The Future of Employer-Sponsored Coverage

Whether or not the new administration strikes a blow to the ACA, the post-industrial society is changing the rules of the game.

By Ian Morrison

Private health insurance offered by self-insured employers is the financial lifeblood of U.S. health care delivery. Commercial payers deliver all of the financial margin for health systems. With the rare exceptions of highly disciplined health systems that manage fairly well on a Medicare level of reimbursement (such as Benefis in Montana, Citrus Valley Health Partners in California, Munson in Michigan and in most good years, Aultman Hospital in Ohio), most hospitals are 15 percent or more from breaking even on Medicare payment levels.

Over the years the differential between public and private payment has widened to the point at which private payers are paying on average 150 percent of Medicare, in some cases (such as prestigious academic centers or small regional systems with dominant market positions) close to 300 percent or more of Medicare.

No mass exit

A pleasant upside surprise of the Affordable Care Act (ACA) was that large employers, as widely projected, did not abandon coverage. While many employers contemplated it, and examined alternatives such as private exchanges or moving more employees to public exchanges, there was remarkably little change in the number of Americans who received health insurance through employment. That is not to say that employers continued to expand coverage to employees – quite the reverse. Kaiser/HRET surveys reveal a steady erosion over the last 20 years in the percent of American workers in all sizes of firms who have health insurance through work.

This gradual decline is not the fault of the ACA. The cause is the progressive unaffordability of health care delivery to self-insured employers; the more stringent corporate rules for the coverage of spouses and dependents; and the increasing differentiation of benefits between full- and part-time workers and between contract staff, temporary workers and the permanent core of highly valued employees in a changing economy.

Health benefits in a post-industrial economy

Much of the change in the relationship between employment and health coverage is part of a broader story: the rise of the post-industrial economy. A lot of people may work at Google but not a lot of people work for Google.

In many of the rapidly growing high-tech employers such as the great global brands Google, Facebook, Apple and Netflix, workers who enjoy full-time permanent status also enjoy incredibly rich health benefits (plus they get gourmet chefs in the cafeteria and get cool bikes to ride around campus). But not everyone in an Apple store or in an Apple call center is in that category, as an in-depth article published in the San Francisco Chronicle documented on November 25.

Apple has 80,000 employees according to the article. Millions more work for contract manufacturers making iPhones in China. At Apple’s Austin, Texas, facility, there are 6,000 employees, up from 2,100 only seven years ago. Most are employed in customer support functions, but there are also upward of 500 engineers who work on new chip sets for Apple’s next generation of laptops. Before becoming full-time employees in the call center, many start as contractors making $14.50 an hour. With luck and great performance, they will graduate to full-time status with generous health benefits and earn $45,000 year.

The same story applies to many great companies such as Disney, Amazon, Wal-Mart or CVS, which have a cadre of highly compensated professional workers and a lot of people making just above minimum wage. Disney employs thousands of “cast members” cleaning rooms at Disneyworld, but it also has high-priced talent making movies and TV shows at Disney Studios, Lucas Film, ABC and ESPN.

Many Americans work in retail and hospitality industries and other low compensation environments with poor health benefits. While President-elect Trump has talked about bringing back well-paying manufacturing jobs with benefits once enjoyed in the Rust Belt, the reality is that the modern manufacturing economy is one of hyper productivity where knowledge workers add tremendous value and manufacturing work is outsourced to other countries. Over the last decade, those countries have built a massive web of sophisticated contract manufacturers and suppliers who make components and assemble your iPhone. I doubt we could manufacture an iPhone in America even if we tried, because we lack the web of capabilities.

On the back of my iPad is etched all you need to know: “Designed by Apple in California Assembled in China.” Trump may be trying to reverse this, but it seems unlikely.

Instead, if you look carefully at the changes in where the jobs are over the last 50 years, you can see a steady and inexorable shift toward the post-industrial economy. Daniel Bell, the great Harvard sociologist, predicted this much in his 1976 classic book The Coming of Post-Industrial Society, the bible for us futurists. In a quote from no higher authority than an Amazon book review, Bell predicted “a vastly different society developing – one that will rely on the ‘economics of information’ rather than the ‘economics of goods.’ … The new society would not displace the older one but rather overlie some of the previous layers just as the industrial society did not completely eradicate the agrarian sectors… The dimensions would include the spread of a knowledge class, the change from goods to services and the role of women. All of these would be dependent on the expansion of services in the economic sector and an increasing dependence on science… Bell prophetically stated ‘… new premises and new powers, new constraints and new questions—with the difference that these are now on a scale that had never been previously imagined in world history.’”

Bell predicted the migration of the U.S. economy from agrarian economy through an industrial economy to an economy dominated by the creation of knowledge, information, science and experiences, including the rise of a “third sector” of massive nonprofit organizations in service industries such as health and education. Sound familiar?

