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Purchasing Health Care and Value

January 1, 1998
Related Topics: Benefit Design and Communication, Health and Wellness, Featured Article
Think about the last time you bought a new car. You probably collected information on different models, you compared the prices, and then you made a purchasing decision based on the cost and quality of the various alternatives. Chances are, the car you bought offered the highest quality in your given price range. This process, known as value-based purchasing, is something individual consumers do all the time.

But although purchasing based on value appears relatively simple, employers continue to struggle when it comes to purchasing health benefits for employees. Instead of ranking plans based on the quality and value they offer, the vast majority of employers still choose health coverage based on price alone.

"The main problem employers have when it comes to purchasing value is the lack of comparable information on the quality of care delivered under different health plans," says Paul Ginsburg, president of the Center for Studying Health Systems Change in Washington, D.C. Simply put, you can’t judge value unless you can compare the quality to the cost.

Despite the lack of quality information, judging the value of health care has become a critical issue for companies today. Although many employers have witnessed a slowdown in health-care expenditures over the past few years, Wall Street analysts expect health-insurance premiums to increase between 6 percent and 10 percent in 1998 as many HMOs recover from poor profits last year. Given that 80 percent of non-elderly Americans receive health-care benefits through their employers, the cost to companies is likely to be staggering.

The only way to prevent these crippling cost increases is for employers to get quality, and thus value, into the health-care equation. How? By defining what value in health care means, by making purchasing decisions based on that value and by working to improve value over the long term. Only when employers have the ability to assess value will they know if they’re getting the best deal for their health-care dollar.

Defining value is the critical first step.
Merriam Webster’s Collegiate Dictionary defines value as "a fair return for something exchanged; the relative worth, utility, or importance; a numerical quantity that is assigned or is determined by calculation or measurement." As this definition suggests, to assess value in health care, employers must first determine the relative worth or quality of the care that’s provided.

"Quality must be quantifiable if you’re going to manage it on an ongoing basis," says Rick Siegrist, an adjunct lecturer at the Harvard University School of Public Health in Cambridge and president of HealthShare Technology, a health-care software vendor based in Cambridge, Massachusetts.

So how are companies defining and measuring quality? What guidelines can employers use to determine if a plan offers high- or low-quality health care? There are several rules of thumb. For starters, many employers, including Xerox Corp., based in Stamford, Connecticut, evaluate whether or not a health plan has been accredited by an organization such as the National Committee on Quality Assurance (NCQA), a private not-for-profit agency based in Washington, D.C., that’s dedicated to assessing and reporting on the quality of managed-care plans.

"We evaluate all of the health plans we’re considering in our benefits package and determine the most efficient plan for a specific region in a specific year," explains Helen Darling, international director of Compensation and Benefits at Xerox. "The most efficient plan is the one that meets our quality requirements, such as having NCQA accreditation, and has the lowest premium in that region."

Some innovative employers are also judging the quality of health care by looking at complex measures such as the clinical results, also known as "outcomes," of health plans, providers and health-care organizations in their markets. This is done by looking at data such as mortality rates and health-status measures, as well as at quality information gathered from providers and patients. Why is it important to collect information from providers and patients? Because quality is determined at the physician level and evaluated by the recipient of care: the patient. As Ginsburg explains, "Quality, and ultimately value, is not really attached to the health plan itself—it is really at the provider and group-practice level."

One company that has started to assess outcomes based on patient and provider data is Hershey Foods, based in Hershey, Pennsylvania. In an attempt to better understand the quality of health care employees were receiving, the company’s HR professionals organized a project to analyze the clinical practices and cost performance of 23 hospitals and 1,000 physicians in central Pennsylvania. The majority of data for the study came from the Pennsylvania Health Care Cost Containment Council, an organization based in Harrisburg that routinely collects clinical information such as mortality rates from hospitals throughout Pennsylvania.

Armed with results of this study, the company, which is self-insured, was able to determine which hospitals and physicians provide the highest quality care at the lowest price. Hershey now encourages employees to choose from among these high-quality providers when making health-care decisions.

