McKinsey Report Says Employers Will Abandon Health Insurance

Today’s Managing Health Care Costs Indicator is 30%

A report from the consulting firm McKinsey has been getting a lot of attention this week; it suggests that almost 1/3 of employers will exit health insurance following the implementation of the major elements of the Affordable Care Act in 2014.

The report provides conclusions, but shares little detail of the underlying assumptions and data.  McKinsey has evaluated the economic “best interest” for firms, and combined this with its own polling data.   Interestingly, the McKinsey survey concludes that employer sponsored insurance is not that highly valued by employees.  Most surveys show employees value health insurance second only to wages.

The McKinsey conclusion starkly differs from the Congressional Budget Office evaluation, which suggests that only a million   will be dropped from employer health insurance due to the Affordable Care Act.  RAND  and the Urban Institute  have also evaluated this question and concluded that the ACA will not lead to wholesale employer exit from the insurance market.

The McKinsey study is consistent with the Towers Watson NBGH 2011 survey , which shows that the percentage of responding employers who believe that they will continue to offer employees health insurance ten years from now has dropped by almost half since 2007.

  

McKinsey also suggests that employers will continue to sponsor wellness programs even if they exist employer-based health insurance.   The economic rationale for many wellness programs is that they will lower medical costs; if the employer is no longer responsible for those costs, wellness programs will be more difficult to justify in corporate budgets.

It’s hard to make predictions – especially about the future, as Mark Twain (and perhaps Yogi Bera) said.  Here are some circumstances that could make the McKinsey predictions more likely:

1. All or virtually all states have functional exchanges where employees could individually purchase good health insurance without fuss and without big bills for those with preexisting conditions.   The Washington Post http://www.washingtonpost.com/national/health%20care/states-slow-to-adopt-health-care-transition/2011/06/03/AGbZbjJH_story.html recently reported that exchange creation has been slow going in many states.
2. The federal government continues to fund generous subsidies for low and moderate income Americans, and these subsidies rise at the rate of medical inflation.   Paul Ryan’s plan to cap Medicare expenditures through a privatization program suggests that there will be limits to the willingness to provide funding for continued rises in health care costs.
3. Health care costs continue to rise at rates substantially above inflation, making more employers subject to the “Cadillac” tax, which increases the effective cost of providing employer sponsored insurance. However, I believe that if too many employers are subject to this tax, the rules themselves will be revised.
4. The penalty for not offering insurance remains low.   Most employers offering credible employee health insurance pay more than $2000 per employee for this coverage,  so many CFOs will see the benefit of exiting employer-sponsored insurance.  However, the Massachusetts experience http://voices.washingtonpost.com/ezra-klein/2010/10/what_massachusetts_tells_us_ab.html is that even with a substantially lower state penalty there have been few employers who exited the market.
5.  Employers are allowed to segment their populations, offering health insurance to some employees who are expensive to recruit, train and retain, and not offer insurance to low-skilled workers.  The ACA specifically prohibits companies from doing this, but companies might change their corporate structures to allow this.

Employers far prefer to know their future costs, and so prefer a defined contribution to a defined benefit plan.   The defined benefit plan carries an unknown future cost, which is hard to budget for, hard to account for, and in many cases, hard to pay for.  Employers rushed to the door to get out of defined benefit pension plans when an Accounting Board rule made them divulge future liabilities, and most Americans no longer have a fixed pension for retirement.  Employers have largely exited retiree health insurance at this point as well. So there is some reason to believe that they could do the same for active employee health insurance.

Employers pay about a third of the cost of health insurance in the US – over $700 billion.  Widespread employer abandonment of health insurance will require funding from alternate sources – and neither out-of-pocket payment nor increased taxes are getting high poll numbers right now.  I suspect that if employers do discontinue offering health insurance in large numbers there will be “tweaks” to the Affordable Care Act to encourage them to continue to offer or at least fund health insurance.  

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Remarks for a corporate executive upon joining a hospital or health system Board

Today’s Managing Health Care Costs Indicator is 10

Top corporate executives sit on the boards of directors or trustees of nonprofit hospitals and health care delivery systems in many communities.  It’s natural that health care providers want the best minds in business to participate in their governance.  It’s also natural that executives want to ‘give back’ to the community, and it’s an honor to serve on a hospital or health system board.

However, it’s a tough position to be in.  The rise in health care costs is a major headache for the corporate executive, but hospitals seek to increase their revenue.  A hospital that has not increased its revenue is likely to have trouble borrowing money to make capital investments that will keep it successful.

I’ve been talking to a few colleagues about this, and I offer theoretical maiden remarks for a corporate CFO who has just joined the board of a health care delivery system.

Thanks for the opportunity to serve on this board.   This health care delivery system is a pillar of our community.  It delivers health care to many of my company’s employees, and my family has benefited from the excellent quality of health care within this system.

I know I’m joining this board at a time of great change.  Health care costs have skyrocketed over the last decade, and insurance premiums are increasingly unaffordable to companies and to our employees.  My own company has only been able to continue to offer health care coverage and maintain our bottom line through converting our employees to high deductible health plans – so I’m well aware of the impact of rising health care costs.  At the same time, we’ve learned more about the mistakes patients suffer within the health care system, and we know that the system is rarely designed with patients in mind.

