Big Firms Overhaul Health Coverage

By Anna Wilde Mathews
The Wall Street Journal, September 26, 2012

Two big employers are planning a radical change in the way they provide health benefits to their workers, giving employees a fixed sum of money and allowing them to choose their medical coverage and insurer from an online marketplace.

Sears Holdings Corp. and Darden Restaurants Inc. say the change isn’t designed to make workers pay a higher share of health-coverage costs. Instead they say it is supposed to put more control over health benefits in the hands of employees.

The approach will be closely watched by firms around the U.S. If it eventually takes hold widely, it might parallel the transition from company-provided pensions to 401(k) retirement-savings plans controlled by workers and funded partly by employer contributions. For employees, the concern will be that they could end up more directly exposed to the upward march of health costs.

“It’s a fundamental change…the employer is saying, ‘Here’s a pot of money, go shop,’ ” said Paul Fronstin, director of health research at the Employee Benefit Research Institute, a nonprofit. The worry for employees is that “the money may not be sufficient and it may not keep up with premium inflation.”

Darden did say that employees will pay the same contribution out of their own pockets that they currently do for approximately the same level of coverage. Employees who pick more expensive coverage will pay more from their paychecks to make up the gap. Those who opt for cheaper insurance, which may involve bigger deductibles or more limited networks of doctors and hospitals, will pay less.

“It puts the choice in the employee’s hands to buy up or buy down,” said Danielle Kirgan, a senior vice president at Darden. The owner of chains including Olive Garden and Red Lobster will let its approximately 45,000 full-time employees choose the new coverage in November, to kick in Jan. 1. Darden says that employees with families to cover will be given more money to buy insurance than employees covering just themselves.

The hope is that insurers will compete more vigorously to get workers to sign up, which will lower overall health-care costs. Darden and Sears are both currently self-insured, meaning that the cost of claims each year comes out of company coffers.

Several big benefits consultants and health insurers are betting on the employee-choice model. Major consulting firm Aon Hewitt, a unit of Aon PLC, is behind the insurance exchange that Sears and Darden will use, while rival Towers Watson TW & Co. in May bought Extend Health Inc., an online marketplace used by employers to hook retirees up with Medicare coverage. It plans to expand the marketplace to include active workers buying individual plans, starting in 2014.

“Within the next two or three years, it’s going to be mainstream,” said Ken Goulet, executive vice president at WellPoint Inc. The insurer will roll out a product next year called Anthem Health Marketplace that lets employers offer a variety of its plans to workers, paired with a fixed contribution. Mr. Goulet said it is close to signing up more than 30 midsize and large employers for early next year, including one with more than 50,000 workers.

Exchange operators today say they offer employers more predictable costs, as well as potential savings gleaned from workers’ voluntary choice of skinnier coverage and competition among insurers offering plans on the exchanges.

Many larger employers have said that they do not want to be the first to initiate major structural reforms in their employee health benefit programs – reforms that would bring the employers relief but at a cost to their employees – but that they would quickly follow others out the door. It looks like the door has opened.

This is a very fundamental change in employee health benefit coverage. The Affordable Care Act relies heavily on self-insured large employers maintaining their coverage of a large percentage on America’s workforce, so that the Act can concentrate on lower-income and uninsured individuals. Under the radical change described in this WSJ article, employers will discontinue their self-insured programs and switch to a defined contribution – a specific dollar amount that employees will use to shop for health plans in these employer insurance exchanges.

There has been considerable discussion recently over converting Medicare to a defined contribution – premium support or voucher program – in which the costs to the government would be fixed to some index of inflation, whereas the greater increases in health care costs would be borne by the Medicare beneficiary. Thus health care would become less and less affordable, especially for those with greater health care needs.

With this move by employers, they are putting in place the same perverse defined contribution approach which we have determined would be so destructive to our Medicare program. And, oh yes, the benefits consultants and health insurers are jumping in to draw off even more health care funds in administrative costs – already one of the greatest burdens in our health care system. The executive vice president of WellPoint says, “Within the next two or three years, it’s going to be mainstream.”

Further, as was reported in yesterday’s Quote of the Day, over 90 percent of individuals do not select the Medicare Part D drug plan that would be best in their individual circumstances. It shows that health insurance shoppers really do not know how to shop for health insurance. Obviously comprehensive health plans are much more complex, and it would be virtually impossible for individuals to select the best plan, even with the language of simplified plan descriptions called for in the Affordable Care Act.

In fact, several studies have shown that most individuals select plans based primarily on the lowest net premium, with very little attention paid to plan benefits and cost sharing. The most common strategy for insurers to keep premiums low is to use large deductibles and coinsurance, though they also manipulate benefits and provider networks to reduce costs. Besides the increasing deductibles, coinsurance is particularly a problem since it is a percentage of the charges rather than a dollar copayment which is usually much smaller. Low premium plans tend to set coinsurance rates at very high percentages. As this article states, the savings will be dependent upon “workers’ voluntary choice of skinnier coverage.” It’s all the workers’ fault!

It is likely that the initial defined contributions will be fairly close to the amounts that employers are currently paying for the health benefit programs, so the immediate impact will not be transparent. Only after many employees face bankrupting medical debt – a phenomenon that will increase as the employer contribution buys ever less insurance – will the implications be clear. It is tragic that so many will have to experience financial hardship before we are ready to get serious about fixing our system by enacting an improved Medicare for everyone.