Quality, and ultimately value, is really at the provider and group-practice level.

When it comes to determining the quality of a given health plan, employees also are playing a larger role. According to a 1994 study conducted by The Massachusetts Group Insurance Commission, located in Waltham, Massachusetts, employees increasingly are interested in information on quality, such as the quality of physicians affiliated with a health plan and whether or not a plan has been accredited by a national agency such as the NCQA. When employees are given this kind of information, they can use their purchasing power to influence demand for health-care services. As more employees choose high-quality plans, low-quality plans will be forced to improve or go out of business.

Quality, and ultimately value, is really at the provider and group-practice level.
-Paul Ginsburg, President, Center for Studying Health Systems Change.

Unfortunately, the kind of quality information employees want doesn’t appear to be readily available. According to a 1997 survey by the Washington Business Group on Health (WBGH), an employer purchasing coalition based in Washington, D.C., and Watson Wyatt Worldwide, an international consulting firm with offices throughout the United States, 80 percent of employers provide cost data to their employees, and 76 percent provide information on how to use a health plan. Only 10 percent, however, offer the kind of information that would enable employees to assess quality and compare health-plan options.

Furthermore, despite employees’ growing interest in quality information—and the good reasons for companies to provide that information—there’s evidence that consumers may actually distrust information that comes directly from the plan itself or even from their employers. A 1996 survey by Kaiser Permanente, a national health plan based in Oakland, California, and the Agency for Health Care Policy and Research, a government agency based in Rockville, Maryland, found that 58 percent of employees are suspect of information that comes from employers because they believe "the employer’s main concern is to save money on benefits."

One way to address the trust issue is to allow employees themselves to decide the quality of a plan and the benefit options available. Glaxo Wellcome, a pharmaceutical company based in Research Triangle Park, North Carolina, recently launched a program in which employees were asked to use a software package from Decision Innovations, also in Research Triangle Park, to evaluate health-plan options.

The company installed 22 computer workstations at 11 different sites at corporate headquarters. Using these computers, employees were given the opportunity to rank five health plans based on attributes such as patient satisfaction, level of co-payment, prescription coverage level, lifetime maximum benefit level, and choice of primary-care physician. Using this information, Glaxo Wellcome was able to select the plans that offered the highest value.

"Decision-support tools, such as software programs to measure employee tastes and preferences, enable companies to define value from the employee point of view," says Peggy Olson, director of Glaxo Wellcome’s managed-care division.

Go beyond cost to purchase based on value.
With quality defined, employers can begin to determine the best strategy for purchasing the desired benefits. When it comes to actually making a purchasing decision, however, cost is still the primary factor used by most employers. According to the WBGH/ Watson Wyatt survey, 93 percent of employers use cost information to make a decision, and 81 percent look at the range and quality of services offered to employees. Quality information is used by less than a third of companies.

"Choosing a health plan is complex," says Jeff Johnston, president of Decision Innovations. "In order to choose an appropriate health plan it’s important to consider and compare health plans based on many different attributes." These include such things as NCQA accreditation, employee preferences and measurements found in the Health Plan Employer Data Information Set, more commonly known as HEDIS. HEDIS, which was developed by the NCQA, ranks plans based on the following categories: effectiveness, availability and cost of care; customer satisfaction ratings; health education and promotion; and a plan’s stability.

In terms of purchasing health-care benefits, there can be large differences between the strategies of large companies and small to mid-sized employers. While large employers generally have a dedicated benefits manager, many smaller companies are forced to go it alone or join employer coalitions—a growing phenomenon in major metropolitan areas and in California. Although employer coalitions were started with the primary intent of negotiating price discounts, many coalitions are now using their collective power to measure the quality of the health plans in their regions and then distribute results to employer members.

