cost
                            plan offered. The losses in health plan enrollment that can result when a
                            plan bid requires a greater out-of-pocket contribution from employees can

                            29
                             The degree of standardization ranges from identical benefits in Wisconsin to roughly comparable
                            benefits in Minnesota. CalPERS allows health plans to offer several supplementary benefits.
                            Washington Health Care Authority has a roughly comparable benefit design that applies to both its
                            self-funded PPO and its HMO, albeit with different limits, copayments, and deductibles. Thus, both the
                            PPO and HMOs cover preventive care. However, the state allows HMOs to waive inpatient hospital
                            copayments of $100 per admission. Gateway Purchasing Association has focused considerable energy
                            on standardizing the benefit exclusion policies of contracting HMOs.
                            30
                             Private sector coalitions may accept bids on a standard benefit package but allow member firms to
                            vary the mix of benefits that they actually offer to employees.



                            Page 44                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
    Chapter 3
    Purchasers Use Evaluation Criteria to
    Pursue Price, Quality, and Access Goals




    send a strong message to health plans. Although the structure of Medicaid
    prevents the use of financial incentives, since it is offered largely free of
    charge to beneficiaries, Arizona exercises the option of assigning the
    approximately 50 percent who fail to select a health plan to lower-cost
    bidders.

    Negotiation. All but one of the bidding systems we examined assume that
    negotiation is an integral part of the process. Initially, however, one of the
    states in our sample did not negotiate with plans that submitted bids.
    Rather, this state’s officials assumed that the competitive framework itself,
    coupled with heightened employee price sensitivity as a result of
    incentives, would help to control premium increases. A resumption of
    rapid price increases and concern about shadow pricing necessitated a
    modification of the original design. Wisconsin now sees evaluation of
    health plan bids and direct negotiation as integral to the design of its
    managed competition system. Unlike Wisconsin, CalPERS had previously
    discussed premium increases with health plans. However, pressure to
    contain costs became critical in 1991 when California froze the state
    contribution to premiums, magnifying the impact of rate increases on state
    employees. As a result, CalPERS began aggressive negotiations with health
    plans in 1992.

    Flexibility. Purchasers in our sample believe that flexibility is key to
    maintaining and nurturing a successful bidding system.

•   As noted earlier, Wisconsin’s response to anticompetitive behavior was the
    introduction of negotiations. According to BHCAG, the 1996 care system
    bids resulted in a 9.5-percent reduction in per-member-per-month incurred
    claim costs—without negotiations. However, the coalition’s Executive
    Director commented that he would not rule out negotiations in the future
    if the current approach showed signs of not working.
•   Arizona Medicaid’s competitive bidding process has continually evolved
    since its inception in 1982.31 Thus, the state’s most recent RFP, issued in
    February 1997, contains a number of departures from past practice
    intended to increase competition and lower costs. First, bids will be
    solicited for a 5-year period rather than for 3 years. Second, the state has
    consolidated the 12 rural counties into 6 geographic areas and intends to
    maintain its policy of awarding a minimum of only two contracts for each

    31
      Analysts familiar with the Arizona program have stressed the importance of allowing the bid process
    to change as the marketplace in a community changes. At some times, it may be important to stimulate
    entry by relaxing plan participation requirements. At other times, it may be important to ensure the
    stability of the program by requiring strict financial or other criteria for entry. See Lynn Paringer and
    Nelda McCall, “How Competitive Is Competitive Bidding,” Health Affairs (1991), p. 229.



    Page 45                                 GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                 Chapter 3
                                 Purchasers Use Evaluation Criteria to
                                 Pursue Price, Quality, and Access Goals




                                 area. This consolidation could eliminate some health plans. Finally, in one
                                 urban county, the state’s target is to contract with six rather than eight
                                 plans.
                             •   As an incentive to bid competitively, Digital adopted a policy of allowing
                                 only its benchmark plan (in terms of quality and price) to offer a POS
                                 option to its employees. A company official added that this opportunity
                                 can be taken away from a plan if either its cost or quality performance
                                 slips. And, he noted, such slippages have caused Digital to change POS
                                 partners.
                             •   In 1996, the Washington Health Care Authority switched from a 1-year to a
                                 2-year contract period. An official told us that health plans realized that if
                                 they did not attract a large enrollment base with their bid, they would not
                                 be able to recover for 2 more years. A board member on the Missouri
                                 Consolidated Health Care Plan told us that the board believes its approach
                                 to multiple-year bids is unique. In 1994, it solicited bids that locked in rates
                                 for 5 years with a maximum yearly increase tied to the medical Consumer
                                 Price Index. However, because a buyer’s market persisted and new
                                 entrants were willing to bid, it has tested the waters every year since then
                                 by calling for new bids. If an existing plan rebids, the board retains the
                                 right to accept the new bid if it beats the 5-year guaranteed rate or stick
                                 with the guaranteed rate through a renewal if the new bid is higher. In
                                 1995, it did the former, while in 1996, the latter. Rebids also permitted the
                                 state to insert additional contract terms, which would not have been
                                 possible with a straight renewal.

Major Differences Observed       Two major differences surfaced among the bidding systems we examined:
Among Bidding Systems            (1) the number of winning bidders and (2) the criteria used to select them.

                                 Number of Winning Bidders. Whether or not they belong to a
                                 purchasing coalition, the firms we interviewed are less likely than state
                                 governments to offer a large number of HMOs to their employees. They are
                                 concerned that fragmentation of their workforce among a large number of
                                 HMOs will reduce their leverage, not only in markets where they have a
                                 large presence but also in those where they have a small number of
                                 workers and there is no active purchasing group. In contrast, the state
                                 governments in our sample appear to have sufficient leverage on their
                                 own.32 They are often the largest employer in a state, and their risk pool is
                                 concentrated in a smaller area, that is, usually within the confines of state
                                 boundaries. Their large workforce allows them to negotiate with and

                                 32
                                  CalPERS and HIPC are PBGH members, but they only participate in the coalition’s quality initiatives,
                                 not in its separate negotiating alliance. A HIPC official, however, told us that one motivation for joining
                                 PBGH was to observe the coalition’s negotiating strategy and evaluate it for approaches applicable to
                                 HIPC.



                                 Page 46                                 GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3
Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals




actually offer more HMOs without fear of fragmenting their risk pool and
diminishing their leverage. A CalPERS official told us that such a strategy
might not be viable for smaller purchasers. For them, narrowing the
competition might be a better approach.

Although there was no consensus on the optimal number of plans needed
to maintain competition, a number of private firms suggested that, at a
minimum, two plans should be required. Offering only one HMO, a benefit
manager told us, opens up the possibility of becoming “a captive of that
plan.” The number of plans typically offered is a “market-by-market”
decision. Some markets have no competing HMOs, others are only
beginning to experience competition, and some have undergone a
consolidation that restricts competition. Thus, one coalition noted that the
two to three dominant plans in a mature HMO market area refused to
submit bids unless they were guaranteed that only one plan would be
selected. The coalition refused to go along. A few firms did indicate that
they only contract with a single HMO in certain market areas. According to
one such firm, a consultant had advised it to add a second HMO in a
particular market because offering only one plan had adversely affected its
negotiating position. This firm now thinks competing plans is a better way
to go. Another firm recounted that rates fell by 30 percent when it added a
second HMO.

While firms may only contract with a handful of HMOs in a given market,
some of the private coalitions in our sample appear to believe that
competition and leverage are enhanced by accepting bids from a large
number of plans. For the first round of negotiations in 1994, all HMOs in
California were invited to submit bids. More recently, PBGH negotiated with
and offered its members a choice of 15 HMOs for benefit year 1996.
However, no member firm offers employees all of the plans and most
contract with four or fewer. The inability of the coalition to obtain a third
straight year of price reductions from participating HMOs has led PBGH to
consider a number of options to enhance its market power, including
expanding its California membership, moving into other nearby states, and
excluding some HMOs from the negotiation process. We were told that the
HMOs themselves suggested that further premium concessions might be
possible if the market share of participating plans was increased.

Selection Criteria. In addition to price, many bidding systems
incorporate quality and access criteria. The final section of this chapter
describes how the purchasers in our sample integrate these three criteria
to arrive at a decision.



Page 47                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                         Chapter 3
                         Purchasers Use Evaluation Criteria to
                         Pursue Price, Quality, and Access Goals




                         Ensuring the quality of health plans, particularly HMOs, poses a formidable
Quality: Some            challenge to purchasers—one for which past experience with indemnity
Employers Hesitant       coverage provides limited guidance. Nonetheless, the private sector has
About Using Quality      been on the cutting edge in exploring and mapping this new frontier.
                         Capitation, a key characteristic of HMOs, underscores both the importance
Criteria                 of purchaser-sponsored quality initiatives and the extent of the challenge.
                         HMOs are usually prepaid a fixed per capita amount rather than reimbursed
                         after the fact for each service rendered—an arrangement that some
                         analysts believe creates an incentive to underserve.33 Moreover, capitation
                         negates what had previously served as a proxy for quality—the itemized
                         invoice that gave indemnity insurance its fee-for-service nickname.
                         Without claim forms, how are employers to assure themselves that
                         employees are indeed gaining access to medical services? The
                         overwhelming response to what is frequently referred to as the HMO “black
                         box” can be summarized in one word—accountability.


Large Purchasers         Large private sector purchasers have driven the development of two
Developed Managed Care   interrelated approaches to fostering accountability among managed care
Accountability Tools     plans—accreditation and the Health Plan Employer Data and Information
                         Set, commonly known as HEDIS. Accreditation involves a review of a health
                         plan’s quality assurance system against 50 standards. The standards look
                         for evidence that a health plan has the structures and processes in place to
                         report on and continually improve effectiveness. HEDIS, on the other hand,
                         actually measures performance in specific areas. The most well-known
                         HEDIS measures focus on the ability to deliver a set of preventive services,
                         including mammography, childhood immunizations, and cholesterol
                         screening, to enrollees. While accreditation and HEDIS are closely related,
                         accreditation is perhaps the easiest of the two criteria to interpret. An HMO
                         is in one of three categories: (1) seeking or not seeking accreditation,
                         (2) fully or provisionally accredited, or (3) denied accreditation. HEDIS
                         data, on the other hand, demands more analysis and explication,
                         particularly if an employer is attempting to compare a number of health
                         plans across all 63 indicators.

                         Appendix II describes the origins of HEDIS and contains background
                         information on the accreditation process. Appendix III summarizes the
                         type of quality-related data that purchasers we interviewed typically
                         expect from HMOs. The summary is based on performance goals published
                         by Southern California Edison in 1995. Edison’s goals fall into four broad

                         33
                           On the other hand, reimbursement for each service, as in fee-for-service plans, may create an
                         incentive to provide unnecessary medical treatment.



                         Page 48                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                     Chapter 3
                     Purchasers Use Evaluation Criteria to
                     Pursue Price, Quality, and Access Goals




                     categories: (1) structure and philosophy, (2) service to enrollees,
                     (3) clinical quality, and (4) finance and information. An Edison official told
                     us that putting the goals in writing and using them during contract
                     negotiations frequently strengthens the positions of individuals in health
                     plans, such as medical directors, who have been stressing quality issues
                     for a long time but have not received sufficient attention. In establishing
                     its goals, Edison consulted with Digital Equipment Corporation, a
                     founding member of the HEDIS initiative, and with NCQA. Though the
                     specific measures parallel the 63 indicators found in HEDIS, Edison, like
                     other employers, has customized the performance goals to reflect its own
                     focus on patient-centered care in an organized, accountable delivery
                     system.


