Oct. 24, 2012 — Earlier this year, Aon Hewitt, which describes itself as “the global leader in human resources solutions,” published a brochure promoting the transition from defined benefit employee health insurance to defined contribution employee health insurance. The brochure is entitled “Creating a Competitive Marketplace,” and is available in its entirely here.
These excerpts have been selected and annotated by Remapping Debate. Excerpts Numbers in square brackets represent the page of the report from which an excerpt was taken. You can read each annotation by placing your cursor over highlighted material.
From the title page:
Creating a Competitive Marketplace
How the Corporate Exchange Can Help Employers Break Away from the Health Care Trend
This is the point: having employer costs rise less than the cost of premiums.
From the Executive Summary:
Large employers cannot purchase health coverage for their employees through the public exchanges until at least until 2017, when each state exchange will be given the discretion to admit employers with more than 100 employers. [1]
As these dynamics unfold, employers now need to move beyond just compliance with the health reform law, and begin to focus on determining the role they want to play in providing employee health coverage in the future — and the strategies to realize that vision. [1]
The old approaches are failing. What employers need — and are searching for — are new and innovative ones. [1]
In other words, employers take note: don’t assume you should continue to provide the same level of health insurance benefits that you have traditionally provided to employees.
New Choices
…Those employers that continue to offer health coverage can engage in annual plan design reevaluation and vendor negotiation to try to lower their future cost trend to a modest degree. They will also look for ways to reduce the demand for health care services. For example, employers can put a greater emphasis on health screening and wellness activities to improve and maintain the health of employees and their families — with premium reductions or other incentives. [1]
Another solution attracting a great deal of employer interest is the concept of offering health coverage through an innovative private Corporate Exchange. The exchange allows employers to join forces to create a competitive marketplace for health insurance based on consumer choice, which will encourage insurance companies to drive the system toward greater efficiency. [2]
Reducing the demand for health care services by helping employees to be healthier through “wellness activities” and the like doesn’t require a defined contribution model; it can be achieved within the defined benefit framework. The principal method of reducing demand is to make services more expensive, something that isn’t employee-friendly at all.
The term “consumer choice” might be apt if the consumers being referred to are the employers to whom the insurers will be catering. But for employees who are captive to a system not of their design, the concept of consumer choice is a cruel irony.
Efficiency is intended to mean lower cost, and lower costs are achieved by squeezing one or more parties: employees, doctors, hospitals, or insurers. Who is most likely to be squeezed, and who least likely?
The Corporate Health Care Exchange
A health care exchange is a marketplace that connects insurance companies with individuals or employees wishing to purchase health insurance. The more exchange participants, the greater the economies of scale that increase carriers’ ability to offer competitive prices. In this insurance marketplace, as in every consumer market, the element of competition will ultimately reduce prices. [2]
…A company that participates in Corporate Exchange no longer designs and manages its health care plan—that function falls to the exchange. The employer determines how much of the cost of coverage it is willing to subsidize. Employees use this subsidy to select both the plan design and the insurance provider that best fit their needs. Thus, the exchange gives employers a greater ability to predict their costs. [2]
In addition, the employer subsidy is no longer “hidden” — employees can now see the employer’s full monthly or annual subsidy. [2]
Clearly, the market for health insurance is not like every other consumer market. The decision to get a cheaper gadget — or go without the gadget entirely — is very different from a financially-coerced decision to lose the option of being treated for a serious disease by a superior (but non-network and thus not-covered or too-expensive) doctor.
Aon Hewitt is not predicting when, and, in any event, is not making any assurance that competition won’t be a race to the bottom where employees continue to make “choices,” but come to make those choices between and among plans that have all ratcheted down the scope of coverage.
Here is the plain statement of the fact: the beauty of defined contribution plans for an employer is not having to worry about how much to cover, but to set a contribution as it chooses. The employer, of course, can choose to lower that contribution as employees become inured to paying more and more of the bill.
This is an example of the recurring theme of employees being able to make choices that best fit their “needs” when they are presented with costs that the employer has offloaded to them. The conflict between medical needs and financial needs is not explored because the employee is expected to become more sensible (that is, to recognize the importance of choosing a less costly plan that, alas, covers less). The expectation of the re-education of employees is made explicitly later in the brochure.
