Decoding Health Care

Part 2: How did we get here? Employer Sponsored Health Insurance

Rome wasn’t built in a day. And it goes without saying that our convoluted health care system didn’t assume its current configuration in one fell swoop. In fact, US health care has evolved over the last 100 years or so in a series of steps that seemed logical at the time but at the end of the day do not necessarily reflect intelligent design.

There have been textbooks that painstakingly chronicle and critique each step of this journey, but I have chosen to focus on three key themes: employer sponsored health insurance; Medicare and Medicaid; and the Affordable Care Act. Each of these is critical to how health care is delivered today, each is an interesting story with important lessons about what went right and what went wrong, and as we contemplate changes in healthcare, each of these will need to be addressed by whatever solutions we come up with. Each deserves its own post, and today I focus on employer sponsored insurance.

Employer sponsored health insurance was initially designed to benefit the employer. It grew out of a desire of employers to manage workmen’s comp. Large employers sought out provider networks to provide health care to their employees. The employer paid a per employee fee to the providers (supplemented by a small contribution from the employee) to provide all medical care. Now 100 years ago there wasn’t a lot of health care to deliver, but there were industrial accidents so it made sense. This is the genesis of Kaiser Permanente and Blue Shield.

But the real turning point for employer sponsored health insurance came during World War II. During the war, much of the work force was serving in the military. This created a tremendous shortage of skilled workers. An obvious consequence of this shortage was the potential for uncontrolled wage inflation. Recognizing this, the federal government stepped in and passed a law that fixed wages. But the law also allowed employers to offer health insurance as a benefit that fell outside traditional wages. And this benefit was not taxable as wages. Health insurance was widely adopted as a way to attract and retain a skilled work force.

Prior to WW II, fewer than 10% of Americans had employer sponsored health insurance. Currently, about 50% of Americans have employer sponsored health insurance (including 2/3 of working age Americans). The most common reasons workers do not enjoy this benefit are that they are unemployed or self-employed, decline coverage, or work for a small company or in a low wage job that does not offer health insurance. It is important to remember that the Affordable Care Act attempted to provide a health care option for these workers via Medicaid expansion, the creation of the health insurance exchanges (with subsidies for those with a limited income), and the individual and employer mandates. Mandatory Medicaid expansion and the mandates were politically unacceptable and they disappeared either through legislative or judicial action. The subsidized exchanges have had modest success at best.

Most employees really like their insurance benefit. In fact, a recent Gallup poll showed that more than 90% of workers are very pleased with their coverage. But in fact, employer sponsored health insurance is far from perfect, and it is fair to say that the greater the number of health problems you or your family suffer from the less likely you are to be happy with your insurance benefit. This unhappiness is certainly related to the specific health benefits, or coverage, that is offered in your insurance policy. And how “rich” the benefits are all boils down to cost.

In most cases, the employer pays the greater share of the insurance premium, and that premium has been going up. A lot. It has far outpaced inflation and has exceeded 40%  over the last 20 years. For even the most profitable company, that adds a lot to expenses and impacts their bottom line. Many health care economists believe that the rapidly rising employer health care costs have resulted in a significant downward drag on wages.

Let’s begin by reviewing exactly how employers interact with insurance companies. If you as an individual want to buy health insurance, you pay a premium and offset some of the expenses of your health care by also paying a deductible as well as a copay or coinsurance each time you use a service. The insurance company calculates the premium based on what they project your medical expenses over the year will be. They do this using sophisticated accounting techniques, considering what people like you have cost them in the past (this is what actuaries do, and really is the basis of all insurance). Insurance companies do not like to lose money, so there is a little buffer added in. But they cannot put in too much buffer because if they do the insurance will be too expensive and nobody will buy it. If your medical expenditures exceed what you paid in premium, that loss is borne by the health insurer. To be sure they will increase your premium next year to make up lost ground, and they will increase your premium next year even if you do not use a lot of health care services because there is inherent inflation in medical costs. This model is called fully insured, and is one way employers, particularly employers with a small number of employees, pay for health care. This is very expensive.

But there is a second way employers can interact with insurance companies. Employers can choose to pay the medical bills directly, i.e. not use the insurance company to pay those bills. This is less expensive because employers tend to have fairly healthy employees; this translates to a lower premium. For large employers, and even for medium sized employers, this is the most common type of insurance. The employer still needs the health plan because the health plan writes medical coverage policy, credentials physicians and health care facilities, negotiates contracts with those physicians and facilities, and physically transfers the money (pays the claims). But these are all administrative services, and so the relationship is called self-insured or ASO (Administrative Services Only). In this model, the ultimate risk of the cost of the health care is borne directly by the employer. Now there are insurance mechanisms to protect the employer from catastrophic risk (reinsurance or stop-loss), but for the most part the employer is on the hook. It is in the best interest of the employer to limit how much they pay out in claims.

Employers have approached the cost problem several ways. First, they go shopping every year, looking at competing plans with a better price. It is not uncommon for employers to change plans regularly. This is a real nuisance for employees who may need to sign up during open enrollment each time there is a change (https://www.nytimes.com/2023/10/25/opinion/open-enrollment-health-insurance.html). This also makes projecting costs really difficult since sometimes money spent this year on health care can impact how much care is needed and money is spent next year. This process of switching health plans is called churn and has complicated efforts to encourage early adoption of effective therapies, especially if they are really expensive, and if the benefits are not going to be enjoyed years down the line.

A second way employers have attempted to mitigate cost is by shifting it to employees.  A common method is adoption of a high deductible policy. This type of policy requires the employee to pay more out of pocket before the insurance "kicks-in”. Deductible amounts of several thousands of dollars per individual or family are not unusual. These policies deter employees from seeking care since they must pay for it until their annual deductible is met.

A third, more complicated way employers attempt to reduce costs is by using the machinery of the insurance company to encourage less expensive care. For example, the health plan may encourage the use of certain “in network” doctors, hospitals, imaging centers and labs because they offer a better deal. In fact, if one of these providers is really expensive, they might be excluded from the employee’s network options altogether. If this occurs, any care delivered at those excluded entities costs the employee a lot more and may even not be reimbursed at all by the insurance company. In cancer care, these really expensive institutions are often some of the most well-known, well-respected institutions in the country, like MD Anderson or Memorial Sloan Kettering, for example.

Health plans (and by extension employers) can also limit particular treatments. For these treatments, the physician might need to get approval prior to performing the procedure or administering the treatment, and this approval is contingent on meeting certain medical criteria; this is “prior authorization”. Prior authorization does eliminate wasteful and inappropriate use of expensive therapies but it also certainly places some obstacles to utilization of health care services even when they are appropriate. There is little question that if the procedure or treatment is expensive it will require prior authorization. Sometimes, the prior authorization requires a trial of a less expensive therapy first. And sometimes the health care service is not covered at all. Prior authorization adds an extra burden to providers (who must get the approval) and frequently delays care. But by avoiding expensive care that might have appropriate less expensive alternatives, and especially by preventing care that is inappropriate, savings can be realized.

This all seems like it requires a fair degree of sophistication on the part of the employers. And since the health benefit is typically run out of the human resources department which already has a lot on its plate and does not necessarily have a lot of medical expertise, it is difficult to see how effective health benefit management can ever get done internally. This is where benefits consultants, like Mercer and Towers Watson come in. These consultants provide expertise on optimizing the employer sponsored health benefit to the specifications of the employer. They assist in shopping for insurance coverage and give advice on the design of the health benefit while staying within budget. They also recommend programs that they think might help, like health coaches or navigators or entire programs centered on “wellness”. They often participate as go-betweens in conversations between the health plans and the employers. Benefits consultants have a lot of influence. And they add to the employer’s cost in offering health benefits.

But this complicated dance between employers, consultants and health plans has at least three big problems. First, because health care is so expensive and increasing each year, the employer is motivated to limit actual costs of medical care incurred by its employees. Sometimes the efforts to limit cost may result in an inferior health benefit for employees. Second, the employers are really at the mercy of the health plans. There isn’t a lot of transparency (https://www.wsj.com/health/healthcare/these-employers-took-on-healthcare-costs-and-the-fight-got-nasty-54674114; https://www.wsj.com/articles/business-groups-sue-over-healthcare-price-transparency-rule-11629464688). How decisions are made regarding networks and medical policies are not generally shared with the employers. This has recently received a lot of attention in the areas of hospital and pharmacy costs. Third, a lack of medical expertise can lead to bad, uninformed decisions. The consultants theoretically can provide the expertise to avoid this but in my experience, they do not have deep knowledge in many areas (cancer care for example).

Employer sponsored health insurance is deeply entrenched in US health care. And most people like it. The thought that it will disappear anytime soon is not at all realistic. But there are conflicts of interest and the potential for bad behavior that pose constant threats to quality. Increased transparency has the potential to address some of the shortcomings of employer sponsored health insurance. But for employers to address the inadequacies of this system there must be accountability and that can only happen when employers recognize that they have all the leverage in crafting their health benefits.  And employers listen to employees and so employees can have significant influence on what their health benefit looks like. It is completely wrong to think that employers do not care about the quality of care their employees receive. Most want their employees to be happy with their health care. And they want to minimize disability and absenteeism due to health issues and maximize productivity.

As employees, we have the opportunity to make our voices heard. If you are unhappy with your employer sponsored health benefit, let someone know. No HR department wants to deal with unhappy employees.  Since employer and employee interests are at least partially aligned, making employer sponsored health care better is certainly possible.

Next, we will discuss government funded health care, Medicare and Medicaid.