How Purchasers Use   Given the range of quality standards and measures available, which
Quality Indicators   indicators do firms find the most useful? Two minimum requirements for
                     contracting with managed care plans were frequently mentioned by the
                     purchasers we interviewed—NCQA accreditation status and a willingness to
                     collect and report HEDIS data.

                     Many purchasers told us that they give considerable weight to NCQA
                     accreditation status.34 Some view accreditation as an essential criterion for
                     a plan to be offered, while others view it as a minimum proxy for quality.
                     Thus, one purchaser added a particular HMO in order to send a message to
                     other plans that it was serious about quality: This firm explained that the
                     new plan’s “strongest suit” was its NCQA accreditation. Though many of the
                     private purchasers in our sample said they would refuse to contract with
                     an HMO that has been denied accreditation, they continue to contract with
                     HMOs seeking or making progress toward accreditation. In 1996, Xerox
                     suspended new enrollment in 10 HMOs that it believed had not made
                     sufficient progress. A Xerox official also told us that it threatened to freeze
                     enrollment in a highly regarded HMO who argued that its reputation
                     justified being exempted from the requirement. The plan in question is
                     now well on the path to accreditation.

                     The second key indicator for the firms in our sample is a health plan’s
                     willingness to report HEDIS indicators or to provide other data. Some
                     purchasers told us that health plans were initially reluctant to comply but
                     that most now recognize it as a fundamental requirement for contracting
                     with many large purchasers. Purchasers vary in the extent to which they

                     34
                      The Joint Commission on Accreditation of Health Care Organizations, a private, not-for-profit
                     organization, also accredits HMOs.



                     Page 49                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                           Chapter 3
                           Purchasers Use Evaluation Criteria to
                           Pursue Price, Quality, and Access Goals




                           actually use the data available from plans. It appears that, as with
                           accreditation, some firms use the ability and willingness to report data as a
                           proxy for quality. Thus, a benefit manager told us that although the firm
                           lacked the resources to analyze health plan data, the plans themselves had
                           to have HEDIS-type data to effectively manage care. Other firms, however,
                           look beyond the mere ability to report data, and evaluate a plan’s
                           responsiveness to partnering with purchasers to continuously improve
                           quality. For example, at a minimum, one firm conducts annual site visits to
                           assess performance against its written goals and may schedule other visits
                           to discuss ongoing projects directed at improving performance in the
                           future. A coalition’s executive director told us that it uses contract
                           negotiations to provide plans comparative feedback on issues such as
                           physician credentialing and compensation of doctors.

                           Some of the purchasers we interviewed are concerned about the integrity
                           of the HEDIS data they receive from health plans. The Gateway Purchasing
                           Association pointed to the discrepancies between plan-reported enrollee
                           satisfaction and the results of an independent survey that it commissioned.
                           While plans reported 90 percent or better satisfaction, Gateway’s survey
                           showed a range of satisfaction from 60 percent to 80 percent. Gateway
                           also hired a consultant to audit four randomly selected preventive care
                           measures. Gateway’s Executive Director told us that data are more likely
                           to be reliable if a plan believes that it might be audited. PBGH also uses
                           independently verified data on preventive care measures in its quality
                           reports and conducts its own annual satisfaction survey. Some purchasers,
                           however, accept self-reported data and pass it on to their employees.

                           Recognizing that plan-level data may conceal performance differences
                           among medical groups in large, broad network-model HMOs, several
                           purchasers told us that they have recently been encouraging such plans to
                           report data by medical group as well as for the plan as a whole. According
                           to one firm, however, few plans are now willing to share such information.
                           PBGH is also focusing on the differences between medical groups and is
                           conducting its first survey that looks at enrollee satisfaction at the medical
                           group level. Its sample is drawn from enrollees in 55 participating
                           physician groups. PBGH hopes to use the data to gain a more complete
                           understanding of the impact of health plan and medical group selection on
                           satisfaction.


Purchasers Emphasize       Purchasers we interviewed are convinced of the potential for managed
Need for Plans to Manage   care to out-perform indemnity coverage in terms of quality. One firm told
Care                       us that even in immature markets lacking well-developed HMOs, such plans


                           Page 50                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3
Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals




deliver higher-quality care than traditional indemnity coverage. The
Executive Director of Gateway Purchasing Association told us, however,
that purchasers want more clinical management, more integration, and
more differentiation among the HMO products available. Though they see
today’s HMOs as a step in the right direction, this view does not connote
satisfaction with the plans currently offered. Gateway requires health
plans to sign an indemnification affirming that they are actually organized
to manage the care delivered to enrollees. Although several large insurers
had reservations about this contract provision, they eventually acquiesced.

Another coalition observed that the majority of HMOs do not currently have
the integrated information systems necessary to manage care. Instead,
HMOs manage cost—not care. Gatekeepers, we were told, too often limit
access to more expensive services, rather than facilitating receipt of the
care actually needed. The coalition’s observations are based on medical
reviews directed at identifying whether plans have the systems in place to
(1) identify immediately the enrollees who are in need of care and
(2) manage that care appropriately. The review itself consists of an
examination of a random sample of high-cost cases to determine how the
HMO responded. The coalition uses a staff of doctors and experts to review
plan records. The focus is on the adequacy of the systems and procedures
rather than on the outcomes themselves. The rationale for highlighting
high-cost cases rather than more routine ones is statistical: a tiny
percentage of individuals account for a disproportionate amount of health
care costs. To become more efficient, we were told, purchasers and plans
need to focus more attention on what actually generates costs rather than
on easier-to-measure preventive services.

Benefit managers at another firm told us that they had come to a similar
conclusion: sometimes an HMO tries to limit services at the front
end—frustrating healthy people and delaying necessary treatment for
people who are sick. Rather than continuing to hold premiums down by
adding members, they suggested that HMOs need to make fundamental
improvements in the way care is managed. Though this firm offers
employees a choice of HMOs, where available, it is seeking to develop
partnerships with plans that it identifies by a new acronym—OSC, or
organized system of care.35 The firm hoped that its OSC program will push
health plans to reevaluate the way that they deliver care. An OSC, we were
told, is what an HMO should aspire to be—that is, a plan that integrates the
financing and delivery of a full continuum of care and is held clinically and

35
 Company officials told us that they adopted the concept from the Washington Business Group on
Health. Digital also now looks to the HMO to provide its services as an organized system of care.



Page 51                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                    Chapter 3
                    Purchasers Use Evaluation Criteria to
                    Pursue Price, Quality, and Access Goals




                    fiscally accountable for the outcomes and health status of its enrolled
                    population. Though such care systems do not actually exist today, the firm
                    was attempting to identify plans that have the potential to evolve into OSCs
                    because of their operating philosophies, information systems, and
                    physician alignments. Eventually, the firm plans to drop its PPO and
                    nonqualifying HMOs and contract exclusively with such care systems. The
                    number of potential OSCs identified has grown from one in 1995 to nine in
                    1997. Benefit managers at this firm do not believe that some markets
                    currently exhibit the innovation necessary to produce potential care
                    system partners. Even a mature HMO market like Minneapolis, we were
                    told, is not close to the point at which any plan would be considered a
                    potential OSC.


                    Employers and employees often use different criteria in evaluating access.
Access: Employers   Employers look at access in terms of the implications for health plan
Accommodate         efficiency and the adequacy of an HMO’s physician and hospital network,
Employee Concerns   that is, its mix of physicians and their proximity to the population served.36
                    Some purchasers we interviewed suggested that more tightly controlled
About Choice        HMOs with smaller networks are the most likely to yield efficiently
                    delivered, high-quality health care. However, purchasers recognize that
                    workers are still likely to judge access by their ability to maintain a
                    relationship with a particular physician or by how easily they can obtain
                    referrals to specialists of their choice.

                    Ensuring access to employees’ physicians has become a major criterion in
                    selecting HMOs. The firms we interviewed frequently stated that they like to
                    offer HMOs with large networks, preferably ones that operate statewide.
                    Such HMOs are often made up of numerous, independent medical groups or
                    independent physicians operating throughout the state. One firm told us
                    that its preference for statewide HMOs had led it to drop what it referred to
                    as “mom and pop” plans that were only available in regional markets. In
                    general, firms believe it is unnecessary to offer a large number of
                    broad-based networks. Thus, most of the California purchasers in our
                    sample offer only four HMOs to in-state workers, including at least one
                    smaller, group-model HMO. One argument used to justify offering fewer
                    HMOs is the overlapping networks of large plans. Because many physicians
                    or physician groups contract with multiple HMOs, including additional
                    plans with broad networks accomplishes little. One firm that wants to


                    36
                      For example, one of the purchasers we interviewed requires contracting plans to have at least two
                    primary care physicians and two hospitals within 10 miles of 90 percent of its employees at a given
                    location. Other purchasers have similar standards.



                    Page 52                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3
Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals




reduce the number of HMOs it contracts with told us that it will target such
plans.

State purchasers, on the other hand, generally contract with a larger
number of HMOs. For example HIPC, Washington, Wisconsin, and CalPERS
each contract with between 9 and 24 HMOs.37 Moreover, they are more
likely to offer small, local plans or staff-model HMOs that operate in some
but not all counties. A motivating factor is the desire to extend the HMO
option to all enrollees, an option that is often considerably less expensive
than the indemnity-type alternatives. In fact, an explicit criterion used by
both CalPERS and HIPC for adding an HMO is the plan’s ability to expand
coverage to underserved areas.38 Consequently, CalPERS has reduced to
only one the number of counties without an HMO option. Similarly,
Minnesota has cut in half the number of rural counties that have only one
health plan option.

The states in our sample also offer employees a choice of broad
network-model HMOs. Questioning whether such plans really compete
against one another, Minnesota has a long-standing policy against
expanding the number of broad network “look-a-likes.” When state
employees disenroll into another IPA-model HMO, they are often able to
continue seeing the same physician—a factor that reduces plan control
over provider behavior. However, when an employee leaves a staff-model
HMO, the patient also leaves the provider. A HIPC official told us that it was
hard to justify additional broad-network HMOs since 90 percent of
physicians in California now participate in the plans it offers. In fact, HIPC
has dropped one of its original access criteria: Does the plan bring in a
new medical group not currently available through some other HMO? BHCAG
is making a direct attack on broad-based networks. Starting in 1997, it will
contract with 15 separate care systems. The RFP requires that primary care
physicians contract with no more than one participating care system.
Overall, however, the number of participating physicians will be larger
than under the coalition’s previous PPO product.




37
 The number of HMOs offered by CalPERS varies considerably among California’s 58 counties: 40
have between 4 and 11 HMOs; 5 have between 2 and 3; 12 have only one; and 1 county has no HMO
option.
38
 For the benefit year beginning August 1995, CalPERS began offering National HMO to state
employees. National HMO is available in 13 counties, including three that had previously lacked an
HMO option.



Page 53                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                          Chapter 3
                          Purchasers Use Evaluation Criteria to
                          Pursue Price, Quality, and Access Goals




                          We found that the purchasers we interviewed varied considerably in
Application of Criteria   (1) the significance that they attach to a given criterion; (2) how they
Varies                    integrate access, quality, and cost criteria to arrive at a decision; and
                          (3) their willingness to eliminate a plan on the basis of specific criteria.
                          Purchasing coalitions and state governments, in particular, appear to be
                          more reluctant than private purchasers to use quality indicators to select
                          or eliminate HMOs. In general, the use of criteria by many purchasers we
                          interviewed appeared to be subjective. One coalition that expressed
                          confidence in the outcome of a quantification of bids acknowledged that
                          the evaluation was subjective rather than scientific in some areas.