 

Bell was right. If you look where jobs have been created in the last two decades, it is in services and knowledge work – especially retail, hospitality, professional services such as IT consulting and health care. Manufacturing jobs have steadily declined for decades. This is partly a reflection of enormous improvements in productivity in the manufacturing sector and the transformation in production of many industrial mainstays, such as the steel, auto, chemical and textile industries. For example, in 2016 there were 53,000 coal miners in America and 370,000 steelworkers, while there were 1.4 million home health aides and 4 million nurses actively practicing (including 3.2 million registered nurses and 0.8 million licensed practical nurses).

Many of the workers in the post-industrial economy are in the gig economy. You work in a bar, you go to school, you drive for Uber and you are writing the great American novel, all at the same time. Plus you’re probably uninsured. This is the life of many millennials, even those with college degrees. The death spiral on the exchanges is partly a result of profound changes in the ways young Americans make a living. Starbucks has great health benefits, but many other college-educated baristas are uninsured.

It is against this broader context of change that private employers have to decide how to manage health benefits for a post-industrial workforce.

Employers’ recent history

We know that employers mostly hung in there and didn’t drop coverage because of the ACA, particularly the large, self-insured firms. Moreover, most big corporations assiduously followed the letter of the law in preparing for full implementation of the ACA features, including the Cadillac tax.

It has become fashionable to repeat the classic insight from the election: “Trump supporters took him seriously, but not literally, while the media took him literally, but not seriously.” Well, when it comes to big employers and the ACA, they took it seriously and literally, implementing (well in advance of the time line) the necessary adjustments in qualified health plans, in cost-sharing arrangements to meet actuarial value thresholds, and in benefit design to be compatible with deadlines on the Cadillac tax.

This makes perfect sense to me. Corporate America is run by what I call the compliance police, and they are fearful of getting sideways with major federal initiatives.

Jonathan Gruber of MIT, one of the ACA’s architects, was quoted as saying he could live with the employer mandate being removed in Congress because most large employers provide health benefits anyway. If you follow my line of argument about the compliance police, part of the reason the large employers are still providing benefits is that they anticipated it would be breaking the law to back away from that commitment. If the employer mandate is gone, they might feel a wee bit differently, especially smaller and mid-size employers.

The other major shift employers made in the face of the ACA was exemplified by the reaction to the “exit” opportunity. In Nielsen/Harris surveys from 2011 to 2015, we documented the likelihood of employers “getting out of providing health insurance to their employees.” The number of employers considering this peaked around 2015 and declined sharply in 2016. Employers who had seen private and public exchanges as an exit opportunity realized that these exchange vehicles did not necessarily provide a meaningful alternative to health benefits, given current law.

In every talk I have given to health systems in the past two years I have repeated: The good news is large employers are not leaving; the bad news is large employers are not leaving and are going to be increasingly in your face looking for value.

Indeed, they have done so with a variety of methods, including narrow networks; direct contracting using accountable care organization (ACO) arrangements, as in the case of Boeing, Disney, Intel and Cisco; the use of Center of Excellence models by https://www.acheterviagrafr24.com/viagra-pas-cher/ companies like Wal-Mart, Lowes and the Pacific Business Group on Health (PBGH) consortium; the use of reference pricing schemes, as in the case of CalPERS joining with Anthem in California; and more aggressive case management for all high-cost patients – using Dr. Arnie Milstein’s pioneering Ambulatory Intensive Care Unit (AICU) model developed originally at Boeing.

David Lansky, President and CEO of PBGH told me in an interview that the largest employers who have the resources to develop an alternative approach are doing so aggressively: “once you study on it, you run away from the carriers as fast as you can, and the PBMs are next.  And then you start talking to the providers and seeing what kind of deal you can extract from them, including a very intense working relationship.  Of course this is hard to do, but it’s a symptom of how fed up ALL employers are”.

For example, one health benefits leader at a Fortune 50 company explained to me how in developing a direct ACO contract with local hospitals, one of the hospitals, who stood to lose volume in the new arrangement, voluntarily offered a deeper discount on price: “We don’t want the money, we want you to change the way you deliver care,” the company responded.

Many of these more aggressive purchasing activities have yielded some victories and constitute one of the reasons large employers have succeeded in keeping health benefits trend increases to 4 percent (and among some of the more elite employers as low as 2 percent) in 2016, according to National Business Group on Health surveys. The reason the trend is so low is partly greater rigor in their contracts with providers but also the “benefit buy down” (which is benefit speak for increasing the amount that employees pay for their health insurance through increased premium contributions, higher deductibles and other cost sharing) that employers put in place to ensure they did not exceed Cadillac tax requirements.