One example of a successful employer-based coalition is the Buyers Health Care Action Group (BHCAG) in Minneapolis. BHCAG represents 26 member employers, representing 400,000 employees—15 percent of the metropolitan market—and has contracts with 23 care systems, which are organized networks of medical groups and health-care organizations in the Minneapolis region. The coalition enables employers to contract directly with care providers that offer a complete range of services. Although local health plans are still utilized, it’s only for administrative services and not overall plan coordination. By cutting out the middleman, overall costs are reduced.

Employers like the program not only because it reduces their costs, but also because it allows companies to give their employees a choice of care systems based on available quality data. "The employer members of BHCAG see our care system as the next step in managed care," explains Steve Wetzell, executive director of policy and public affairs for the BHCAG. "The providers get what they want—less confusion dealing with a health plan—and the consumers are given the information and power to choose their health-plan providers."

When a critical mass of employers, acting as coalition members or independently, demand quality improvements in health care, other employers in the market will benefit as well. This can be seen in California where groups such as the Pacific Business Group on Health (PBGH), an employer coalition based in San Francisco, have motivated providers and health plans to compete for customers based on quality and cost. Although the coalition began as a way for employers to negotiate price discounts, and that still is a critical function of the group, the members currently are using their combined purchasing power to demand—and receive—information about the quality of care. By making purchasing decisions based on this quality information, the coalition is, in effect, increasing the overall quality of care that’s provided.

Another positive step in the health-care movement is that as employers move closer to a true value-based purchasing system, they’re beginning to realize the importance of managing health benefits similar to any other major purchasing decision. "In the past, employers were simply purchasers of health-care benefits—they left most of the decisions regarding cost and quality up to the health insurer," says Catherine Kunkle, acting president of the National Business Coalition on Health, an organization in Washington, D.C. that represents more than 100 employer health-care coalitions and almost 35 million employees. "That’s changing as many employers are becoming active buyers and negotiating long-term contracts and performance guarantees based on measurements such as customer-service levels and patient satisfaction."

Employers need to determine a minimum level of quality they will accept from providers.

Improving the value of health care should be a long-term strategy.
After a company has learned how to judge quality and purchase value in health-care benefits, the next step is to improve value over time. You see, true value-based purchasing must be a long-term strategy because quality can take years to measure and to improve.

Unfortunately in many companies today, a benefits manager requests annual bids from a number of different health plans, failing to recognize the long-term benefits of creating a relationship with a specific health plan. "Employers need to determine a minimum level of quality they will accept from participating providers and then provide incentives to not only maintain quality but improve the value of the care offered," says Wetzell.

Employers can encourage providers to increase value two ways. The first is by providing financial incentives to promote quality and value.

An example of financial incentives used to promote quality and value can be found in the work done by The Alliance, a purchasing alliance in Denver that serves self-insured companies of all sizes. The Alliance withholds 2 percent of annual premiums from health plans as part of a quality-improvement program. If the plans do not meet the quality targets, which are largely based on HEDIS measurements, half of the withheld premiums are redistributed to the plans that have met or exceeded those quality goals.

The second way companies can encourage providers to increase value is by collaborating with them on quality-improvement projects. PBGH, for example, has been involved in several projects to improve clinical and financial outcomes in the areas of asthma, heart disease and breast cancer. The coalition collaborates with the health plans by helping them collect and analyze performance measurements related to specific diseases such as asthma and diabetes. PBGH also actively participates in patient education and wellness initiatives.

So what does the future of value-based purchasing hold in store for employers? "I think the trend toward value-based purchasing is extremely positive," says Xerox’s Darling. "A critical factor in this trend is the power that comes from increased access to information on the cost and quality of health-care benefits. This has created a system with empowered employees who will choose how they wish to spend their benefits dollars."

When information on the various aspects of quality and cost becomes more readily available, companies will be one step closer to a system by which the definition of value is determined by the three key players: the employers who pay for health care, the providers who deliver the care, and, perhaps most importantly, the patient who receives the care.

Workforce, January 1998, Vol. 77, No. 1, pp. 92-99.

Recent Articles by Mark R. Bard

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