                          Few of the large purchasers we interviewed told us that price is their most
                          important selection criterion. However, a recent study conducted jointly
                          by a benefits consulting firm and the Washington Business Group on
                          Health found that virtually all of the 368 large, medium, and small firms it
                          sampled listed cost as their most important health plan selection and
                          evaluation criterion.39 Other highly-rated criteria were satisfaction with
                          services, availability of utilization data, and access by employees. The
                          survey noted that comparatively few used available quality assessment
                          tools such as HEDIS, plan sponsorship of practice protocols, audited report
                          cards, health outcomes, or accreditation status to evaluate health plans.
                          These information tools were ranked at the bottom in terms of usefulness.
                          The study concluded that while employers are interested in quality-based
                          purchasing, they rate existing measures as less helpful than measures
                          related to cost and service. The survey emphasized, however, that
                          employers of various sizes use the available assessment tools differently.
                          For example, large purchasers with more than 10,000 employees are far
                          more likely than small employers to use HEDIS or report cards and to have
                          adopted health plan accreditation criteria. Moreover, the study projected a
                          significant increase in the use of these assessment tools over the next few
                          years, especially by large employers.

                          Xerox, Digital, and Southern California Edison exemplify a large-employer
                          approach that separates the consideration of quality from price. Both
                          Digital and Edison have published the extensive performance measures
                          that they use to evaluate plans and accept bids only from health plans that
                          meet these quality standards. Digital told us that it only applies the
                          performance measures to about one-half of the HMOs with which it
                          contracts. It is difficult, an official explained, to impose standards on
                          health plans in a market where the firm only has a small number of

                          39
                           Washington Business Group on Health and Watson Wyatt, Worldwide, Is Cost Everything? Getting
                          Value for Your Health Care Dollar (Washington, D.C.: Feb. 1996).



                          Page 54                             GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3
Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals




employees.40 Though it has no published performance standards, Xerox
develops a quality ranking for each plan with which it contracts. The
ranking includes a large number of variables, such as accreditation, and
involves assigning a numerical score for each variable. A benefit manager
told us that Xerox shares these quality rankings with HMOs to let them
know where they stand. The firm is considering eliminating plans that fail
to meet an acceptable threshold. As noted earlier, Xerox does not
negotiate with health plans and considers itself a price-taker. Though
Xerox will contract with plans that are considerably more expensive than
its benchmark plan, employees must pay the difference.

Access is clearly an important criterion—one that appears to have had an
unintended effect on the size and efficiency of health plans. Although
some employers emphasized that they want plans to compete on the basis
of the quality and efficiency of the medical groups in their networks, many
acknowledged that they prefer plans with broad-based networks. The
plans themselves, we were told, believe that they compete at the consumer
level, where paramount importance is attached to maintaining ties to one’s
own doctor. As a result, some plans attempt to recruit as many medical
groups as possible. One purchaser we interviewed conducted an access
study to help it select HMOs. The rationale behind the study was that
employees would be more inclined to join an HMO if they did not have to
change doctors to do so. The firm’s health benefit manager told us that
two of the HMOs selected had higher costs, but the best access scores.
Other purchasers, we were told, also based their selection of HMOs on
access studies.

Finally, some purchasers took a quantitative approach to evaluating health
plan bids. For example, the National HMO Purchasing Coalition and the
Arizona Medicaid programs assign a weight of about 70 percent to quality
and access criteria, and 30 percent to cost. The coalition’s goal is to
identify two to four HMOs in each market. In 1997, it will contract with 134
of the 380 HMOs that submitted bids. Arizona awarded contracts to 14 of
the 21 health plans that submitted bids in 1994, selecting fewer contractors
in rural areas than in urban centers. Florida Medicaid is also about to
adopt a quantitative evaluation methodology. Although plans that do not
achieve a minimum quality and access score will be eliminated, Florida
plans to contract with all qualified bidders. Enrollment will be allocated
among plans on the basis of their overall ranking. Plans with higher scores



40
 Digital estimates that between 80 and 85 percent of employees are enrolled in plans subject to its
performance standards.



Page 55                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 3
Purchasers Use Evaluation Criteria to
Pursue Price, Quality, and Access Goals




will be rewarded with larger enrollment. Cost accounts for 20 percent of
the total score.

Given the difficulty of distinguishing among HMOs using today’s
state-of-the-art techniques, some purchasers use criteria to establish a
minimum threshold for health plan participation and to evaluate and
monitor HMO performance. In some instances, a purchaser’s market power
allows it to dictate the minimum requirements for the plans it contracts
with. Some of these purchasers tend to view any narrowing of the market
as premature, given the preliminary nature of some of the criteria. The
root of this caution is the difficulty of measuring an HMO’s efficiency, true
cost, and quality of services. Is one HMO less costly than another because it
has healthier enrollees, rations care to save money, or puts effective
systems in place to actually manage care?

The Executive Director of the Gateway Purchasing Association in St. Louis
referred to this minimum threshold as the “ground-rules” for health plan
participation. Plans that want to contract with Gateway must be licensed
HMOs, be willing to provide data, agree to the coalition’s benefits designs,
and be willing to undergo performance measurement audits. State
governments also have such minimum thresholds. Adopting minimum
requirements, however, does not mean that such purchasers contract with
every qualified health plan or that they forsake the use of specific criteria
to eliminate health plans. Thus, as described earlier, HIPC, CalPERS, and
Minnesota have specific criteria that they apply in deciding whether to
expand employee health benefit options.




Page 56                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 4

Plan Options, Incentives, and Marketing
Used to Sway Employee Behavior

                                      As of 1994, 19.5 percent of Americans were enrolled in HMOs; enrollment in
                                      HMOs by state ranged from over 35 percent in 5 states to less than 5 percent
                                      in 11 others. Measured against this standard, a representative group of
                                      purchasers in our sample has achieved significantly higher rates of HMO
                                      enrollment, even among unionized workers and retirees who are often
                                      exempt from requirements placed on active, nonunion employees. For
                                      example, only two purchasers have fewer than 50 percent of their active
                                      employees enrolled in HMOs, while 7 out of 11 purchasers have over
                                      70 percent of such employees enrolled in HMOs. Table 4.1 summarizes, for
                                      a representative group of employers in our sample, changes in HMO
                                      enrollment that occurred after implementing major changes in their
                                      purchasing strategies. More recent statistics for some purchasers show
                                      how HMO enrollment has changed over time.

Table 4.1: HMO Enrollment for
Purchasers in GAO Sample Before and   Numbers in percent
After Changing Purchasing Strategy                                                  HMO enrollment
                                                                        Before changes in              After changes in
                                      Purchaser                        purchasing strategy          purchasing strategy
                                      State purchasers
                                      CalPERS active employees                     84 (1993)                    84 (1996)
                                      CalPERS retirees                             50 (1993)                    49 (1996)
                                      Minnesota active employees                   51 (1989)          48 (1993), 72 (1996)
                                      Missouri active employees                    32 (1994)                    75 (1997)
                                      Washington total employees                   66 (1995)                    77 (1996)
                                      Washington active employees                         70                           83
                                      Washington retirees                                 46                           52
                                      Wisconsin active employees                   20 (1983)          55 (1984), 83 (1996)
                                      Private sector purchasers
                                      American Express                             29 (1993)          62 (1994), 74 (1995)
                                      Digital                                      28 (1990)          60 (1992), 66 (1996)
                                      NYNEX total employees                        31 (1993)                    46 (1996)
                                      NYNEX union employees                        34 (1993)                    40 (1996)
                                      NYNEX management                             24 (1993)                    64 (1996)
                                      Safeway                                      21 (1992)          37 (1995), 63 (1996)a
                                      U S WEST total employees                     12 (1991)                    42 (1996)
                                      U S WEST union employees                 Not available                    45 (1996)
                                      U S WEST nonunion                        Not available
                                      employees                                                                 33 (1996)
                                      Xerox                                        40 (1990)                    80 (1997)
                                      a
                                      Projected.




                                      Page 57                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                   Chapter 4
                   Plan Options, Incentives, and Marketing
                   Used to Sway Employee Behavior




                   To what factors do these purchasers attribute increased enrollment in
                   HMOs or in other forms of managed care? The purchasers in our sample
                   identified three basic tools that they believe had a major impact on
                   employee health plan selections: (1) the type and mix of health plans
                   offered, (2) financial incentives, and (3) the information provided on
                   health plan options.


                   The movement toward a managed care purchasing strategy is reflected in
Evolution in       the type and mix of health plans offered by the purchasers in our sample.
Employee Benefit   In some cases, however, purchasers told us that the current list of options
Options            is only an interim step in the direction of increased reliance on HMOs to
                   serve the health care needs of their employees—albeit HMOs from which
                   they expect improved management and accountability for the delivery of
                   care. The range of plans offered reflects (1) a willingness to accommodate
                   the high priority employees attach to selecting a physician and (2) the lack
                   of alternatives to indemnity products in some markets. Few of these
                   purchasers have abandoned plans that allow access to a wider choice of
                   physicians, specialists, and hospitals. And still fewer offer only the most
                   restrictive type of managed care—the staff-model HMO that employs its
                   own doctors, operates its own hospitals, and uses a gatekeeper to regulate
                   access to specialists.41 Instead, what has evolved often strikes a middle
                   ground by restricting, but not eliminating, the right to select a physician
                   and by addressing concerns about having too few physicians from which
                   to choose.

                   Table 4.2 summarizes the health plan options for a representative group of
                   purchasers in our sample.




                   41
                    As noted earlier, the distinctions among managed care plans are becoming outmoded as plans rapidly
                   evolve in response to marketplace demands. For example, Kaiser, a group-model HMO, now offers a
                   point-of-service product in certain markets and sometimes contracts with non-Kaiser hospitals.



                   Page 58                              GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                 Chapter 4
                                 Plan Options, Incentives, and Marketing
                                 Used to Sway Employee Behavior




Table 4.2: Health Care Options
Available                                                                                               Type and mix of plans
                                 Purchaser                                                              offered
                                 State purchasers
                                 CalPERS                                                                PPO and HMO
                                 Minnesota                                                              PPO and HMO
                                 Missouri                                                               PPO, POS, and HMO
                                 Washington                                                             PPO and HMO
                                 Wisconsin                                                              Indemnity, PPO, and HMO
                                 Private sector purchasers
                                 American Express                                                       Indemnity, PPO, and HMO
                                 Digital                                                                Indemnity,a POS, and HMO
                                 NYNEX                                                                  Indemnity, POS, and HMO
                                 Safeway                                                                PPO,a POS, and HMO
                                 U S WEST                                                               POS and HMO
                                 Xerox                                                                  Indemnity and HMO
                                 a
                                  Effective in 1997, Digital’s indemnity option will be available only in areas with no POS plan.
                                 Safeway’s PPO option is no longer available in 1997.




Indemnity                        Although purchasers in our sample still offer an indemnity option, they
                                 have often introduced elements of managed care into their plan designs.
                                 Hybrid “managed indemnity” products now include features such as
                                 (1) utilization review; (2) mandatory case management of expensive
                                 services; (3) precertification for surgery, hospitalization, certain tests, and
                                 inpatient mental health treatment; and (4) centers of excellence renowned
                                 for treating certain diseases. Escalating costs have also persuaded some of
                                 the purchasers we interviewed to place special restrictions on some
                                 services—especially mental health. One company has even required
                                 precertification for substance abuse treatment. Some purchasers are
                                 worried about the continued viability of their indemnity option because of
                                 the tendency for higher utilizers of care to choose plans with fewer
                                 restrictions on selecting providers. In many markets, especially rural
                                 areas, there is no real alterative to an indemnity option.