And, presumably, should be awed and grateful…and have a better sense the incurring medical expense should be avoided.
The Value Proposition: Win, Win, Win
[listed among the “wins” for each group]
Employers: Risk transfer and predictability [3]
Employees: Flexibility to tailor benefit/contribution trade-offs [3]
Carriers: Earnings potential [3]
The given here is that employees are going to be forced to make trade-offs. Thus the “flexibility” is flexibility to choose the ratio in which you, the employee, get to pay more or get less.
From the main body:
Four Decision Paths
…If the employer plans to continue to sponsor health insurance coverage, there are three options:
1. Manage the cost of the benefit on an annual basis by trying to close the gap between top-line health care cost trends and what the business can afford — by changing plan design, increasing employee contributions, and managing vendor contracts. [6]
2. Require employees to take greater responsibility for their health and well-being in order to receive a comprehensive health plan. This “house money, house rules” strategy could, for example, require a health risk questionnaire, biometric screening, and/or ongoing health coaching in order to be eligible for the richest plan or the highest employer subsidy… [6]
3. Continue to offer health coverage, but do so through a Corporate Exchange. This option is increasingly attractive to employers looking for new alternatives to lowering future cost trends, and who wish to lessen some of the administrative burden associated with sponsoring a health plan… [6]
Employers will be more likely to join a health care exchange if they:
- Are philosophically aligned with “monetizing” their commitment in the form of a defined contribution or subsidy [6]
- Are willing to shift from self-insured to insured arrangements [6]
- Want to avoid managing annual plan design changes and negotiating vendor relationships (but are willing to retain responsibility for wellness and health promotion) [6]
- Believe that health benefit plan design is not a key or differentiating component of the organization’s total rewards program [6]
- Desire to move toward a compensation-like rate of cost growth for health benefits while avoiding cost shifting to employees [6]
- Are comfortable with employees accessing information and support from a third party (in this case, the exchange) [6]
Employers want to get away from their existing responsibility to shoulder increasing health care costs, and all the methods (see below) involve reducing employee benefits.
A straightforward company-town proposal, updated from the early 20th century to the early 21st.
The raison d’être of defined contribution plans: lowering the employer cost curve as compared with the rate of increase in health insurance premiums by shifting risk to the employee.
A powerfully Orwellian proposition. By Aon Hewitt’s own estimate, a compensation-like rate of cost growth is significantly lower than the rate of cost growth in health care premiums. The desire to move to a lower cost curve has nothing to do with an employer being concerned to not shift costs to employees. On the contrary, the selection of this model depends on an employer not caring that costs are invariably shifted to employees, either through increased out-of-pocket payments or through a loss in value in the insurance coverage that the employees had enjoyed.
The Competitive Marketplace of a Corporate Exchange
The Corporate Exchange will offer Bronze, Bronze Plus, Silver, Gold, and Platinum levels of coverage, with actuarial values ranging from 66% for the Bronze plan to 92% for the Platinum plan…The use of fixed employer subsidies encourages employees to choose the level of coverage that best suits their needs, recognizing they will pay more for higher-level coverage and less for lower-level coverage. [7]
There are, of course, different kinds of needs. One set has to do with medical needs and the desire to get the highest quality care. Another set has to do with cost pressures. By conflating the two and describing a “choice” that suits an employee’s (undifferentiated) needs, the brochure sanitizes the fact that the medical needs are expected to be subordinated to financial pressures.
How the Corporate Exchange Works
In the Aon Hewitt Corporate Exchange model, the employer continues to offer a group health plan, fully compliant with the PPACA. On behalf of each company wishing to join the exchange, Aon Hewitt solicits employer-specific insured rates from both national and regional insured health plans that have contracted to provide coverage through the exchange. The employer then decides how much subsidy or “credit” to provide employees to purchase coverage… [8]
…Bronze is the least expensive plan, followed by Bronze Plus, Silver, Gold, and Platinum options, each representing richer levels of coverage with increasing prices…The employee chooses the metallic level and insurer that best meet his or her health insurance needs and personal budget. If the employee has a credit of $300 per month, for example, and chooses a plan that costs $400 per month, then he or she pays the additional $100 through pre-tax payroll deductions. [8]
Yet again, the employee is “choosing” in light of the fact that a robust plan is financially prohibitive. No explanation is offered as to what the employee who needs the best plan but can’t pay for it out of pocket is going to be able to meet his needs.
