Americans have relied on employers for their health insurance coverage for 50 years, but that relationship may be coming to an end. Employers are unhappy with the growing number and cost of mandates and regulations. Employees are unhappy with the constraints of managed care, the lack of portability, and the limited choices available to them. Physicians are unhappy with the interference with the way they practice medicine. Politicians are unhappy that the numbers of uninsured are growing even in times of prosperity. How can the system be reformed to be more responsive and more cost-effective?
At a Cato Policy Forum on July 14, three executives with hands-on responsibility and experience presented their views on the future of employment-based health care financing. Speakers were Dwight McNeill, president of WayPoint Health; Mary Barker, vice president of employee benefits management at Baxter International; and Patricia Nazemetz, vice president for human resources at Xerox Corporation.
Dwight McNeill: Why are employers in the business of health care financing? Why do they want to get out? And what could they and the policy world do differently to make things better?
Employers are in the business of health care finance, first, to recruit and retain employees; second, to control health care costs and their exposure; and third, to optimize productivity. Sick people don't come to work, or if they do, they don't work as well as they do when they feel good. Finally, employers are in the business of health care because the government made them do it by giving them a tax exclusion, a deal they couldn't refuse.
Employers hold the keys to the transformation of the American health care system. Americans believe in markets. Yet employers are the very group that has undermined the market as purchasers. Only 17 percent of employers provide any choice of health care. It's hard to have a market if there's no choice of products. Only 6 percent use quality information to make benefit decisions. And only 1 percent gives that information to their employees to use. So it's a very feeble attempt to make this great market work.
The key to a healthy market is the consumer. What's good for consumers is good for the market, and what's good for the market is good for employers. In health care the real customer is the purchaser, not the consumer. As Regina Herzlinger, author of Market Driven Health Care, said, purchasers have very different needs than consumers. The focus of buyers is, above all, on lowering their health care costs. Having the consumer more involved is the real key to making the market work.
So what do employers need to do, and how can the policy community help employers to make the situation better? The first thing is to make employees the direct buyers of health care. That is what employers did with pension plans.
Second, employers need to create a level playing field for employees. A consumer strategy would include choice, information, and purchasing power. If consumers don't have a choice, why should they care about the information? If you don't have any purchasing power, information doesn't mean much.
Third, let the consumers figure out what they want. Health insurance has changed considerably. With the advent of managed care, each plan took on its own characteristics, its own approach to care, and essentially became a choice. If employers are going to make health care decisions for employees, why don't they decide on housing and food as well? If people can make choices about their housing and retirement, why can't they make their own health care choices?
Fourth, employers need to support quality, innovation, and legislation. Employers don't care a whole lot about quality today. And most employers just say no to most legislation. But a lot of the legislation that has been proposed is very supportive of a consumer-driven strategy.
The way to get there is really pretty straightforward. It's to go from defined benefits to defined contribution to total compensation.
Defined-contribution plans have made a competitive marketplace work for retirement programs. It works very simply: give the money to the employees and allow them to spend it on programs that are available—just like 401(k) plans. It's your life, it's your money, you spend it.
Most important is total compensation. The idea is to inform employees of their total compensation packages—wages and salary, bonuses, benefits, stocks, all of that—and say: "It's up to you to allocate your compensation according to what you feel is important. If you want to take benefits as salary, that's fine. It's your money, do with it as you want."
Employers would benefit by supporting tax credits to allow people who are employed but uninsured to have access to health care and get the same tax break that working people get.
Employers should support changes in the Employee Retirement Income Security Act of 1974, which exempts employer-sponsored plans from state laws, including contract and tort law. Accountability in this country goes through the court system, and employers and health plans should be held accountable for damages that result from their actions. Employers should recognize that change is inevitable. You can't support a consumer-driven health care system if you don't support consumers' right to sue.
Finally, if we haven't been able to make positive changes during prosperity, what's going to happen during a recession? I don't have to tell you that 43 million Americans don't have health insurance now; 35 million of those people are workers; prices for health care are going up; and a recession is around the corner. If a price increase coincides with a recession, there will be such an economic crisis that our hopes for transforming the system into something different will be totally overshadowed by the need to cut costs yet again. The time to act is now.