Preferred Provider               Some purchasers have substituted a PPO—a somewhat narrower network
Organization                     of doctors and hospitals—for their indemnity option. For example, the
                                 CalPERS PPO includes 83 percent of physicians in California, while the PPO
                                 offered to Washington State employees includes 85 out of 89 hospitals.
                                 Some PPO designs even incorporate an out-of-network option that provides



                                 Page 59                                 GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                     Chapter 4
                     Plan Options, Incentives, and Marketing
                     Used to Sway Employee Behavior




                     employees with a safety valve back to traditional indemnity coverage. As
                     with indemnity coverage, purchasers have introduced similar management
                     features to help control costs. The introduction of a management feature
                     can be triggered by employee demographics or analysis that identifies a
                     high-cost area. For example, analysis by one firm with a predominately
                     young workforce suggested that maternity costs were its biggest expense.
                     To help identify potential prenatal problems, this employer instituted a
                     voluntary nurse advocate hotline. In Minnesota, state employees must now
                     select a primary care physician gatekeeper, a feature often associated with
                     HMOs, if they elect to enroll in the state’s self-funded PPO. The use of
                     gatekeepers is often associated with more restrictive HMOs. CalPERS
                     developed a second, self-funded PPO product that was first offered in 1993.
                     It was intended as a more affordable option for members who want fewer
                     restrictions on their choice of providers. Its lower premiums are offset by
                     higher out-of-pocket costs for enrollees. Minnesota also developed a
                     second, more restrictive self-funded product in order to respond to an HMO
                     with a self-referral option that was competing with the state’s PPO product.
                     A state official referred to this new option as an “HMO clone.”42 It consists
                     of a high-performance network of doctors and clinics that were
                     handpicked because they were good at managing care. The only difference
                     between the larger PPO network and this new option is that it eliminates
                     the self-referral option still available through the larger network.


Point-of-Service     Some purchasers have replaced indemnity or PPO plans with a
                     point-of-service (POS) option—a less contentious move, from the
                     standpoint of employee relations, than adopting an HMO-only strategy. POS
                     is a hybrid design that can have elements of an HMO, a PPO, and even a
                     traditional indemnity product. Employees may decide which tier to utilize
                     each time they seek medical services. Several purchasers told us that they
                     view POS as a bridge from indemnity plans to HMOs. A few purchasers in
                     our sample offer POS in conjunction with either traditional indemnity or a
                     PPO option. In some instances, an indemnity-type option is only available if
                     a POS plan is not offered in a particular market. Some purchasers, however,
                     offer no middle ground between indemnity coverage and an HMO. HMO
                     enrollees of one such firm have an out-of-network option for certain
                     serious procedures, such as transplants.


Health Maintenance   As discussed in chapter 3, most private sector purchasers emphasize
Organization         broad-network HMOs that operate statewide and provide access to a wide

                     42
                      Although not licensed or regulated as an HMO, a state official told us that this option operates like an
                     HMO with a closed panel of physicians.



                     Page 60                                 GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                        Chapter 4
                        Plan Options, Incentives, and Marketing
                        Used to Sway Employee Behavior




                        choice of primary care physicians, specialists, and hospitals. State
                        purchasers, on the other hand, are more likely to contract with smaller,
                        local health plans in an attempt to provide an HMO option to as many
                        employees as possible.


                        Purchasers we interviewed believe that financial incentives are an
Developing Financial    important tool in facilitating acceptance of HMOs by employees. They are
Incentives Poses        often inherent in the design of a managed care or HMO option in the form of
Challenges for          lower premiums, copayments, and deductibles coupled with a richer set of
                        benefits. Such incentives, however, were generally viewed by the
Purchasers              purchasers in our sample as less effective than ones that focus on the
                        amount deducted from an employee’s paycheck—that is, the employee
                        share of the cost of health care coverage.

                        Before purchasers adopted a managed care strategy, employees were
                        insulated from the true costs of their health care. To a greater extent than
                        in the past, the purchasers we interviewed are exposing workers to the
                        financial implications of their choices. The ability of purchasers to adopt
                        stronger financial incentives, however, is often limited by a common set of
                        constraints, including the extent to which workers are unionized or the
                        corporate culture’s perspective on employee cost-sharing.


The Theory Behind       Most employers pay a fixed percentage of an employee’s health plan
Contribution Formulas   premium. Table 4.3 uses hypothetical monthly premiums for four health
                        plan options to demonstrate the impact of different cost-sharing formulas
                        on employee out-of-pocket expenses. For each option, the firm pays
                        90 percent of the premium according to the specified formula and the
                        employee pays the remainder. For example, under the option 3 formula,
                        the employer contribution is based on the cost of the benchmark plan43
                        —in this instance, HMO A—and totals $108 (90 percent of $120). An
                        employee selecting HMO A pays the remaining 10 percent ($12). On the
                        other hand, an employee electing to enroll in the most expensive plan is
                        responsible for 46 percent of the premium, and one choosing the least
                        costly option pays nothing.

                        Moving across the table from left to right, each successive formula
                        provides a stronger financial incentive for an employee to consider cost in
                        choosing between indemnity and managed care options. So when an

                        43
                          The term “benchmark” is associated with Xerox and Digital, which screen the HMOs that they offer
                        to employees on explicit quality criteria. Generally, the benchmark HMO is the lowest-priced plan in
                        that market that year.



                        Page 61                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                        Chapter 4
                                        Plan Options, Incentives, and Marketing
                                        Used to Sway Employee Behavior




                                        employer pays 90 percent of the cost of any plan (option 1), the employee
                                        only faces a $10 differential between the low-cost HMO and the indemnity
                                        option. If, on the other hand, the employer’s contribution is tied to
                                        90 percent of the low-cost plan (option 4), an employee considering the
                                        indemnity option must contribute $100 more each month compared with
                                        the least expensive HMO. In addition to widening the cost gap between
                                        indemnity and managed care options, each successive formula also forces
                                        an employee to take a closer look at the cost differential among managed
                                        care options. In our examples, HMO A is designated as a benchmark HMO
                                        because of outstanding quality. Under option 2, HMO A is free; however,
                                        under option 4, which uses a low-cost formula, the employee’s share of the
                                        premium is $30—$20 more than HMO B, an acceptable, but less expensive,
                                        HMO.


Table 4.3: Hypothetical Firm-Employee
Contribution Options (Single                                     Formula: Firm pays 90% of (employee pays remainder)
Coverage/Per Month)                                                                Option 2:    Option 3: Cost    Option 4: Cost
                                                            Option 1: Cost     Average cost     for benchmark       for low-cost
                                                              for any plan        of all plan        plan (HMO        plan (HMO
                                                                  selected    options ($124)            A/$108)           B/$90)
                                        Indemnity: premium = $200
                                        Firm pays                      $180             $124              $108              $90
                                        Employee pays                   $20              $76               $92             $110
                                        Point-of-service: premium = $130
                                        Firm pays                      $117             $124              $108              $90
                                        Employee pays                   $13               $6               $22              $40
                                        Benchmark HMO A: premium = $120
                                        Firm pays                      $108             $120              $108              $90
                                        Employee pays                   $12               $0               $12              $30
                                        Low-cost HMO B: premium = $100
                                        Firm pays                       $90             $100              $100              $90
                                        Employee pays                   $10               $0                $0              $10

                                        The strength of any financial incentive is also influenced by a number of
                                        other factors, including (1) the magnitude of the difference among health
                                        plan premiums, (2) employer generosity, and (3) the characteristics of the
                                        workforce. The closer premiums are clustered together, the less incentive
                                        an employee has to discriminate among plans due to cost differences.
                                        Similarly, an employer electing to pay a higher percentage of the premium
                                        may reduce employee cost-sensitivity. Finally, a young, relatively healthy
                                        workforce will probably be more responsive to small changes in price than
                                        one that is older and sicker. Generally, however, a fairly significant price



                                        Page 62                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                  Chapter 4
                                  Plan Options, Incentives, and Marketing
                                  Used to Sway Employee Behavior




                                  differential may be required to convince employees to switch to a
                                  managed care plan with a more restrictive choice of physicians.


Employees Asked to Share          We were told that in the past many employers targeted their contribution
More of Health Care Costs         to higher-cost plans, reducing the incentive for an employee to choose a
                                  less expensive alternative. Although some purchasers in our sample
                                  continue to use higher-cost plans as a reference point in determining the
                                  level of employee cost-sharing, others have adopted contribution formulas
                                  that more explicitly encourage migration to what they consider efficient
                                  health plans. Only one firm told us that it did not believe in using financial
                                  incentives to influence employee choice. As noted earlier, the specific
                                  formula adopted, cost differentials between plan options, and employer
                                  generosity all influence the effectiveness of incentives. Whatever formula
                                  is used, however, purchasers we interviewed generally now ask employees
                                  to contribute more to the cost of coverage, particularly employees who
                                  choose an indemnity option. Table 4.4 describes the employee
                                  contribution formulas of a representative group of purchasers in our
                                  sample and provides a rough comparison of employee out-of-pocket costs
                                  if the employee elects to enroll in an indemnity-type product.

Table 4.4: Financial Incentives
Adopted by Purchasers                                                                      Monthly employee share of
                                                        Financial incentives (for          family coverage under
                                  Purchaser             active employees only)             indemnity-type option
                                  State governments
                                  CalPERS               Incentive for state employees       Ranges from $80 to $256 for
                                                        based on California’s freezing      state employees, depending on
                                                        its contribution at the 1991 level. the PPO option chosen.
                                  Minnesota             Low-cost plan formula              $84 in the Minneapolis area
                                                        introduced in 1989. Low-cost       (PPO enrollment in 1996 was
                                                        plan is free for full-time         about 27%).
                                                        employees.
                                  Missouri              Low-cost plan formula              $266 in the Jefferson City area
                                                        introduced for state employees     for the PPO option. In contrast,
                                                        in 1995. Low-cost plan is free     the lowest-cost HMO is $112.
                                                        for employees.
                                  Washington            First introduced cost-sharing in   $36 (Enrollment in the state’s
                                                        1996. PPO is benchmark for         self-funded PPO dropped 35%
                                                        cost-sharing.                      with the introduction of
                                                                                           cost-sharing).
                                  Wisconsin             Low-cost formula introduced in     Ranges from about $75 (where
                                                        1984. State pays the lesser of     there are no low-cost
                                                        90% of indemnity option or         alternatives) up to $333.
                                                        105% of qualified lowest-cost
                                                        plan.
                                                                                                                 (continued)


                                  Page 63                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 4
Plan Options, Incentives, and Marketing
Used to Sway Employee Behavior




                                                         Monthly employee share of
                      Financial incentives (for          family coverage under
Purchaser             active employees only)             indemnity-type option
Private sector
American Express      Gradually moving to benchmark Unavailable.
                      plan formula by 2001. The
                      benchmark is the local HMO
                      with the highest value measured
                      in terms of quality (70%) and
                      cost (30%) and is usually, but
                      not always, the lowest-cost plan.
                      1994 increase in HMO
                      enrollment attributed to
                      promoting HMOs in open
                      season literature.
Digital               Introduced a benchmark plan        $623.92 in the Boston area (less
                      formula in 1991 in which firm      than 6% are in the indemnity
                      pays 85% of plan that meets its    option in 1997); 16% are in POS
                      cost and quality criteria. The     in 1997.
                      benchmark plan is usually, but
                      not always, the lowest-cost plan
                      in an area.
NYNEX union           No incentive—free.                 Indemnity option is free.
NYNEX management Cash-back incentive increased Ranges from $214 to $340,
                 significantly in benefit year 1994 depending on the employee’s
                 for employees electing to join an location.
                 HMO.
Safeway               First introduced cost-sharing in   Replacing PPO with POS in
                      1994. Starting in 1996, will pay   benefit year 1997. PPO
                      90% of average-cost plan.          enrollment dropped by 50%
                                                         between 1994 and 1996.
U S WEST union        Limited incentive—POS and          Indemnity no longer offered.
                      low-cost HMO are free;
                      employee pays difference for
                      higher-cost HMOs.
U S WEST              Limited incentive—POS and          Indemnity no longer offered.
management            low-cost HMO are free;
                      employee pays difference for
                      higher-cost HMOs.
Xerox union           No incentive—indemnity option      Unavailable.
                      is free to employee.
Xerox management      Benchmark plan (low-cost) is       $201.
                      free, and, in addition, employee
                      gets cash back.