Employers have shifted cost to employees, but many may have reached their limits. Anecdotally, we hear of “buy down fatigue” among large employers, and our surveys show that a majority of employers agree they have reached the limits of cost sharing with their employees.

Although large self-insured employers stabilized rate increases at 4 percent per annum through these actions, many realize they must change the payment and delivery system toward value if they are going to sustain their commitment to providing health coverage.

Self-insured employers in the Trump era

It is early days. No one knows what will actually happen legislatively in 2017. But large employers are as anxious as all health care stakeholders about what the new brand of change may bring. There is high uncertainty given the volatility of the political and policy process that is unfolding and given the unpredictability of the Trump administration.

What are employers worried about? Here are a few issues to watch:

Tax-deductibility of employer-sponsored health insurance. This has to be the number one and immediate issue. Currently this is worth $260 billion per annum in tax benefits. If it were to be chipped away at, either in the form of the current law’s planned reinstatement of the Cadillac tax or some Republican proposals to scale back deductibility, this will have a significant negative effect on employers.

Pharmaceutical costs. Rising drug costs are a huge issue for employers and indeed for almost every health care stakeholder I work with. The shift to specialty pharmaceuticals and price gouging, even on generics, is taking its toll. At a recent PBGH board retreat, the top issue raised by all participants was specialty pharmacy, not only because of the salience of the cost (explaining perhaps a full quarter of the increase in trend) but because the private sector options to control pharmaceutical costs are minimal. Trump recognized the drug cost issue in his campaign, but after winning the election his website no longer speaks of controlling prices of drugs. Instead, there are visionary statements about innovation. Pharma may be getting a pass, as evidenced by the easy passage of the CURES Act. But for employers, this issue is not going away. In most commercial health insurance plans (including self-insured plans), per-member per-month drug costs now exceed inpatient hospital costs.

Lansky of PBGH told me in the interview: “employers aren’t just mad about price gouging, but have looked very hard at the pharmaceutical supply chain in order to restructure it – even to the point of talking directly to manufacturers.  They want to challenge the very nature of the business:  formulary placement, the split between medical benefit and the drug benefit; rebates to PBMs; coupons that insulate consumers from cost sharing; Intellectual Property and patent rules, etc.  They know that beating up on the PBMs (like beating up on the health plans) is not productive; the system needs re-engineering and no one is motivated to do it except the employers who are paying”.

The inevitable cost shift. It may be off in the distance, but if coverage is eroded for the 20 million or so who benefitted from the ACA and if the federal money for Medicaid expansion and exchange subsidies is geared back, providers will seek to replace that revenue from employers. Good luck with that, to all concerned.

Employers stepping up to manage their health costs directly. Many of the sophisticated employers will double down on their management efforts with narrow networks or using ACO arrangements and direct contracting. Others like Apple will expand their on-site clinic operations and corporate wellness initiatives (although the track record on wellness saving money is spotty at best).

Déjà vu. The new administration has already signaled greater emphasis on consumerism, transparency, health savings accounts, shopping tools, personal responsibility and “skin in the game.” Most sophisticated employers would say, “Been there, done that, bought the T-shirt.” They believe much of this stuff and they have done it already, so what do they do for an encore?

Partners in value. Sophisticated employers believe that health care does indeed need to migrate from volume to value (but they also expect to pay less if volumes subside). They recognize that opportunities for cost reduction exist within the delivery system, and they do not have the clout as individual employers in any geographic market to demand meaningful change in payment and delivery reform. That is why groups like PBGH have been active partners with Centers for Medicare & Medicaid Services in promoting value-based reimbursement and innovation. These sophisticated employers want to know if they still have a partner in value in the federal government. For example, PBGH has worked for six years in promulgating the AICU model including a $20 million Center for Medicare and Medicaid Innovation (CMMI) project to extend the model to Medicare, and now doing the same with Medi-Cal (using a “health homes” approach).  As Lansky noted: “it’s an example where a very small idea can be aligned with national, over-65, low income, and other public programs to drive actual care transformation”.

Looking for the exit. Finally, depending on what comes out of the sausage-making machine in Washington, employers (especially the compliance police) will take a hard look at the rules of the road and reconsider their ongoing commitment to health benefits. Nothing makes corporate chief financial officers more misty-eyed than the thought that they could really write a check for $10,000 a year and kiss this issue good-bye forever in a defined contribution. As PBGH’s Lansky noted: “either the system gets serious about re-engineering or the exit is the only sensible path.”

Wise policymakers in Washington need to be mindful of the second order effects that the new round of health reform may have on large, self-insured employers. As we contemplate further change, health systems would be well served by engaging with corporate leaders to explain what is at stake for the health care delivery system and in turn, really listening to what these important purchasers want from healthcare. Happy New Year!

Ian Morrison is an author, consultant and futurist based in Menlo Park, California. He is also a regular contributor to H&HN Daily.