Mary Barker: Baxter is very interested in the people who may not have current, adequate access to the health care system. It's important that those of us who are large employers begin to get a picture of what's happening in this country and the dramatic changes that are occurring.
There is a real shift in the employment base in this country. Large employers have done a pretty good job of providing benefits to their employees. But people today are employed less and less by major employers and more and more by small employers. So as we large employers try to globalize our businesses, make new products, innovate, and compete worldwide, we are also faced with the cost pressures that health care and other benefit programs put on us. But imagine the guy who's running the corner dry cleaner. How can he possibly deal with health care?
We're one of the employers in the minority that provides a choice of health plans. We provide at least four choices of medical programs and three choices of dental. Every plan that does business with Baxter must be accredited by the National Committee for Quality Assurance. We have done all we can to provide choice and quality programs.
Our employees are concerned about whether health care costs are going up more than their wage increases, but there is provider resistance to the cost controls that are being put upon them by the managed care plans.
Changes are needed. More than half of Americans have a negative opinion of the health care delivery system. About half expect the situation to get worse. Americans are split about whether they trust the government or private industry to improve the system. More than half of Americans think that empowering consumers is the way to bring reform.
So what is the answer? We need to have a consumer-based system. It will allow more folks to get into the game. We need to move to a defined-contribution approach so that we can define the dollars and give them to the employees. You might say, "Well, why don't you do that today?" Because today there's no good way for my employees to receive that money in a tax effective manner.
Tax reform alone is not going to be enough to enable the consumer-based system to emerge. There also has to be insurance reform. We have to guarantee that all Americans are going to be able to get into the system whether they're sick or healthy.
The employer cannot continue to be held accountable for plan design and cost while simultaneously trying to compete effectively in the world market. We need a platform to allow for more choice for all employees, and we need to also include entrepreneurs and the self-employed.
We need to provide portable health care coverage for employees. I happen to be in a company that offers a lot of choice. But that is unusual. Many large employers have only one plan because they're trying to leverage their total volume. The sooner we allow people to have access to the system and begin to make possible a consumer-based system, the sooner we're going to be able to get market-driven improvements so we don't have to legislate improvements.
Why should we care? Because of the increasing number of uninsured. We cannot have 25 percent or 20 percent of Americans uninsured; quite frankly, that keeps me and my colleagues up at night.
Benefit professionals should assume a leadership role in designing and communicating the reforms needed to make possible the individual consumer market. I'm watching what's happening at our shop with the explosion of the Internet. Consumers can enter information about what's important to them in the purchase of health care, and a consolidator will put the information together and bring consumers back three quotes that meet what they're interested in. Sounds pretty exciting. It's what I want as an individual; it's what I want for my employees.
More and more that's going to happen because, in the new information age, access to information is going to empower the individual consumer. The problem is that individuals cannot currently afford to purchase health care cost effectively. We need some kind of transition plan.
Increased consumer involvement will lead to employee discomfort in the beginning. When employers began to put 401(k) plans in, there was a lot of concern on the part of employees. So there has to be a transition plan for employees who are not used to this kind of power.
There are longer-term human resources implications for all of us as employers. How do we plan total compensation on an ongoing basis? How do we plan for that evolution? How do we recruit and compete for talent in that environment? How do we make the transition and help our counterparts in the smaller businesses also make the transition?
Patricia Nazemetz: I'll cover four points about what Xerox is doing: where we are today; where we want to go; why, always an important point, we want to go there; and how we're going to get there.
Today, we have a system of company-sponsored and company-funded health care. Xerox pays about 96 or 97 percent of the cost of health benefits for our employees. We have almost 50,000 people employed in the United States, about 15,000 retirees, and we provide the lion's share of the funding.
Our system came into being in its current form in 1989. It is built on choice, cost sensitivity, and, probably most important, performance and quality measurements. We call the system the Xerox Health Link System. It's a system of health plan choices that include about 260 health maintenance organizations throughout the country. Our employees have multiple choices in various locations, depending on where they live and what's offered in those locations.