Relatively few of the purchasers in our sample—only six—elected to
target their contribution to the low-cost or benchmark plan. The two firms
that use a benchmark formula screen plans using explicit quality criteria
before offering them to employees. In adopting this approach, purchasers




Page 64                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 4
Plan Options, Incentives, and Marketing
Used to Sway Employee Behavior




need not penalize individuals living in markets with limited managed care
alternatives. Thus, in rural areas with few HMOs, Wisconsin and Minnesota
designate their indemnity and fee-for-service PPO plans as the low-cost
option. In rural Wisconsin, a state employee pays only $75 monthly for
family coverage under the indemnity plan, while in areas with competing
HMOs, the same plan costs as much as $333.


The impact of a low-cost plan formula on employee choice can be
dramatic. For example, Digital saw enrollment in HMOs double in one year
from about 30 to 60 percent—a level where it appears to have stabilized.
Xerox’s enrollment in HMOs now stands at about 80 percent. Digital, unlike
Xerox, offers a POS alternative that has attracted a steady 15 to 16 percent
enrollment.44 HMO enrollment by Wisconsin State employees went from 20
to 55 percent the year after it adopted a low-cost contribution formula that
only offered a choice between HMOs and an indemnity plan.

On the other hand, Minnesota implemented a low-cost plan option in 1989.
By 1993, HMO enrollment by Minnesota State employees had actually
decreased slightly, from 51 percent to about 48 percent. During this
period, the cost differential between the low-cost plan and the state’s
self-insured, fee-for-service PPO remained fairly constant. Officials
attributed the recent growth in HMO enrollment, which now stands at
72 percent, to a widening of this cost differential. In 1995, an HMO with a
self-referral option and a network that closely resembles the state’s
fee-for-service PPO product cut its rates by 25 percent. Since this HMO was
now substantially cheaper, the state fee-for-service PPO lost 10 percent of
its enrollment. The actual amount of an employee’s share of the premium
for alternative types of coverage also helps explain the impact of a
low-cost formula on plan enrollment. For example, in 1996, a Minnesota
State employee in the Minneapolis area who elects fee-for-service PPO
coverage for his family paid about $64 a month more than for the
lowest-cost HMO. Minnesota still has about 27 percent of state employees in
its PPO option. In contrast, a Digital worker in the Boston area who chose
indemnity coverage for his family paid about $560 per month more than
for the lowest-cost HMO. Not surprisingly, only about 5 percent of Digital
employees are still enrolled in the company’s indemnity plan.

Over time, the already strong, low-cost incentive can become stronger:
Those remaining in indemnity plans tend to be higher utilizers of health
care services, increasing the cost per enrolled employee and the

44
 As of January 1, 1997, Digital managed care enrollment stood at 82 percent: 66 percent of employees
are enrolled in an HMO and 16 percent in a POS plan.



Page 65                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 4
Plan Options, Incentives, and Marketing
Used to Sway Employee Behavior




associated premium. But a firm may choose to subsidize its indemnity
option to prevent this adverse selection “death spiral.” The incentive
structure of such firms is based on the assumption that younger, single
individuals use little health care and are thus cheaper to insure under an
indemnity option.45 Thus, single employees at two firms in our sample pay
nothing for indemnity, while families are given a greater financial incentive
to join an HMO. A different firm, on the other hand, has removed most of
the subsidy for the indemnity option. Its goal is to eventually replace this
option with a POS alternative.

The Missouri Consolidated Health Care Plan, which manages health
benefits for public employees, adopted a low-cost formula for state
workers in 1995. A board member suggested that purchasers who
self-insure their indemnity plan often find it difficult to be neutral about
the plan’s success or failure, including the extent to which employees
share in ever-rising costs. Self-insurance, he argued, clouds a purchaser’s
view of competing plans, a factor that contributed to the board’s decision
to sell its indemnity product and offer a fee-for-service PPO option through
an independent carrier. The logic behind the decision is that an insurance
company is more likely to take the necessary steps to make such a plan
competitive and to charge realistic premiums that ensure profitability.
Another program for state employees, the Washington Health Care
Authority, has been directed by the state legislature to study the
advantages of selling off its fee-for-service PPO product.

One purchaser we interviewed adopted a more radical and costly
approach to increasing HMO enrollment. Initially, a management-level
employee paid nothing for the low-option indemnity plan and, in fact, got
money back. To increase HMO enrollment, the firm required single
employees to contribute toward the cost of this indemnity option and
offered what the firm’s benefit manager characterized as a “huge”
managed care incentive—$2,000 to $3,000 cash back. Its popularity has
forced the company to gradually scale back the value of the incentive.
Over a 3-year period, the firm’s nonunion HMO enrollment grew from
24 percent to 64 percent. Firms that pay 100 percent of coverage have also
adopted a cash-back incentive model to increase participation in certain
types of health plans. Another firm offers employees additional benefit
options, such as dental and vision, rather than cash when they choose less
expensive options.




45
  This group also tends to be sensitive to smaller cost differentials.



Page 66                                  GAO/HEHS-97-71 Health Insurance Purchasing Strategies
    Chapter 4
    Plan Options, Incentives, and Marketing
    Used to Sway Employee Behavior




    The contribution formulas used by most of the purchasers we interviewed
    fall somewhere between a low-cost formula and one that pays a fixed
    percentage of any plan selected. Some of the approaches adopted include

•   average cost of all plans, including the indemnity option,
•   use of a PPO as a benchmark,
•   grouping plans into low- and high-cost tiers, and
•   freezing the employer contribution at the 1991 level.

    BHCAG  employers have agreed to group care system bids into three tiers
    and to base the contribution for each tier on the average premium.
    Employees choosing a plan in the first tier would pay the lowest cost for
    single coverage, but selecting a plan in the third tier would cost the
    employee the most. Moreover, some BHCAG members told us that they may
    eliminate some or all of the other plans currently offered to employees.
    Other purchasers we interviewed recently implemented or are in the
    process of phasing in stronger financial incentives. One firm is moving
    toward the low-cost plan approach over a period of 7 years. Other
    purchasers we interviewed also phased in stronger employee contribution
    formulas.

    Purchaser failure to periodically review and update the contribution
    formula can water down its impact on employee behavior, especially when
    premiums are rising slowly or even declining in some markets. Such
    trends also lessen the urgency for a purchaser to strengthen incentives.
    For example, until 1991, the state of California based its contribution for
    active employees under the CalPERS program on the cost of the four most
    popular plans, which were also among the most expensive.46 Since then,
    the monthly contribution level has been frozen at $410 for family coverage.
    Although the goal was to establish a new contribution formula through
    collective bargaining, as of August 1996 no agreement had been reached
    for most of the bargaining units. The pressure to agree on a new formula
    may have been undercut by the fact that (1) many HMO premiums are now
    less than they were in 1993 and less than the state’s “frozen” contribution
    level, (2) the most popular PPO has experienced a modest price increase of
    only 4.5 percent over 4 years, and (3) an alternative PPO option fell nearly
    20 percent in cost since 1993. Chevron negotiates a fixed-dollar
    contribution with its employees every 3 years. With the decline in
    California HMO rates through its participation in PBGH, HMOs are now free to

    46
      Under the CalPERS program, California still uses the average weighted cost of the four most popular
    plans to calculate the premium contribution for state retirees. In 1996, the state’s monthly contribution
    fell from $410 to $369. If this formula had still applied to active state employees, family coverage in the
    most popular HMO would have been about $15 a month rather than free.



    Page 67                                  GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                          Chapter 4
                          Plan Options, Incentives, and Marketing
                          Used to Sway Employee Behavior




                          employees. Since the cost of the firm’s POS alternative has also decreased,
                          we were told that there is now little incentive for employees to join an
                          HMO.


                          Purchasers also use financial incentives to steer employees toward
                          specific health plans. Xerox announced that it would give employees a
                          $120 price break for joining HMOs that were fully accredited by NCQA.
                          Members of the National HMO Purchasing Coalition meet annually by
                          region with contracting HMOs and ask plans to set their own performance
                          standards. Subsequently, one coalition member surveyed employees to
                          measure health plan progress against these self-defined standards.
                          Depending on the survey results, this firm will increase or decrease its
                          contribution for the plan by up to 20 percent.


Constraints on Employee   Corporate culture, collective bargaining, and the low salaries of some
Cost-Sharing              workers limited the ability of firms in our sample to share the cost of
                          health insurance coverage with their employees. The corporate culture of
                          some firms in our sample is paternalistic toward employees, placing limits
                          on the extent to which employees could be asked to contribute toward the
                          cost of health care. One firm told us that it had a huge internal debate over
                          employee cost-sharing and the adoption of a low-cost contribution
                          formula. For years, the firm had told employees that it did not choose
                          health plan partners on the basis of cost. Thus, switching to a low-cost
                          contribution formula would have directly contradicted 10 years of
                          emphasis on partnering with plans. The firm adopted a more modest
                          cost-sharing formula, but the benefit manager was not sure that the
                          differential between the plan options was significant enough to encourage
                          migration into HMOs.

                          Other firms had a significant portion of their workforce covered under
                          labor agreements that prohibit cost-sharing for traditional indemnity, PPO,
                          and even POS plans. One company not only offers many of its plans free to
                          union employees but also feels compelled to do the same for
                          management-level staff to avoid making a union attractive to nonunion
                          employees. The benefit manager of this firm commented that a larger
                          percentage of union than management-level staff had enrolled in HMOs. All
                          of the company’s executives are in the POS plan, and there is not much
                          encouragement from top management to develop stronger incentives for
                          HMO enrollment. A few firms, however, have been able to persuade their
                          unions to accept a POS plan in lieu of a PPO option. Benefit managers told
                          us that a relatively small percentage of their POS costs were attributable to



                          Page 68                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                         Chapter 4
                         Plan Options, Incentives, and Marketing
                         Used to Sway Employee Behavior




                         enrollees who sought services outside the HMO tier, that is, the PPO or
                         indemnity tiers.

                         Finally, some purchasers are limited in their ability to impose cost-sharing
                         by the character of their workforce. A firm told us that even though it kept
                         the premium contribution low, few of its hourly employees signed up for
                         health benefits. One factor was low wages. This firm said that if it charged
                         more than $50 a month for single coverage, few, if any, employees would
                         sign up. Another factor, we were told, was the youth of many employees,
                         who would “rather spend the money on a car stereo instead.” Those who
                         did enroll tended to be married and planning to have children.


