Health Insurance:

Management Strategies Used by Large Employers to Control Costs

HEHS-97-71: Published: May 6, 1997. Publicly Released: May 14, 1997.

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William J. Scanlon
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Pursuant to a congressional request, GAO reviewed 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.

GAO noted that: (1) several dominant themes emerged from GAO's examination of 25 large purchasers' health benefit purchasing strategies: (a) emphasis on the delivery of services by better-integrated managed care plans; (b) focus on measuring and improving the quality of the services provided; (c) transition to the sharing of costs, responsibility, and information with employees; and (d) greater reliance on competitive market principles; (2) large purchasers use their size and reputations to fashion health care purchasing strategies responsive to their own needs; (3) 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; (4) strategies are also fashioned to respond to constraints such as unions or contract rules and strengths like a younger, healthier workforce or market presence; (5) large purchasers do not hesitate to use their market power to make demands of potential health insurers or to influence provider behavior; (6) 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; (7) the specific tools used by large purchasers in implementing their strategies vary considerably, but fall within three broad categories: (a) health plan evaluation criteria, including techniques to assess premiums and foster competition among plans; (b) incentives to sway employee behavior; and (c) overt marketing strategies to influence employees' choice of delivery systems and of specific plans; (8) many large purchasers GAO interviewed recognize the shortcomings of the cost, quality, and access criteria that have been developed so far; (9) despite their shortcomings, these criteria are of growing importance; (10) 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; (11) they also recognize that lower copayments and deductibles coupled with a richer set of benefits are probably insufficient incentives in terms of achieving significant increases in the number of employees who choose a managed care option; (12) 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; and (13) factors that limited purchasers' flexibility in this regard included unions or the corporate culture's perspective on employee cost-sharing.

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