We have attempted to build a system that makes employees price sensitive. It's built on what we refer to as flexible architecture. We use a pricing strategy that we refer to as benchmark pricing. Employees who participate in a benchmark HMO will actually get money back. The other extreme is a fee-for-service system, which in all cases is the most expensive system that we have. If an employee covers a full family, that employee will pay about $500 a month out of his paycheck in addition to the company contribution. It's a very, very expensive plan. It currently costs about $15,000–$16,000 a year for full family coverage.
We have built the system on a set of performance measures. We require NCQA accreditation. We were the first company in the country to actually mandate that accreditation for all of our health plans. We provide an additional premium contribution for those plans that have full NCQA three-year accreditation status. We require all those systems to report information in a common format so that we can provide report card–like information to our employees to enable them to make their choices. And we also require customer satisfaction measurements from the health systems.
Where do we want to go? We want to go to a system that provides more choice, that focuses on total pay, and that increases employee cost sensitivity.
More choice. We offer a lot of choice in our system, a lot more than other employers. And even with 260 health plans, we don't offer every available plan. There are many other choices out there, many that may suit our employees' needs better than the ones we have in our system. We would like to get to the point where our employees can pick any system, any insurance program, or any other health care arrangement that they feel meets their needs.
In terms of total pay, we need to convert health care contributions back to wages to essentially move to a defined-contribution approach. And we need to preserve the tax effectiveness or work toward helping to reform the tax system.
Let me just touch on a couple of those components. In terms of more cost sensitivity, basically, wages are diverted to purchase health care benefits. Today we do that, but we don't give employees control of that money. For instance, if employees don't want health care coverage through Xerox, we allow them to opt out. It's a fairly significant competitive allowance compared to other organizations', but it is nowhere near the full value of what we would pay if the employee stayed in the system and we bought his health care for him.
We'd like to get to the point where the use of those dollars was totally in the hands of the employees. Choosing what's valuable to them should be left within their control.
We believe value is a function of the quality of the system and the cost of that system. Therefore, quality measurements are critical. Results have to be measurable and measured, and comparable and compared, and then communicated to individual employees so that they can in fact make informed choices. To move to this new state we need better measurement.
Now, why are we going where we're going? For all the reasons that you've heard, and also because the diversity of our work force would indicate that one size does not fit all. Even with the choice that we have in the system, there are people who would rather make other choices. They would use the health care dollars we're committing to them differently. Perhaps they might want to participate in a spouse's plan instead. Some employees are retirees of other companies and have access to other sources of health care benefits. Others might prefer to purchase coverage outside the employer system altogether. Employees have come to expect more control over those dollars. They want maximum choice and maximum flexibility in how they use that money.
The other point is that employees are much more mobile. They need more portability. They don't stay with Xerox forever. And even if they do, if they move from one work location to another, one housing location to another, if a spouse changes jobs and needs to take different coverage, our employees want the ability to take their health care benefits with them and not be locked into one system.
It gets to be a very difficult balance, particularly when you're working with a fixed number of dollars, when the dynamics of the marketplace are changing all the time, when employee expectations are increasing all the time, and when you're constantly asked to make tradeoffs. We are getting to a point where we are not comfortable in making those tradeoffs on behalf of our employees. Since we are spending hundreds of millions of dollars on health care, we would prefer to allow employees to make those decisions. We would continue to provide the funding but allow employees a lot more control over how health dollars were used.
So how are we going to get there? Our goal is to move to a defined-contribution approach. To allow employees full access to that contribution, we would not put restrictions on it. In other words, they could use it within the system to buy a health plan that was being sponsored by or offered through the employer system, or take those dollars outside. It would mean that we would have to offer many fewer choices within the system because, eventually, we'd be able to disengage from the internal system altogether.
At the end of all of this, we see a new role for us as an employer. We need to move from micromanaging a program to providing health care choices for employees. We will educate our employees, provide what purchasing leverage we can unless and until there's a better vehicle out there, and provide the financing for the system, but it will be on a defined-contribution rather than a defined-benefit basis.
This article originally appeared in the September/October 1999 edition of Cato Policy Report.