Relative Importance of   The relative importance of financial incentives versus other factors that
Incentives Sometimes     influence an employee’s choice of health plans is difficult to distinguish.
Difficult to Discern     Clearly, workforce demographics, degree of HMO penetration, or dislike of
                         the paperwork often associated with indemnity plans can also affect
                         employee plan selection. Union employees are a case in point. Many of
                         these workers have no explicit financial incentive to join an HMO other
                         than copayments and deductibles, since indemnity coverage is often free.
                         Yet purchasers told us that many union employees have chosen HMOs.
                         Some firms attributed the high HMO enrollment of unionized workers, in
                         part, to dislike for the indemnity claim forms and “red-tape.”47

                         HMO penetration in a given market is another factor affecting the behavior
                         of union workers. Thus, when Xerox began to implement its benchmark
                         HMO strategy for management-level employees in 1990, the firm already
                         had 40 percent HMO enrollment—largely among its union workers in
                         Rochester, New York. According to Xerox, HMOs have long been accepted
                         in Rochester and include almost every doctor in the area. In the early
                         1990s, HMOs provided insurance to more than half of the city’s residents.48
                         In general, the purchasers in our sample have more employees enrolled in
                         HMOs in areas with significant HMO penetration.




                         47
                           One employer, whose no-cost indemnity option for union employees had a $250,000 lifetime limit,
                         told us that many such employees chose an HMO not because of this low limit but to avoid the
                         indemnity paperwork hassle.
                         48
                          Health Care: Rochester’s Community Approach Yields Better Access, Lower Costs (GAO/HRD-93-44,
                         Jan. 29, 1993), p. 8.



                         Page 69                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                             Chapter 4
                             Plan Options, Incentives, and Marketing
                             Used to Sway Employee Behavior




                             The most serious obstacle to the health benefit management strategies
Firms Try Marketing          described in this report is often the negative employee perception of
to Overcome                  managed care. This general antipathy for restricted choice and
Resistance to                apprehension about the quality of care have been heightened over the past
                             several years by what purchasers characterize as a constant stream of
Managed Care                 negative publicity ranging from gag rules to maternity stays.49 Employers
                             have used three basic tools to help sway employee opinion and to assuage
                             specific employee concerns about managed care. First, as discussed in
                             chapter 3, they articulate and explain the criteria used to select managed
                             care plans. Second, they now more prominently feature HMOs in their open
                             enrollment literature. Finally, they provide employees specific
                             comparative data about the quality of the available health plan options.
                             The purchasers in our sample are not merely supplying relevant
                             information; their role during the annual open season is sometimes one of
                             advocate rather than neutral broker.


Open Enrollment Season       The purchasers in our sample give employees an opportunity to reassess
Offers Opportunity to        their health plan selections annually during what is commonly referred to
Promote HMOs                 as an “open season.” American Express told us that after switching to an
                             HMO strategy, it began to devote more space to the managed care options
                             in its open season literature. Previously, this material had zeroed in on the
                             company’s indemnity plan, leaving it up to the employee to take the
                             initiative to learn more about participating HMOs. The open season
                             brochure merely provided plan names and phone numbers. According to a
                             benefit manager, the firm was more knowledgeable about and comfortable
                             with how its own indemnity plan worked, and the open season literature
                             simply reflected this fact. It was much harder to describe HMO benefits,
                             since they differed from plan to plan.

                             Some purchasers we interviewed now routinely provide employees with
                             basic information about the HMOs they offer. Although the specific data
                             vary from employer to employer, the following categories of information
                             usually were included:

                         •   General: Description of how an HMO works, including an explanation of the
                             difference between group/staff and IPA model plans, the role of the primary
                             care physician, and how to obtain referrals to specialists.
                         •   Plan-specific data: How long the plan has been operating, whether it is
                             for-profit or not-for-profit, the number of enrollees it has, the growth or

                             49
                              The typical comments about HMOs from a focus group conducted by one purchaser were (1) “the
                             care is inferior,” (2) “I don’t think my doctor participates,” and (3) “top-quality physicians aren’t
                             available through an HMO.”



                             Page 70                                 GAO/HEHS-97-71 Health Insurance Purchasing Strategies
    Chapter 4
    Plan Options, Incentives, and Marketing
    Used to Sway Employee Behavior




    decline in enrollment over time, and the percentage of fellow employees
    who have selected each plan.
•   Physician data: Physician turnover, the number of board-certified
    specialists and primary care physicians, and the percentage of primary
    care physicians accepting new patients.
•   Hospital: Hospitals affiliated with the plan and those most frequently used.
•   Accreditation: NCQA accreditation status.

    Some purchasers in our sample give employees a context for interpreting
    the data provided, such as including a benchmark or goal for evaluating
    the physician turnover rate. Xerox informs employees how plan premiums
    have changed over the last few years and suggests a goal of less than
    4 percent over a 3-year period.

    As shown by the prominence of such data in this list, access may be the
    single most important issue for employees. One firm told us that it put
    together a special brochure to educate employees on the differences
    between Kaiser and several new IPA-model HMOs that were being offered
    for the first time. It wanted to be sure that employees understood that the
    new plans were different from Kaiser, which is a staff-model HMO with a
    much narrower choice of physicians and hospitals. This firm, as well as
    other purchasers, told us that employees are more willing to choose an
    HMO or other managed care product when they know that their doctors and
    local hospitals participate. While it is relatively simple to provide a list of
    affiliated hospitals, the names of network providers are generally only
    available from individual health plans. One purchaser, however, went a
    step further. HIPC now publishes a semiannual list of participating
    providers and the health plans with which they are affiliated. When a
    provider is available through several plans, as is often the case in
    California, it gives employees an opportunity to focus on other selection
    issues.

    Some purchasers are also attempting to provide information on HMO
    benefits and exclusions in their open season material. This task was
    simplified for those purchasers who have adopted standardized HMO
    benefits. Standardized benefits, however, do not mean that the policies
    and procedures of each HMO are identical. For example, Wisconsin
    furnishes additional information on each plan regarding the policy on
    maternity stays, the operation of the drug formulary, procedures for
    dispensing drugs, covered outpatient mental health services, and how to
    obtain disposable diabetic supplies. For other purchasers we interviewed,
    however, explaining HMO benefits is complicated by the lack of



    Page 71                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                           Chapter 4
                           Plan Options, Incentives, and Marketing
                           Used to Sway Employee Behavior




                           standardization. Despite the difficulty, some firms do provide comparative
                           information on HMO copayments and limits for various services, while
                           others still refer their employees to each health plan.


Quality Is Focus of Some   Generally, purchasers recognize that they cannot advocate enrollment in
Data, Especially Report    managed care plans without addressing a fundamental employee
Cards                      concern—the suspicion that cost, not quality, is the motivating factor for
                           adopting a managed care strategy. Some of the basic information just
                           described touches indirectly on the issue of health plan quality—like the
                           percentage of board-certified physicians and accreditation status. What
                           are commonly referred to as “report cards” are an attempt to tackle the
                           quality issue head on.50

                           About half of the purchasers in our sample currently provide employees a
                           report card on the HMOs that they offer, and others are planning to do so in
                           the near future. These report cards focus on the results of employee
                           satisfaction surveys and, to a lesser extent, health plan performance in
                           delivering HEDIS preventive services such as immunizations or cancer
                           screening. Purchasers offered a number of explanations for not putting
                           greater emphasis on HEDIS measures. One firm that was involved in the
                           development of HEDIS told us that it had doubts about sharing these data
                           with employees because the attempts to measure quality are in their
                           infancy. This firm is only issuing its first report card for the 1997 benefit
                           year. Another purchaser noted that employees are not interested in HEDIS
                           performance data; employees only wanted to know what the firm was
                           doing to ensure that the “right” plans, that is, high-quality plans, were
                           offered. Finally, research suggests that individuals have greater confidence
                           in and attach more weight to the opinions of peers. A purchasing coalition
                           that tested its report card on a focus group told us that individuals were
                           unimpressed with the HEDIS data and were more likely to rely on the
                           member satisfaction results.

                           As with other information on managed care plans, some purchasers try to
                           help employees understand and use the report card data. Thus, rather than
                           merely reporting a raw score, some report cards rank plans as either
                           above or below average, making it easier for employees to compare plans
                           and draw conclusions from the data. Xerox publishes a goal or standard
                           for most satisfaction and performance measures. CalPERS actually includes
                           a worksheet and encourages employees to use the report card data to

                           50
                            See Health Care Reform: “Report Cards” Are Useful but Significant Issues Need to Be Addressed
                           (GAO/HEHS-94-219, Sept. 29, 1994).



                           Page 72                              GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                            Chapter 4
                            Plan Options, Incentives, and Marketing
                            Used to Sway Employee Behavior




                            compare plans and highlight areas of concern. Minnesota tells state
                            employees how the satisfaction results for each plan have changed in
                            targeted areas since the last survey. A few purchasers also include results
                            on their own self-funded indemnity plan or the POS option, giving
                            employees an opportunity to see how their peers rate satisfaction among
                            the different types of plans available


Marketing Strategy: Using   The purchasers we interviewed believe that managed care offers the best
Information to Advocate     “value”—the right combination of price and quality—for employees.
Managed Care                Moreover, some are convinced that choosing a health plan is seldom a
                            rational decision based on good information or even on the right
                            information. Although they hesitate to recommend or endorse a particular
                            plan, these purchasers are not bashful about advocating enrollment in
                            particular types of managed care plans that they offer. And they use
                            information both to support their position and to encourage employees to
                            be more analytical about their health care options. According to one
                            benefit manager, however, large purchasers are careful to make sure
                            employees understand both the pros and the cons of managed care; they
                            prefer not to deal with angry individuals who subsequently decide that this
                            option is not for them.

                            Communications can be a powerful tool, because a purchaser has the
                            latitude to either minimize or maximize the exposure it gives to a health
                            plan in the plan’s interactions with employees. One firm told us that it was
                            using compelling arguments and information to interest employees in a
                            new class of managed care plans. When it first introduced these
                            plans—without a lot of fanfare—only about 1 percent of those eligible
                            signed up. It attributed a large enrollment increase the following year to an
                            intensive marketing effort. Though written information played a role, the
                            firm believes that meetings with employee groups was also a key factor in
                            promoting these plans.51 A second firm implemented a sophisticated
                            marketing strategy with similar results. This firm used employee focus
                            groups to develop a video script; the video was produced with
                            professional actors and a local physician, who responded to employee
                            concerns and observations. The firm credited a significant jump in HMO
                            enrollment to use of this video and to time spent talking with employees
                            about HMO quality.



                            51
                             A different firm told us that during open enrollment, it asks participating HMOs to bring in medical
                            group representatives to talk to employees. Plans tend to bring in their best medical groups, which
                            makes them more attractive to employees.



                            Page 73                                GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 5

Observations


                      Our work suggests that some large purchasers and state governments have
                      taken a more aggressive role in managing their employee health benefit
                      costs. Double-digit premium increases common a few years ago have been
                      controlled considerably in the last 2 years, a development attributable, at
                      least in part, to more active management of health insurance costs. Some
                      common elements distinguish these purchasers’ benefit management
                      strategies: (1) advocacy of managed care; (2) the application of
                      competitive market principles to purchasing decisions; and (3) increased
                      sharing of costs, responsibility, and information with employees. Despite
                      common elements, a diversity of approaches is also evident—a diversity
                      fostered by institutional flexibility and the willingness to pursue and wield
                      purchasing leverage.


                      Advocacy of managed care, particularly HMOs, is the linchpin of the active
Advocacy of Managed   purchasing strategies we examined. In response to employee skepticism,
Care                  labor constraints, or the immaturity of HMOs in certain markets, some
                      purchasers have introduced hybrid or less restrictive forms of managed
                      care as a bridge to future HMO enrollment. The purchasers we interviewed
                      have either incorporated elements of managed care in their indemnity
                      products or replaced them with a fee-for-service PPO product. Their
                      explicit promotion of HMOs contributed to, if not necessitated, other
                      common elements of an active purchasing strategy: (1) the development of
                      evaluation criteria based on price, access, and quality goals and (2) the
                      adoption of financial incentives and information strategies to influence
                      employee behavior. The criteria serve both employers and employees in
                      comparing and contrasting plans and in justifying their selections.