Health care reform promises to increase the portion of Americans with health insurance; however, many will have Medicaid, which I know has low payment rates.  It won’t be possible for providers to simply shift extra costs to employer-sponsored health insurance to make up for poor Medicaid payment rates.  

I intend to use my expertise to push this health care system retool itself to succeed in this new world. I hope my fellow Board members will join me.   I don’t underestimate the challenge, and I know that many of this health care system’s constituents would rather things remain as they were.  The current state, though, is not sustainable. We can meet our community mission through delivering higher value in health care, and we cannot meet our community mission if our costs continue to escalate unchecked.

I know that some good transformation work is already underway here, and I’ll be listening to our executives and our staff because I know many of the best ideas will come from those practicing within this system.   As I start my term, I’d like to suggest ten steps this health care delivery system should start working on tomorrow morning to start down the road toward being more accountable, and to deliver better quality, more affordable health care to this community.

1.      Be fully transparent

I’d like to see us make public all of the data we collect on quality, patient service, and patient satisfaction.    That especially means reporting on our performance where we don’t look as good as our reputation and our self-image.  I know our clinicians are intensely committed to being the best – and I suspect that we’ll make things better more quickly when everyone knows that our quality scores will be readily available to anyone through our web site.

2.      Put together bundled prices for various service lines

We need our entire medical staff to function as a team – and we need to have the right incentives to take steps out of our processes that will allow us to deliver the best treatment for a lower price.   As long as we are paid more for delivering more units of service, it will be hard for us to figure out how to make our patients better with fewer units of service.

3.      Fully disclose any medical error or bad outcome, apologize, and offer restitution when we make errors

Harvard Medical School hospitals adopted this policy a few years ago, and the Veterans Administration and the University of Michigan have showed that this can lower the overall cost of health care.  It’s also the right thing to do, and the way all of us would want ourselves and our families treated when we get care within this system.

4.      Consider the community’s real medical needs, rather than revenue potential, when we make capital decisions.

Many hospitals purchase new fancy technology which adds little to patient benefit, but allows for much larger bills and revenue.  Some hospital CEOs have complained about this, but haven’t had the fortitude to obey their own rhetoric.  We want technology that will be the best for our patients and allow us to deliver the highest quality care that is cost-effective. We don’t just want the latest gizmo.

5.      Get rid of sample closets for pharmaceuticals in practices owned by the health care system, and prohibit pharmaceutical representatives from our campuses

Our physicians are making purchasing decisions on behalf of their patients.  Let’s give them access to nonbiased sources of information, and let’s not entice them to prescribe the latest brand name medicine for which there are plenty of generic equivalents at a fraction of the price.

6.      Drive a hard bargain with suppliers

Medical devices are expensive – and often drive up the cost of medical care unnecessarily.  Limit the number of different implantable devices available, and get the best price on behalf of our patients.  The same goes for all supplies.  First, be sure we need the supply.  If we need it, get the supply at the most advantageous price – as if it were our money we were spending.  We will be spending our own money on supplies in a future world of bundled payments.

7.      Improve the health habits of our own employees

Our employees serve as an example to the entire community, and preventable chronic diseases take up too much of our medical resources.  Let’s fully cover counseling and medications to help them quit smoking, and offer healthy food alternatives in our cafeterias.  Let’s make it easy for our employees to walk or cycle to work where that’s safe, and let’s set up employee competitions for exercise to drive the social network here to promote healthy lifestyles.

8.      Give our patients better tools to help them make better decisions

Patients often don’t have the best available information to help them make difficult choices, especially where there is no single “right” medical answer.  Examples include back surgery, hysterectomies, heart surgery, and mastectomy and prostatectomy for cancer.  Patients given access to objective information on treatment alternatives often choose less invasive therapy and have lower costs.  Hospitals have not been enthusiastic about this in the past, as more invasive therapy is often more profitable.  I’d like us to focus on helping our patients make the best decisions for themselves and their families, not merely focus on promoting decisions that might be better for our bottom line

9.      Support efforts to improve the health of the entire community

Our mission is to improve the health of the community – not just those who see us as patients.  I know in the past we’ve done cancer screenings which can increase our own volume. I’d like to see us do much more.  I’d like to see this health care system as at the hub of ‘information therapy’ in the community, and I’d like to see us helping more members of our community avoid chronic disease, and avert preventable emergency department visits and preventable hospital admissions.  We should publish an annual stewardship report showing what we have done to improve the health of the entire community.

10.   Reach out to community employers to see what their real needs are, and to get feedback on how we’re doing. 

Employers purchase health care for their employees because it’s genuinely important. Employees value their health insurance, and the certainty of this insurance means that they can focus on their jobs.  Better health also leads to increased worker productivity.  I’d like to see us regularly interview executives from other companies in our community to assess their needs and how we’re meeting those needs.   When I talk to my colleagues I hear that they would like more primary care access to prevent avoidable emergency department visits and better musculoskeletal care to help patients with back injuries return to work more quickly. I’m sure we’ll learn a lot from talking to other employers, and we’ll help improve our own processes here.

None of what I’m suggesting here is easy, and much of it will be very disruptive. I’ve already talked to the CEO about this, and she’s supportive, but aware that she’ll face opposition from some clinicians and others within the organization.  To succeed, we will need this transformation to be the focus of this Board over the coming months and years.   

I think as a Board we’ll be up to this challenge, and I’m glad to have to opportunity to join you.

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