Like consumers, employers are always shopping for a better deal. Nowhere is that more apparent than in shopping for health plans. Some employers change health plans regularly in search of ways to insulate themselves against the ever-spiraling costs of healthcare.
Ironically, that may be a big reason why health insurance premiums stay so stubbornly high, according to an award-winning paper by three researchers at The Center for Health Care Research and Policy, a joint program by MetroHealth and Case Western Reserve School of Medicine.
While executives at small companies might believe their escalating insurance costs are attributable to pre-existing conditions and bad lifestyle choices by their employees, the research shows that is only part of the problem.
An equally big cause of rising prices is the fact that insurance companies offer such a wide array of benefits, conditions, and stipulations in their small group health plans, that employers perceive that there is always a better deal available elsewhere. This contributes to a high churn rate for those companies that provide employee health insurance. Further, the high churn precludes investment in care management and disease management programs that require a long-term investment to pay off.
"We were interested in the fact that the turnover rates for policyholders were very high," says Mark Votruba, a Case Western Reserve School of Medicine associate professor of economics and medicine, and one of the paper's authors. "What kinds of disincentives does that create in financing care to improve health down the road?"
Quite a lot, it turns out, but there's no big surprise there.
Questions about disincentives to financing long-term health improvement led the authors to consider the source of the constant turnover, and that's where the research got interesting, according to Randall Cebul MD, director of the Center.
And it is probably the reason the paper won a prestigious Arrow Award from the International Health Economics Association for the best paper in health economics in 2011. Essentially, employers can't effectively shop for plans because the choices are so mind-bogglingly complex.
"There's so little transparency that I'm not sure that without a clear expectation of transparency and clear benchmarked parameters that employers can make an informed choice, to say nothing of the individual insurance market," Cebul says.
That's at least partially by design, they contend.
While about half of health plan turnover comes from employees changing jobs, about 40% of turnover comes from employers changing plans, says Votruba.
If the insurance market worked like it's supposed to in the textbooks, insurers would have to sell the same products at roughly the same prices as one another. Votruba contends that there is a lot of unexplained variation in premiums for plans that look to be similar, and that even if you control for everything about the plan and group being covered, you can't predict the premium.
In economist jargon, the shopping problem is called search friction, meaning there is a general impediment to consumers' ability to evaluate all the options in the market. Generally, and smaller hospitals and physician practices should recognize this in negotiations to cover their own employees, they see a random sample of the insurance offers available in the market.
But they don't know whether they got the best possible plan because they didn't see all the options and that leads to more turnover. In a future year, they might find a better option that gets them to leave their current plan.
"The really important thing is that when the sellers (insurers) know that employers can't see everything, they don't have to compete as hard on quality and price," Votruba says. "Instead of everyone charging the same premium for the same type of plan, insurers will choose a variety of different strategies. Some might choose high-volume, low-premium offer.
The other strategy is the high-margin strategy where you set prices high, and you know you'll lose business from the more well-informed, but you will pick up enough of the less informed. Your volumes will be lower, but you're receiving higher margins."
In some other countries, the authors argue, the government takes a role in the private insurance market to alleviate the shopping problem, "because they have prescriptions on what the basic plan must look like," says Cebul. "The downside is that if you think there are benefits to letting lots of plans proliferate, you're limiting innovation of new health coverage products."
They permit the sales of auxiliary plans, mostly bought by individuals, but the group plans are prescribed. The authors predict that state health insurance exchanges may begin to alleviate the problem.
"If exchanges work well, the difference in premiums should start to go down, so then it becomes a little less attractive to send workers to individual market," says Votruba.
If they don't work well, employers will begin to offload their insurance responsibilities to the exchanges, paying the penalty and forcing their employees to obtain their own insurance in the individual market, and right now, individuals get very bad value in the market," says Cebul. "Anything that fosters churn has got to be an impediment to long-term investments in health."
Philip Betbeze is the senior leadership editor at HealthLeaders.