                      Large purchasers have spurred the development of explicit criteria to help
Competitive Market    them evaluate and select competing health plans. Often, these criteria are
Principles            spelled out in a request for proposal used to solicit bids. The criteria range
                      from quality benchmarks such as National Committee on Quality
                      Assurance accreditation or the ability to report HEDIS data, to standardized
                      benefits that simplify a cost comparison among plans. Today, few of these
                      purchasers would describe themselves as price-takers. Some closely
                      analyze proposed premiums to help assure themselves that price
                      quotations are based on the demographics and utilization experience of
                      their workforce. Most actively negotiate with health plans and some use
                      their market power to extract discounts.




                      Page 74                       GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 5
Observations




Some employers do not hesitate to use their relative size to influence
health plan behavior—a purchasing tool unavailable to a small firm or
individual. Thus, size—either innate or attained by joining like-minded
employers—allows some purchasers to demand that health plans
negotiate or adopt a particular approach to quality assurance. However,
market leverage stemming from a firm’s size or reputation is probably
oversold as key to an effective health care purchasing strategy. Indeed, the
firms we reviewed were more likely to adopt strategies that rely on
competition among a number of health plans as opposed to strategies that
would maximize a firm’s market power by demanding concessions from a
single health care plan. To some extent, the development of employer
coalitions, which combine the purchasing power of a number of large
firms, appears to be an attempt to magnify a firm’s leverage. But even such
coalitions appear to rely more heavily on setting up a competitive
framework among rival plans. The public purchasers in our sample—often
the largest single employer in a state—have also focused on developing a
competitive framework.

By no means is there unanimity on the use of evaluation criteria. Many
large purchasers we interviewed recognize the shortcomings of the cost,
quality, and access criteria that have been developed so far. Thus, some
told us that today’s quality criteria are too process oriented and incapable
of distinguishing the plans that produce the highest-quality outcomes.
Similarly, despite efforts to analyze proposed premiums, many purchasers
acknowledged that they still have little idea of the true cost of providing
coverage through HMOs. Though some are comfortable with using one or
more criteria to eliminate health plans from contention, others see the
criteria more as improvement and development goals for the plans
themselves.

The purchasers in our sample generally believe that efficiency and quality
are closely linked: in a situation in which care is, in fact, managed, lower
cost is compatible with higher quality. Some are convinced that continued
pressure on HMOs to lower prices and to justify any increases will force
plans to become more efficient, encouraging competition based on quality
rather than price. Others, however, are concerned that employers and
coalitions are so focused on cost that they are doing little to ensure that
health plans are taking the necessary steps to become more efficient.
While the debate continues over the degree to which large employers’
contracting decisions are or should be influenced by cost, there is general
agreement that enhancing competition is key in a health care system that
looks increasingly to managed care to help moderate premium growth.



Page 75                      GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                       Chapter 5
                       Observations




                       The negative public perception of managed care has played an important
Influencing Employee   role in shaping purchasers’ attempts to influence employee behavior.
Behavior               Employees, we were told, have been convinced by a barrage of
                       unfavorable publicity that managed care achieves lower costs, not
                       efficiency, by denying needed services and impinges on the doctor-patient
                       relationship. In addition, employees are usually aware of the cost issues
                       underlying employer decisions about health benefits. As a result,
                       purchasers have used three basic tools to sway employee opinion and to
                       assuage specific concerns about managed care. First, purchasers articulate
                       and explain their criteria for selecting managed care plans; second, they
                       now more prominently feature such plans in the open season material;
                       finally, they attempt to provide employees specific comparative data about
                       the quality of the available options.

                       Intuitively, financial incentives would appear to be a more powerful tool
                       than communication in influencing an employee’s health plan selection.
                       For the purchasers in our sample, however, introducing effective and
                       reasonable financial incentives was perhaps the most difficult aspect of
                       implementing an active purchasing strategy. Few have adopted what is
                       said to be the strongest financial incentive to select a managed care
                       plan—targeting the employer contribution to the lowest-cost option. Most
                       employers fall somewhere in between the adoption of a low-cost formula
                       and one that provides no incentive to be cost-conscious. Whatever the
                       formula, however, the purchasers we interviewed are generally now
                       asking employees to contribute more to the cost of coverage, particularly
                       for those who choose an indemnity option.


                       Despite these common elements, a diversity of approaches more aptly
Common Elements,       characterizes the individual strategy and specific tools adopted by each of
Yet Diversity of       the purchasers in our sample. They have used the flexibility inherent in the
Approaches             private market to fashion strategies that are contingent on the unique
                       characteristics of their workforce and the health markets where their
                       employees reside. Their flexibility has temporal, locational, and structural
                       dimensions. Thus, we observed firms that opted to make marginal changes
                       and, in some cases, radically revised their strategies just a few years later.
                       Firms can choose to employ a uniform strategy across all their plant
                       locations or tailor their strategy to the characteristics of particular
                       markets. Indeed, many firms choose to develop a benefit management
                       strategy only in those markets where they have a reasonable expectation
                       of gain.




                       Page 76                      GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Chapter 5
Observations




These organizations face some important constraints in developing
effective health benefit management strategies. Their approaches must be
developed within the context of (1) labor-management negotiations and
collective bargaining agreements; (2) the health care market structure in
the firm’s major locations; and (3) corporate cultures, which may require
uniformity of benefits or cost-sharing by employees. These differing
constraints are another factor that demands flexibility and contributes to
the diversity of strategies by these large purchasers.




Page 77                     GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Appendix I

Characteristics of Purchasers in GAO
Sample


Table I.1: Characteristics of Private Firms
                                                                                                   Year current
                                                  Number of active,                               health benefit
                                                    U.S. employees                                  purchasing
                                                  eligible for health   Headquarters               strategy was      Purchases through
Firm                   Primary business                      benefits   location                        adopted      coalition
American Express       Financial services                     51,000    New York, NY                                 Yes (National HMO
                                                                                                            1993     Purchasing Coalition)
Bank of America        Banking                                60,000    San Francisco,                               Yes (Pacific Business
                                                                        CA                                  1994     Group on Health)
Chevron                Oil and natural gas                    30,000    San Francisco,                               Yes (Pacific Business
                                                                        CA                                  1993     Group on Health)
Dayton Hudson          Retail                               110,000     Minneapolis, MN                              Yes (Buyers’ Health
                                                                                                            1991     Care Action Group)
Digital Equipment      Computers                              27,000    Maynard, MA                                  No
Corp.                                                                                                       1991
General Mills          Food processing                         9,500    Minneapolis, MN                              Yes (Buyers’ Health
                                                                                                            1992     Care Action Group)
Mervyn’s a             Retail                                 15,000    Hayward, CA                                  Yes (Pacific Business
                                                                                                            1994     Group on Health)
NYNEX                  Telecommunications                     62,000    New York, NY                        1994     No
Pacific Bell           Telecommunications                     48,000    San Ramon, CA                                Yes (Pacific Business
                                                                                                            1988     Group on Health)
PepsiCo                Beverages, snack                     250,000     Purchase, NY                                 No
                       foods, and
                       restaurants                                                                          1989
                                                                    b
Safeway                Supermarkets                            8,000    Pleasanton, CA                               Yes (Pacific Business
                                                                                                            1994     Group on Health)
Southern California    Utilities                              14,000    Rosemead, CA                                 No
Edison                                                                                                      1995
Toyota Motor Sales     Automobiles                             5,400    Torrence, CA              Not applicable     No
U S West               Telecommunications                     60,000    Englewood, CO                       1991     Noc
Xerox                  Office equipment                       49,000    Stamford, CT                        1991     No
                                              a
                                              Mervyn’s is a division of Dayton Hudson.
                                              b
                                               Safeway has about 85,000 employees. However, all but about 8,000 are union members whose
                                              health benefits are managed by a Taft-Hartley Trust.
                                              c
                                               In 1997, U S WEST plans to purchase coverage for employees in Arizona through the Pacific
                                              Business Group on Health.




                                              Page 78                              GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                             Appendix I
                                             Characteristics of Purchasers in GAO
                                             Sample




Table I.2: Characteristics of Private Purchasing Coalitions
                             Headquarters                                                                        Date activities initiated
                                                                                              a
                             location                   Member firms         Covered lives                            Quality            Purchasing
Buyers’ Health Care Action   Minneapolis                              24     100,000                                     1992                     1992
Group
Gateway Purchasing           St. Louis                                30     114,000                                     1995                     1996
Association
National HMO Purchasing      New York                                   9    Unavailable                                 1993                     1993
Coalition
Pacific Business Group on    San Francisco                            18b 280,000b                                       1989b                    1994
Health
                                             a
                                              Represents employees and dependents insured through options negotiated by the coalition.
                                             Member firms frequently offer employees and their dependents health benefit options other than
                                             those jointly negotiated through the coalition. For example, Gateway firms employ 100,000
                                             workers, for a total of 260,000 covered lives. However, only about 114,000 employees and
                                             dependents have enrolled in the HMOs with which Gateway negotiates.
                                             b
                                              Thirteen additional firms plus CalPERS and the Health Insurance Plan of California also
                                             participate in the coalition’s quality initiatives. Altogether, the 33 firms and state agencies involved
                                             in quality initiatives represent about 2.5 million covered lives.



Table I.3: Characteristics of State
Government Programs                                                                               Covered        Year strategy Coalition
                                                                       Location                      lives       implemented membership
                                             CalPERS                   Sacramento, CA             1,000,000                 1992 Pacific
                                                                                                                                 Business Group
                                                                                                                                 on Healtha
                                             Health Insurance          Sacramento, CA              123,000                  1993 Pacific
                                             Plan of California                                                                  Business Group
                                                                                                                                 on Healtha
                                             Minnesota Dept. of        St. Paul, MN                150,000                  1989 Buyers’ Health
                                             Employee Relations                                                                  Care Action
                                                                                                                                 Group
                                             Missouri            Jefferson City,                   115,000                  1994 None
                                             Consolidated Health MO
                                             Care Plan
                                             Washington Health         Olympia, WA                 290,000                  1996 None
                                             Care Authority
                                             Wisconsin                 Madison, WI                 209,000                  1983 None
                                             a
                                              Does not participate in the Pacific Business Group on Health subgroup that jointly negotiates
                                             premiums.




                                             Page 79                                 GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Appendix II

Background on HEDIS and NCQA
Accreditation

              The Health Plan Employer Data and Information Set (HEDIS) is the result of
              a 3-1/2-year cooperative endeavor between representatives of major
              employers and a combination of both large and small health plans.
              Employers had been searching for credible tools to help them identify, and
              demonstrate to others, the “value” resulting from premiums paid to HMOs.
              Their specific objective was to develop standardized performance
              measures that would help purchasers evaluate the quality of services
              across the managed care plans with which they contract. In 1991, a draft
              set of HEDIS performance measures known as version 1.0 was presented to
              several business coalitions and health care organizations for their use.
              When it became apparent that further revisions and refinements were
              necessary, HEDIS 1.0 was turned over to a committee of health plan
              representatives and corporate purchasers under the auspices of the
              National Committee for Quality Assurance (NCQA)—an independent,
              nonprofit institution that reviews and accredits managed care
              organizations.52 The result was HEDIS 2.0, which was released in
              October 1993. HEDIS 3.0, the latest iteration, has over 60 indicators that
              describe performance in five key areas.53

              NCQA only reviews health plans that are fully licensed and have been
              operational for at least 18 months. The typical review for a 50,000-member
              HMO is conducted by a team of three physicians and an administrative
              reviewer who spend 2 to 4 days meeting with key personnel and reviewing
              health plan records in six areas: (1) quality improvement, (2) provider
              credentialing, (3) utilization management,54 (4) members’ rights and
              satisfaction, (5) preventive health services, and (6) medical records. Since
              NCQA began accrediting managed care plans in 1991, it has reviewed over
              40 percent of the nation’s approximately 574 HMOs. Table II.1 summarizes
              the results of those reviews.




