Companies Search For Ways To Pass Costs on to Employees

Today, almost all major companies have completed the shift from indemnity insurance to managed care. By 1999, only 11 percent of employees at Fortune 500 companies were still enrolled in indemnity plans, with the vast majority being covered by some form of managed care (see “Holding on to a lead” below).

According to health care economist James Maxwell, Ph.D., who recently completed the first survey of major corporations’ health care purchasing practices, this shift has been driven by senior management as a cost-containment strategy.

To hold down costs, the same aggressive purchasing techniques that are used to acquire, say, #8 titanium widgets at a favorable price, have been applied to health care. In other words, it’s often a nasty business.

Whereas the long-term partnering associated with indemnity insurance was collegial, the tactics employed in the request-for-proposal realm can be brutal.

The survey looked at health care purchasing practices by Fortune 500 firms between 1994 and 1999. It was sponsored and published by the National Health Care Purchasing Institute (NHCPI). With a mission to promote health care quality by influencing purchasing practices, NHCPI in turn is supported by the Robert Wood Johnson Foundation.


The study has been summarized in a monograph titled “Corporate Health Care Purchasing Among the Fortune 500” (available at: «»). The implications of the findings are discussed in a companion article with an almost identical title in the May/June Health Affairs (available at: «»).

Maxwell, the lead author of each piece, is the director of health policy and management research at the John Snow Research and Training Institute in Boston. He holds a Ph.D. in public policy and did postdoctoral work in health care economics at MIT.

Maxwell observes that now that major corporations have exhausted the savings from the transition to managed care, the companies are left wondering what they can do next to curtail rising health care costs. The short answer: Most have no idea. Oh, they do have one plan — letting employees shoulder more of the burden of increasing premiums.

Between 1994 and 1999, there has been a trend among Fortune 500 employers to chip in less toward premiums. About 25 percent of the companies paid the full premium for employees in 1994, but that percentage had fallen to under 10 percent by 1999.

Likewise, only 20 percent of employers contributed less than 80 percent of the premium in 1994, but by 1999 one-third of the Fortune 500 was below the 80-percent level.

Declining coverage

Such cost-shifting could be counterproductive. During the transition to managed care, it took a reduction of only 2.5 percent in employers’ contributions to induce employees to select managed care instead of indemnity.

Faced with similar or, lately, substantially greater percentage hikes in their premiums, some low-wage employees now are declining health care coverage altogether.

That kind of employee response would seem undesirable, if you give credence to the argument that employers include health insurance in their compensation packages because it helps to recruit and retain good employees while reducing sick time and increasing productivity. That philosophy was easier to embrace when the economy was booming.

In a bind

Today, however, employers in industries like retailing, are caught in a bind, Maxwell says. No matter how well-intentioned, their profit margins are simply too low to cope with double-digit increases in health care premiums. Of course, the health care benefit is hardly the only component of compensation packages that’s being re-evaluated these days.

It’s not that the Fortune 500 corporations are being callous when they believe they have no option but to pass premium increases along to employees. Rather, they’re experiencing tremendous frustration and anxiety, and some feel disillusioned after the high hopes that they held for managed care were dashed.

“When I started interviewing large employers in the mid-1990s, in the midst of a booming economy, they thought they could save a lot of money, invest in quality, and accomplish a lot by switching to managed care,” Maxwell says. “But today, they feel incredible pressure. Their health care costs are going up as the economy slows.”

Maxwell’s study was conducted during the first half of 2000 through 35-minute telephone interviews with the most-senior official for health benefits, typically the director of health benefits or compensation, or vice president for human resources, on the 1999 list of the Fortune 500.

An accurate picture

Due to mergers and acquisitions, the number of corporations was reduced to 489, and 408 participated in the study — an admirable response rate of 84 percent. So you can regard this study as an accurate picture of what’s going on in big-league corporate America with respect to health care purchasing.

In the absence of any national policy on health care, the Fortune 500 by default have become the leaders in this arena. That means you also can take the survey as an indication of what’s happening, or likely to happen, in small and medium-sized businesses with respect to health care purchasing strategies.

The survey’s most disturbing finding — provided you’re more concerned with outcomes than the bottom line — is that cost-containment is the dominant factor in health care purchasing by the Fortune 500. The quality of the purchased service is a secondary consideration.

Although 83 percent of companies say they use quality criteria in selecting their health care carriers — and 55 percent require NCQA accreditation — only 32 percent contractually demand annual improvements in clinical quality. On the other hand, 86 percent set contractual standards for customer service.

Why the disproportionate emphasis on customer service relative to clinical quality? Maxwell says it’s because customer service is much easier to measure than clinical quality. Judging quality in a product as complex as an automobile is easier than gauging clinical quality, he adds.

A lot of companies (93 percent) say they’re collecting quality-related data (which they define broadly) — but most keep this information to themselves instead of sharing it with employees to help them make decisions.

Only 35 percent disseminate information about health carrier quality to their employees. Maxwell speculates that companies’ reluctance to share the quality information stems from, among other reasons, their lack of faith in the data. They also may view the quality-related data as primarily a managerial tool.

Further, if employees’ choice of carriers has been limited as a result of new purchasing strategies — and 93 percent of the Fortune 500 dropped more carriers than they added between 1994 and 1999 — it doesn’t make a lot of sense to distribute comparative data.

Ask the consultants

When health benefits managers need data about health carrier quality, 53 percent say consultants are their most useful source (see the chart “Employers Turn to Consultants”). Consumer satisfaction is used by 18 percent. Only 5 percent turn to HEDIS.


Maxwell suspects that there is heavy reliance on consultants and minimal attention paid to HEDIS — essentially a creation of major corporations, after all, like NCQA and the Leapfrog Group — because a lot of health benefits managers lack a background in health care. Of course, a lot of consultants may lack a background in health care, too — but that’s another story.

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