Major employers are struggling to hold down healthcare expenditures amid rising medical costs, and are just starting to flex their purchasing power to make fundamental changes to keep providing workers with benefits in years to come, according to respondents participating in Modern Healthcares inaugural Healthcare Purchasing Power Survey.
The buyers' market
Our inaugural Purchasing Power Survey examines large employers as they use their leverage to find better value in healthcare spending
Results of the survey of 45 major employers with annual revenue of $1 billion or more show that healthcare expenditures for workers, their dependents and retirees are all over the map. Some employers reported expected drops in spending between 2007 and 2008, while others were projecting double-digit increases.
Overall, all 45 survey participants reported $7.4 billion in healthcare expenditures in 2007, while 42 respondents projected their 2008 spending, totaling $5.3 billion. Based on 44 respondents that provided both healthcare spending figures and beneficiary numbers for 2007, per-beneficiary spending averaged about $3,540, compared with about $3,435 per beneficiary in 2008 based on projected numbers from 41 respondents providing comparable data.
One of the toughest challenges we have is to get employers to take greater responsibility for healthcare, given that they are the ones paying the bills, says Andrew Webber, president and chief executive officer of the National Business Coalition on Health, a co-sponsor of the survey. We see how variable quality and cost are.
The Leapfrog Group, a national quality-improvement organization created by large employers, is also a co-sponsor of the survey.
Not surprisingly, an automaker topped our list of healthcare purchasers. Ford Motor Co. spent $2.2 billion on healthcare in 2007. The company declined to release estimates on healthcare expenditures for 2008 before year-end.
Fords healthcare spending dropped 29% from 2006, when the Dearborn, Mich.-based company spent $3.1 billion. It spent even more, $3.5 billion, in 2005. But it has also shed covered lives. In 2007, Ford covered 535,000 people, down 2.7% from 550,000 in 2006 and 9.3% from 590,000 in 2005, according to the company.
Ford is taking some steps to reduce healthcare spending, but isnt nearly as aggressive as some other companies that participated in the survey. It provides smoking-cessation programs, on-site Weight Watchers meetings and other wellness initiatives. It is looking at changing the benefit design of some health plans to boost prevention, says Marcey Evans, a Ford spokeswoman.
Ford is, in part, getting out of the healthcare benefits business, starting in 2010. Along with General Motors Corp. and Chrysler (neither of which participated in the survey), Ford last year struck a deal with the United Auto Workers to shift the responsibility of retiree healthcare benefits to an independent fund, called a voluntary employees beneficiary association, or VEBA. Ford will transfer $23.7 billion in retiree healthcare liabilities to the union through the VEBA, and the union will manage the benefits of about 200,000 retired auto workers and their families. Under the court-approved agreement, Ford will contribute a total of $15.4 billion to the trust. Getting retiree healthcare costs off Fords books is expected to boost the automakers cash flow by $1 billion annually.
All told, the UAW will manage about $56.5 billion in the Big Three automakers contributions for retiree healthcare for the next 80 years in the three plans. That will make the UAW among the top purchasers of healthcare nationally. By comparison, the California Public Employees Retirement System, CalPERS, is the second-largest public purchaser of healthcare after the federal government, spending $5.5 billion on healthcare for its 1.2 million members this year. CalPERS fund has a market value of $189.6 billion. (Because it is a public entity, CalPERS was not eligible to participate in our survey.)
The automakers VEBAs are something that could really result in some dramatic changes in healthcare purchasing, says Jack Billi, board member of the Michigan State Medical Society and associate dean for clinical affairs at the University of Michigan Medical School. It will give the UAW power to do things they couldnt do before, like benefit-based copayments and other benefit design changes. And they will have the power to design much more aggressive, multitier drug plans.
Several Healthcare Purchasing Power Survey participants mentioned that union negotiations can impede benefit design changes, or slow progress in implementing value-based purchasing, which means designing health benefits to promote prevention and lower healthcare costs.
The vast majority of the survey respondents were in the healthcare sector. North Shore-Long Island Jewish Health System in Great Neck, N.Y., was the largest health system purchaser of healthcare among survey participants, with $274 million in expenditures in 2007, and a projected $293 million this year, a 6.9% increase.
North Shore, which operates 10 acute-care hospitals, has started implementing some prevention initiatives among its nonunion employees, and were hoping that unions will partner with us in these wellness programs, says Joseph Molloy, corporate director of human resources and benefits strategy for North Shore, which ranked fourth overall in the survey.