              52
               NCQA was founded in 1979 by two trade associations that represent the managed care industry. It
              became independent in 1990 and now represents the interests of purchasers and consumers, as well as
              health care organizations.
              53
               Compared with earlier versions, HEDIS 3.0 moves quality measurement closer to an outcomes
              perspective by including more standardized, relevant, useful measures than its predecessors.
              54
               Does the plan use a reasonable and consistent process when deciding what health care services are
              appropriate for individuals? When the plan denies payment for services, does it respond to member
              and physician appeals?



              Page 80                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                              Appendix II
                              Background on HEDIS and NCQA
                              Accreditation




Table II.1: Status of NCQA
Accreditation Reviews as of   Accreditation status                        Number of plans                 Percent
December 1996                 Full (3-year)                                            115                   46.0
                              1-year                                                    86                   35.0
                              Provisional                                               21                     8.5
                              Denied                                                    26                   10.5
                              Under review                                              21
                              Scheduled for review                                      65

                              Plans receiving a 1-year accreditation meet most standards and are
                              reviewed again after a year to determine whether they should be granted
                              full accreditation. Provisional accreditation means that a plan meets only
                              some standards. According to NCQA, each of the plans denied accreditation
                              was state-licensed and, in some instances, federally qualified as well.




                              Page 81                        GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Appendix III

Summary of Southern California Edison
Performance Measures


Structure and philosophy                         Service to enrollees              Clinical quality                  Finance and information
Goals
Assess plan commitment to principals of total    Assess plan ability to meet       Assess plan ability to meet       Assess plan ability to
quality management/continuous quality            enrollee needs.                   goals for providing medical       manage resources
improvement.                                                                       and behavioral services.          efficiently and
                                                                                                                     monitor/improve data
                                                                                                                     processes, integrity, and
                                                                                                                     reporting.
Criteria
Demonstrate and document results of quality      Provide choice of primary         Conduct systematic                Use integrated information
improvement initiatives.                         care physicians (PCP) that        assessment of                     systems to provide
                                                 are a reasonable distance         doctor/medical groups             high-quality care more
                                                 from Edison enrollees and         against accepted standards        cost-effectively.
                                                 maintain low PCP turnover         for referrals, clinical
                                                 rate.                             performance, utilization, use
                                                                                   of protocols, and so on.
Possess integrated information systems to        Provide reasonable                Credential and recredential       Provide
track improvement initiatives, clinical          appointment availability for      physicians following NCQA         per-member-per-month
outcomes, and enrollee satisfaction.             nonurgent, urgent, and            standards.                        trend data by category of
                                                 emergency care.                                                     service for administrative
                                                                                                                     and medical costs/revenues
                                                                                                                     for (1) all plan enrollees and
                                                                                                                     (2) Edison enrollees.
Achieve full NCQA accreditation.                 Ensure accurate/ timely           Develop clinical guidelines       Pursue management goals
                                                 communication with                and disease-specific              that provide for efficient
                                                 enrollees about how plan          programs to reduce                collection and reporting of
                                                 operates, for example,            variation in practice             all HEDIS data.
                                                 referrals, copayments, PCP        patterns.
                                                 selection, and grievances.
                                                 Conduct annual satisfaction Conduct health risk
                                                 survey and/or focus groups. assessments that promote
                                                                             prevention, for example,
                                                                             cholesterol testing and
                                                                             prenatal care.
                                                                                   Ensure hospital affiliations
                                                                                   result in coordinated care.
                                                                                   Provide care that integrates
                                                                                   treatment of mental
                                                                                   health/substance abuse
                                                                                   under PCP.
                                                Note: Most criteria are backed up by specific standards. For example, PCP access criteria
                                                specify time and distance requirements, the availability of obstetricians/gynecologists and
                                                pediatric PCPs, and direct access to gerontologists.




                                                Page 82                               GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Appendix IV

Changes in HMO Enrollment, Plan Options,
and Financial Incentives


                                                  HMO enrollment for active
                                                    employees (percent)
                                             Before
                                             making                               Monthly employee
                                             changes in                           share of family          Financial incentives
                                             purchasing                           coverage under           (for active
Purchaser           Type/mix of plans        strategy         After changes       indemnity option         employees only )
Public purchasers
CalPERS             PPO and HMO              84 (1993)        84 (1996)           Ranges from $80 to       Incentive for state
                                                                                  $256 for state           employees based on
                                                                                  employees                California’s freezing
                                                                                  depending on the         its contribution at the
                                                                                  PPO option chosen.       1991 level.
Minnesota           PPO and HMO              51 (1989)        48 (1993), 72       $84 in the               Low-cost plan formula
                                                              (1996)              Minneapolis area.        introduced in 1989.
                                                                                  1996 PPO enrollment      Low-cost plan is free
                                                                                  was about 27%.           for full-time
                                                                                                           employees.
Missouri            PPO, POS, and            32 (1994)        75 (1997)           $266 in the Jefferson    Low-cost plan formula
                    HMO                                                           City area for the PPO    introduced for state
                                                                                  option. In contrast,     employees in 1995.
                                                                                  the lowest-cost HMO      Low-cost plan is free
                                                                                  is $112.                 for employees.
Washington          PPO and HMO              70 (1995)        83 (1996)           $36. Enrollment in the   First introduced
                                                                                  state’s self-funded      cost-sharing in 1996.
                                                                                  PPO dropped 35%          PPO is benchmark for
                                                                                  with the introduction    cost-sharing.
                                                                                  of cost sharing.
Wisconsin           Indemnity, PPO,          20 (1983)        55 (1984), 83       Ranges from about        Low-cost formula
                    and HMO                                   (1996)              $75 (where there are     introduced in 1984.
                                                                                  no low-cost              State pays the lesser
                                                                                  alternatives) to $333.   of 90% of indemnity
                                                                                                           option or 105% of
                                                                                                           qualified lowest-cost
                                                                                                           plan.
                                                                                                                      (continued)




                                        Page 83                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                              Appendix IV
                                              Changes in HMO Enrollment, Plan Options,
                                              and Financial Incentives




                                                        HMO enrollment for active
                                                          employees (percent)
                                                   Before
                                                   making                                Monthly employee
                                                   changes in                            share of family         Financial incentives
                                                   purchasing                            coverage under          (for active
Purchaser                 Type/mix of plans        strategy         After changes        indemnity option        employees only )
Private sector purchasers
American Express          Indemnity, PPO,          29 (1993)        62 (1994), 74        Unavailable.            Gradually moving to
                          and HMO                                   (1995)                                       benchmark plan
                                                                                                                 formula by 2001. The
                                                                                                                 benchmark is the
                                                                                                                 local HMO with the
                                                                                                                 highest value
                                                                                                                 measured in terms of
                                                                                                                 quality (70%) and
                                                                                                                 cost (30%) and is
                                                                                                                 usually, but not
                                                                                                                 always, the
                                                                                                                 lowest-cost plan.
                                                                                                                 1994 increase in
                                                                                                                 HMO enrollment
                                                                                                                 attributed to
                                                                                                                 promoting HMOs in
                                                                                                                 open season literature.
Digital Equipment Corp.   Indemnity,a              28 (1990)        60 (1992), 66        $623.92 in the Boston   Introduced
                          POS, and HMO                              (1996)               area (less than 6%      benchmark plan
                                                                                         were in the indemnity   formula in 1991 in
                                                                                         option in 1997);        which firm pays 85%
                                                                                         16% were in POS in      of plan that meets its
                                                                                         1997.                   cost and quality
                                                                                                                 criteria. The
                                                                                                                 benchmark is usually,
                                                                                                                 but not always, the
                                                                                                                 lowest-cost plan in an
                                                                                                                 area.
NYNEX total                                        31 (1993)        46 (1996)
NYNEX union               Indemnity, POS,          34 (1993)        40 (1996)            Indemnity option is     No incentive—free.
                          and HMO                                                        free.
NYNEX nonunion            Indemnity, POS,          24 (1993)        64 (1996)            Ranges from $214 to     Cash-back incentive
                          and HMO                                                        $340 depending on       increased
                                                                                         the location of the     significantly in benefit
                                                                                         employee.               year 1994 for
                                                                                                                 employees electing to
                                                                                                                 join an HMO.
Safeway                   PPO,b POS, and           21 (1992)        37 (1995), 63     Replacing PPO with         First introduced cost-
                          HMO                                       (1996, projected) POS in benefit year        sharing in 1994.
                                                                                      1997. PPO enrollment       Starting in 1996, will
                                                                                      dropped by 50%             pay 90% of
                                                                                      between 1994 and           average-cost plan.
                                                                                      1996.
                                                                                                                            (continued)



                                              Page 84                           GAO/HEHS-97-71 Health Insurance Purchasing Strategies
                                        Appendix IV
                                        Changes in HMO Enrollment, Plan Options,
                                        and Financial Incentives




                                                     HMO enrollment for active
                                                       employees (percent)
                                                 Before
                                                 making                                  Monthly employee
                                                 changes in                              share of family            Financial incentives
                                                 purchasing                              coverage under             (for active
Purchaser           Type/mix of plans            strategy            After changes       indemnity option           employees only )
U S WEST total                                   12 (1991)           42 (1996)
U S WEST union      POS and HMO                  Unavailable.        45 (1996)           Indemnity no longer        Limited incentive—
                                                                                         offered.                   POS and lowest-cost
                                                                                                                    HMO are free;
                                                                                                                    employee pays
                                                                                                                    difference for
                                                                                                                    higher-cost HMOs.
U S WEST nonunion   POS and HMO                  Unavailable.        33 (1996)           Indemnity no longer        Limited incentive—
                                                                                         offered.                   POS and lowest-cost
                                                                                                                    HMO are free;
                                                                                                                    employee pays
                                                                                                                    difference for
                                                                                                                    higher-cost HMOs.
Xerox total                                      40 (1990)           80 (1997)


Xerox union         Indemnity and                Unavailable.        Unavailable.        Unavailable.               No incentive—
                    HMO                                                                                             indemnity option is
                                                                                                                    free to employee.
Xerox nonunion      Indemnity and                Unavailable.        Unavailable.        $201                       Benchmark plan (low-
                    HMO                                                                                             cost) is free and, in
                                                                                                                    addition, employee
                                                                                                                    gets cash back.

                                        Note: If the state contribution exceeds the Medicare risk premium, the retiree can use the
                                        difference to pay the part B premium.
                                        a
                                        Only if no POS option is available.
                                        b
                                            PPO option no longer available in 1997.




                                        Page 85                                  GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Major Contributors to This Report


               Michael Gutowski, Assistant Director, (202) 512-7128
               Walter Ochinko, Senior Health Policy Analyst, (202) 512-7157
               Mark Ulanowicz, Senior Health Policy Analyst




(101398)       Page 86                     GAO/HEHS-97-71 Health Insurance Purchasing Strategies
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested