To Control Health Care Costs, U.S. Employers Should Form Purchasing Alliances

When it comes to health care costs, America’s employers are at a crossroads. Competing for scarce labor in a tight market, they will have trouble continuing to shift medical bills onto employees as they have for several decades.

That means that to control costs going forward, employers may have to confront the true underlying causes of rising health care expenditures: high prices and health care inefficiencies. To address these challenges, they will have to band together in purchasing coalitions that give them the local market power to force health systems to reform.

Employers are the largest single provider and purchaser of health insurance in the United States, covering over 150 million workers and their dependents and purchasing 34% of all health care dispensed in the country. As a potential force for change, only the U.S. government can rival America’s business community.

And in recent years, employers have enjoyed some success in controlling rising health care costs. Their premiums have been increasing 3% to 5% annually, rather modest by historic standards. As a percent of workers’ compensation, employers’ health care spending has held steady at between 8% and 9% since 2010. Much of this success seems attributable to the spread of high-deductible health plans (HDHPs), which have shifted more of the costs of care onto employees. The proportion of workers with HDHPs (deductibles of more than $1,300/$2,600 for an individual/family) increased from 6% to 22% between 2006 and 2018. High deductibles have the dual effect of reducing workers’ use of services and employers’ liability for the services employees use.

So what’s the problem? There seems growing nervousness among employers that they’ve pushed high deductibles about as far as they can. Workers’ increasing out-of-pocket costs are creating widespread discontent with the underlying costs of care — a problem largely driven by the high prices charged to private payers for health services and pharmaceuticals. Data from the Commonwealth Fund’s biennial survey of the American public shows that the percent of U.S. workers who are underinsured — face out-of-pocket health care expenses greater than 10% of their income excluding premiums — increased from 10% in 2003 to 24% percent in 2016. Between 2011 and 2017, employees’ premiums and deductibles grew faster than their median income. Beyond this, studies clearly show that when workers face high upfront payments, they frequently skip services, some of which are critical to their long-term health and productivity, a pattern that must worry responsible employers.

Add to this picture the increasingly competitive labor market — which limits the tools companies can use to constrain health spending — and it becomes clear that employers may have to find new ways to tame the health care cost tiger in the future. They may have to address the underlying reasons for rising health care premiums, rather than just shifting more of those expenditures off their own books.

Those fundamental reasons are varied and complex but at least two stand out. The first is that health care providers charge employers very high prices — way higher than those paid by public insurers like Medicare and Medicaid. The second is that our health care system is highly inefficient and wasteful. It has enormous administrative costs. Care is fragmented and uncoordinated. We have too many high-priced specialists and not enough high-quality primary care to keep patients out of emergency rooms and hospitals when they could be cared for in less expensive (and dangerous) settings. In other words, employers need to get better deals on prices and remake our health care system while they’re at it.

Employers are not new to this game. For decades, large sophisticated companies have undertaken pioneering experiments with reshaping the health care system. As far back as the early 1990s, Pitney Bowes focused on patient education and consumerism and prevention and care management to slow cost growth. Companies such as Boeing have experimented with direct purchasing of health care from providers, securing better prices, and eliminating the administrative costs of insurers. Other employers such as Walmart have cut deals to send their high-end elective procedures (e.g., open-heart surgery, hip and knee replacements) to centers of excellence that offered lower prices and higher quality. Employers have instituted wellness programs in the (now disappointed) hopes that health maintenance could lower costs of care. And companies have come together in regional coalitions such as the Pacific Business Group on Health and the Midwest Business Group on Health for the purpose of sharing lessons on how to become better health care purchasers.

The latest venture in employer health innovation is, of course, the alliance of Amazon, Berkshire Hathaway, and JPMorgan Chase. The as yet unnamed joint venture, led by the highly respected Dr. Atul Gawande, is promising to solve the health care conundrum for its parent companies and perhaps for the nation as a whole.

The fact is, however, that until employers switched to high-deductible plans, they enjoyed relatively little success in restraining health spending. This disappointing record reflects persistent challenges to their cost-control efforts.

The first challenge is lack of purchasing power. All health care is local, and efforts to negotiate better prices and reform health care delivery depend on an employer’s ability to force price concessions and behavior change from local physicians and health care institutions. Collectively, employers may constitute an important share of health providers’ market. But individually, with the exception of a few companies in a few markets, such as Boeing and Amazon in Seattle, no one employer has enough leverage to wrangle price concessions from area doctors and hospitals or induce them to reshape the way they do business. This is true even for large national companies because their aggregate workforce is spread across tens or hundreds of localities.

Efforts to form purchasing coalitions in local markets have had modest impact at best because employers have so little else in common and because antitrust laws limit their ability to collaborate. The growing consolidation among providers — 90% of metropolitan areas have highly concentrated hospital markets and 65% have highly concentrated specialist physician markets — also works to employers’ disadvantage.

A second challenge facing employers is lack of sophistication as health care purchasers. Medicine is complicated, and while there are a handful of large employers such as Comcast or Walmart with the funds and motivation to hire sophisticated health benefits specialists, there are 7 million to 8 million mid-size and small employers who have their hands full just managing their core business in turbulent times. Even if they had the leverage to demand delivery system reforms from providers, most CEOs and CFOs largely lack the time and patience to grasp the complex, non-intuitive, and often experimental interventions involved: accountable care organizations, value-based purchasing, outcomes based pharmaceutical pricing and so on. Better to raise deductibles and move on.

A third challenge is that when employers try to reform health care, they can easily alienate employees. To get better health care deals, employers often have to channel their workers to a select group of providers who offer lower prices and/or better quality. This can sometimes mean bypassing prominent but highest-priced local facilities and specialists where workers are already getting their care or want to if they ever need it — for example, the Partners HealthCare system in Boston, Memorial Sloan Kettering in New York City, and MD Anderson Cancer Center in Houston. In tight labor markets, the last thing employers want to do is to get between workers and their doctors.

To achieve the kind of gains in controlling health care costs that employers want, they will have to get bigger and smarter in the future.

They will need to band together in local purchasing alliances, come to agreement on common features of health insurance products, and then, working with local insurers, wrangle price and delivery concessions from local providers. This will likely require newfound willingness on the part of employers to surrender the freedom to tailor each insurance product to their own specific preferences. It will also require that, working together, employers immerse themselves in the complex details of reforming health care delivery systems so that they push insurers to insist on greater provider accountability for cost and quality, better primary care and prevention, improved care coordination, reduction in administrative costs, and a variety of other nitty gritty health care reforms.

Employers will not be able to do this without help from government. They may need antitrust allowances to band together for joint purchasing of care. They will also need state and federal antitrust authorities to break up increasingly dominant local provider coalitions. They will certainly want to strongly encourage federal and state authorities to pursue value-based payment programs for federally insured populations in the hope that employed populations will benefit from these reforms as well. Some employers may even decide — despite innate opposition to government regulation — that the only way for them to stay in the business of providing insurance to employees will be to have government regulate health care prices in their states. This is the tactic that most industrialized countries use to keep health care affordable for their populations.

The alternative to these fairly radical changes in employer behavior is continuing the hollowing out of employer-sponsored insurance. Aside from the pain this will inflict on workers and their families, this trend could cause the American public generally to lose faith in our current system of employer-sponsored insurance, and open the way politically for alternatives, including government-provided coverage.