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Employers must step up to control health care prices

June 1, 2021, 11:30 AM UTC
"By relying on traditional offerings from health insurance companies that allow access to every provider, employers relinquish opportunities to provide high-value health care," the authors write.
Luis Alvarez—Getty Images

During 2020, as the pandemic compelled us to shelter in place, Americans avoided doctor’s appointments and postponed elective surgeries. For the first time in decades, employers actually saw their spending on health care services decline.

It would be naïve to presume that this trend will continue. As the economy rebounds with the arrival of COVID vaccines, employees are finally pursuing the care they deferred. With this return to the doctor’s office, employers will see their trend in health care spending on the rise again. But the sticker shock won’t come just from paying for more health care services, but from prices rising.  

Prices remain the single biggest driver of health care cost growth, and economists agree that provider consolidation—mergers and acquisitions among hospitals and/or physician practices—is the fuel that keeps the fire raging. As demand dwindled for high-margin, elective procedures during the pandemic, some health care providers found themselves in financial dire straits, compelled to surrender to mega-sized health systems or shutter altogether.  

Most markets already lack sufficient competition among health care providers, and employers can rarely command the size and scale to counterbalance providers’ market power. This means providers can call the shots, charging higher prices and resisting pressure for price transparency, among other reforms.

By relying on traditional offerings from health insurance companies that allow access to every provider, employers relinquish two opportunities to provide high-value health care: They forego the chance to create competition among providers, and they abdicate responsibility to direct employees and their family members to providers who deliver higher quality, more affordable care.  

The good news is that employers do have some means of exerting pressure on providers. Here are three ways they can go about it: 

Leverage buying power

Preferred provider organizations (PPOs) remain the dominant health insurance offering by employers because they include essentially every physician and hospital, offering unlimited choice to health plan members. But the problem with PPOs is that they compel employers to pay for care from the highest-quality, most cost-efficient providers—but also from those delivering the highest-cost and poorest-quality care.

Innovative health insurance companies and other vendors offer insurance options that either exclude the most expensive hospitals and doctors or entice plan members to seek specialty services from providers with a superior track record. The largest purchasers—typically those with 5,000 to 10,000 employees or more in a specific region—may have the scale and resources to contract directly with health care providers for better pricing, quality and patient experience, but there are a limited number of companies of this size. 

Aggregated purchasing

Frustrated by decades of rising health care prices, some employers have attempted to re-capture market power by joining forces with other businesses. Pooling the employees and family members they insure and negotiating contracts with local health care providers creates strength in numbers, but it is rare to find the market conditions that support such aggregated purchasing. Past failures demonstrate how difficult it is for employers to sustain this type of collaboration. However, with the right corporate leadership, engagement, and commitment to make trade-offs and reach compromise, aggregated purchasing models can work, and when they do, the results are noteworthy. For examples, look to The Alliance in Madison, Wis.; Peak Health Alliance in Summit County, Col.; and Equity Healthcare, which helps manage the health care benefits for 70+ companies invested in by Blackstone and other private equity firms.

As an alternative, instead of negotiating their own contracts with health care providers, coalitions of like-minded employers can relinquish traditional insurance carriers and collectively work with alternative “market-making” vendors who offer insurance plans centered on doctors and hospitals that meet cost and quality criteria. This approach telegraphs to providers and traditional health insurance carriers that prices are too high, and that employers are willing to take their business elsewhere.  

Leverage buying power for health careadjacent services

Together, employers can get better prices for pharmacy benefit management (PBM), analysis of their health care trends and spending, or even flu vaccines. These programs are easier to implement—the stakes are lower—but the reward is smaller too. Such strategies have no impact on the overall cost of medical care and do nothing to re-balance power in the health care marketplace.

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If employers do not rise to the challenge of buying health care services strategically and intentionally, the only remaining source of transformation will be government intervention—through state and federal policies. Private sector employers usually recoil at the idea of regulation; after all, unfettered free markets underpin their own business models. But after decades of struggle to control health care costs with only marginal yield, employers should recognize they are on an uneven playing field. If employers do not make their theoretical leverage real, intervention from government to enforce fair play and control prices may be the only way to make health care affordable. 

It’s spring, employers. This is your chance to plant something new.

Suzanne Delbanco, Ph.D., is executive director of Catalyst for Payment Reform. Robert Galvin, M.D., is operating partner at Equity Healthcare.

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