The health system is also tinkering with benefit design changes to promote health and lower costs. Two years ago, North Shore changed its copayment pricing structure, so members pay $15 per visit to a primary-care physician but $35 to visit a specialist. That continues to have an impact on utilization, Molloy says. The system also increased emergency room copayments from $30 to $75 per visit, though employees who receive treatment at North Shore hospitals enjoy full coverage, he says.
Others are being even more aggressive in benefit design. Toyota Motor Engineering & Manufacturing North America, which came in sixth in the survey, with nearly $182 million in healthcare expenditures in 2007, is expecting healthcare spending to rise less than 2% this year, to nearly
$185 million. Yet the automaker says it will drop fewer than 100 covered lives. While these estimates could change by year-end, Toyota officials attribute the relatively steady rate of spending to more cost-sharing among employees.
We did drastically change benefits this year, says Krista Seibel, benefits specialist at Toyota. Changes included tiered medication costs, such as free generics and higher copayments for expensive or experimental brand-name drugs, increased deductibles across every employeehourly and salariedand higher out-of-pocket costs. The company has no separate executive health plan.
We had some plans that were totally free to workers, Seibel says. Now we have money going into every plan from the member.
At the same time, Toyota is working more closely with consultants to comb through data on utilization and costs. It implemented varying deductibles for in-network vs. out-of-network usage, which has steered workers into using more in-network providers that have negotiated savings into their contracts, Seibel says.
Last year, Toyota opened its first on-site health clinic, at a factory in San Antonio, which the company says has helped improve workers health and lower costs. It plans to open another clinic at a Mississippi factory in the next two years. And since Toyota started offering free generic drugs, utilization of generics among all covered lives has risen 20%, Seibel says.
Other employers are also increasingly flexing their purchasing power. Norton Healthcare, a not-for-profit health system in Louisville, Ky., with three hospitals, is offering a high-deductible health plan for the first time in 2009. The Humana plan costs a single person about $7 per pay period in premiums and is also available to families for somewhat higher premiums, based on the number of dependents. By contrast, Nortons preferred provider plan, also from Humana, costs about $50 per pay period for a single person and more for families. The cheaper plan has deductibles ranging from $1,000 to $5,000, depending on whether the providers are in or out of network, with coverage thereafter of between 40% to 100%. Its too early to say how many workers will choose the high-deductible option for next year.
Youre kind of weighing, am I going to get sick? says Mary Jo Bean, vice president of planning and business analysis at Norton Healthcare. Copayments are waived for those who receive treatment at Norton facilities, she says.
For the first time this year, Norton is also showing workers exactly how much it spends on healthcare through an internal Web site. Weve seen our healthcare costs continue to rise, Bean says. We just cant continue to bear the burden.
Still, like many other health systems that participated in the survey, Norton says it must continue to provide quality benefits to attract workers. Nursing staff is hard to come by, so we have to be competitive, Bean says.
Hewitt Associates, a global for-profit human resources consulting firm, was one of the few on the list that appears to be managing to keep healthcare expenditures down while not significantly reducing covered lives. Hewitt, No. 17 on the list, expects spending to rise by 1.2% from 2007 to 2008. Hewitt offers its more than 23,600 covered employees and families flexible healthcare plans. This includes a build your own PPO that allows employees to customize the level of healthcare appropriate to their needs. That plan is one of the most popular offered, says MacKenzie Lucas, spokeswoman for Hewitt.
In 2009, Hewitt intends to boost health education for employees and provide financial incentives to workers who complete health risk-assessment surveys, which can help employers target health interventions, such as disease-management programs, to certain at-risk individuals. Hewitt also is opening on-site clinics at its largest offices, with the goal of having 75% of workers able to access these clinics by the end of 2010, Lucas says.
We also participate in our own Hewitt pharmacy purchasing group, a coalition that allows Hewitt and its clients to obtain pharmacy program pricing typical of Fortune 50 companies, to keep our prescription drug costs low, Lucas says in an e-mail.
Some participants in the survey expressed concerns about soaring medical costs during the recession. Goodwill Industries International, which ranked last in our survey, with about $1 million in healthcare expenditures expected this yearat its headquarters operations only says it has seen about an 8% to 10% increase in expenditures over the years. But we expect this percentage to almost double next year with the current state of the economy, Lauren Lawson, spokeswoman for Rockville, Md.-based Goodwill Industries, says in an e-mail.
Webber of the National Business Coalition on Health says that employers can do more to take control of healthcare spending, even in a down economy. The key to lowering cost is pushing the quality agenda, he says. Its time we begin to talk about health as a competitive asset.
Send us a letter
Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.