Like homeowners seeking fixed-rate mortgages when they believe interest rates are on the rise, escalating healthcare premiums should compel purchasers to look for longer-term relationships with payers, according to a study by Watson Wyatt Worldwide and the Washington Business Group on Health.
Altogether, 43% of the 252 firms surveyed in the second annual value in healthcare study claim they have established long-term relationships with their health plans. The participating companies range in size from 500,000 employees to fewer than 10. Combined, they represent 4 million employees and $35 billion in healthcare purchasing power.
While there are no comparative figures in the previous year's study with regard to long-term relationships-and there are dramatic differences in responses between large companies (1000 or more employees) and small-the authors conclude that locking in long-term deals is not only becoming a trend, but something that should be encouraged.
"If you don't have a multiyear deal with a supplier, they will no longer invest the money to do the best job. They're just going to skim the cream and move on," said David Friend, M.D., global director of Watson Wyatt's healthcare consulting practice. "Just doing a price deal (is not) going to work anymore, because the marketing costs for health plans are huge."
Industry observers say that after years of price cutting, carriers-particularly publicly traded concerns-are now under pressure to keep premiums up because earnings have been flat. Friend observed that not only would a long-term contract be more likely these days to stabilize employers' costs against the possibility of rising premiums but health plans would benefit as well.
He noted that some carriers, such as Minneapolis-based United HealthCare Corp., experience annual turnover as high as 25%.
"That means they have to capture 45% new business to grow 20%," Friend said. "Long-term relationships also work to their advantage."
And while the role of price is declining as a bargaining chip, quality is growing as a factor in purchasing healthcare, Friend and his co-authors at WBGH concluded.
Some 51% of the companies surveyed concluded that overall quality was one of the key factors in determining value, compared with 45% in the previous study. Cost was also listed by 51% of respondents, but that declined from 59% in the previous study.
"Companies are beginning to realize that cost-obsession, in isolation from quality, can take its toll," said Mary Jane England, M.D., WBGH's president.
But cost still appears to govern health plan choices: 92% of companies surveyed said cost was the information most likely to be used in picking a health plan, compared with 91% in the previous study.
"Cost is still going to be the most important driver, but employers are now looking at other parts of the value equation," said Watson Wyatt spokesman Andrew Sandor. "Value is quality (multiplied by) access, divided by cost. Now, instead of focusing only on the denominator, the numerators are also coming into play."
Purchasers, especially large employers, are now more likely to scrutinize quality data, such as that provided by the Health Plan Employer Data and Information Set (32% vs. 27% in the previous study), outcomes (22% vs. 19%), and other health plan report cards (24% vs. 19%).
"The numbers remain low because many of those reports are still consumer unfriendly," said Friend, who noted that they are gradually improving. "Some firms, such as J.D. Power & Associates (See story, this page), are getting into the market because they realize the potential if they do it right."
In terms of educating employees about their health plan, only 20% of the respondents considered cost among the most important factors, compared with 27% previously. Lifestyle management increased to 32% from 28%; quality to 16% from 11%.
Still, small employers appear far less likely to closely examine their healthcare data than larger companies: only 6% of those surveyed use HEDIS data, compared with 62% of large employers; only 13% use other report cards, vs. 32% of larger companies. They are also entering long-term relationships with plans in far smaller numbers: just 33% vs. 77% of larger companies. Conversely, cost seems to be more of a concern with small employers: 45% thought healthcare costs affected quality, compared with 33% in the previous study. Only 24% of large companies thought cost affected quality, compared with 23% a year ago.
"The wide gap . . . reflects the fact that larger employers are more likely to have the resources to take advantage of the most sophisticated quality measures," said the WBGH's England. "Over time, small companies will also profit from larger employers' efforts to refine these tools."