What happens to the employee who needs Platinum but is only getting that $300 credit per month referenced in the next sentence? That employee’s medical needs will be sacrificed under defined contribution.
Transparency, Cost Savings, Choice
…The introduction of consumer choice removes the concern of some employees that their employer is unilaterally making choices that take more money out of their paychecks. For the employer, the movement to a fixed subsidy allows for greater alignment with a total rewards framework. Subsidies may be set to increase at a compensation-like rate of trend (2% to 3%) versus a traditional health care rate of trend (7% to 10%). Over time, jumping off the health care trend curve can create significant cost savings and increased shareholder value. [9]
…If the exchange concept performs as designed, future cost increases do not necessarily shift costs to employees. If a true consumer market is created, competition among insurers will create efficiencies that will translate into lower premium increases. The participation of multiple health insurers is the key. [9]
…Where do the savings from an exchange go? Some go into the pockets of employees, who are buying more cost-efficient plans and therefore reducing their contributions. Some go to employers, who can use the savings to strengthen the business or invest in other human resources programs that drive employee engagement—such as increased 401(k) match, paid time off, training and development, tuition reimbursement, or wellness programs. [9]
Finally, an explanation of what lowering costs to a compensation-like trend means in relationship to the health care cost trend: a difference of from 4 percent to 8 percent per year.
The clearest explanation of the motivation to move to a defined contribution system: the desire to cut costs and increase profits by taking that 4 percent to 8 percent per year gap and shifting the responsibility for that gap to the employee.
The painting of a rosy future, if a some undetermined time there is a “true consumer market” — something that the statement implicitly acknowledges does not exist now (the moment at which defined contribution is being forced onto workers).
The only “savings” that accrue to employees are savings that are a function of their being effectively forced to buy a lower-value product.
Changing Employee Behavior
In an exchange, employees clearly see the employer’s share. Their first reaction may be surprise at how large that amount actually is. They also see that if they choose a more expensive health insurance option, they’ll pay more out of their paychecks — and for some options, pay a lot more. This may lead to the “light bulb moment” — the realization that the affordable coverage comes with deductibles and cost sharing. If they want to reduce their exposure, they’ll need to start paying attention to what things cost and the behaviors that generate health care expenses. That may mean using the decision-support tools available to choose the right doctor, get the right treatment, and do things such as exercising, losing weight, and quitting tobacco use. [10]
The range of cost options in the Aon Hewitt Corporate Exchange offers more flexibility to employees and may also offer a better fit with an employee’s lifecycle. Employees who are in their 20s and relatively healthy may choose less expensive plans. In their 30s and 40s, they may want to begin to increase their coverage. In their 50s and beyond, they may want to invest in plans that will protect them even more. [10]
The key behavioral modification moment: give up on unrealistic expectations that your benefits will not be sliced and realize that the only way to make something “affordable” at the premium end is to buy into a system that powerfully — through higher deductibles and larger co-pays — discourages the use of the medically necessary services.
In other words, Aon Hewitt fully anticipates that high benefit plans will be disproportionately saddled with higher-risk participants. That is the formula for the problem of “adverse selection.” As a plan attracts higher-risk participants, the insurer has an incentive to raise premiums further. Raised premiums discourage all but the sickest (who have no other choice) from participating, intensifying the risk concentration, and leading to further rate increases and a continuation of the vicious cycle (discussed in the accompanying article). Though Aon Hewitt says that, “To protect carriers from adverse selection, risk adjustment mechanisms will provide offsetting payments to reflect the higher risk of their enrollees,” it is not at all clear how or whether such mechanisms would work in practice.
Excerpt selection and annotations by Craig Gurian