Health Insurance: Management Strategies Used by Large Employers to
Control Costs (Chapter Report, 05/06/97, GAO/HEHS-97-71).

Pursuant to a congressional request, GAO reviewed the strategies of
large, innovative purchasers who have attempted to stem the rapid
escalation in health insurance costs while maintaining or enhancing the
quality of care for their employees.

GAO noted that: (1) several dominant themes emerged from GAO's
examination of 25 large purchasers' health benefit purchasing
strategies: (a) emphasis on the delivery of services by
better-integrated managed care plans; (b) focus on measuring and
improving the quality of the services provided; (c) transition to the
sharing of costs, responsibility, and information with employees; and
(d) greater reliance on competitive market principles; (2) large
purchasers use their size and reputations to fashion health care
purchasing strategies responsive to their own needs; (3) flexibility
with regard to timing permits some large purchasers to choose between a
radical, but quick transformation or the adoption of a more gradual
transition; (4) strategies are also fashioned to respond to constraints
such as unions or contract rules and strengths like a younger, healthier
workforce or market presence; (5) large purchasers do not hesitate to
use their market power to make demands of potential health insurers or
to influence provider behavior; (6) among the requirements that a large
purchaser can establish are that health plans justify and substantiate
premiums, submit performance and quality data, and offer broad provider
networks; (7) the specific tools used by large purchasers in
implementing their strategies vary considerably, but fall within three
broad categories: (a) health plan evaluation criteria, including
techniques to assess premiums and foster competition among plans; (b)
incentives to sway employee behavior; and (c) overt marketing strategies
to influence employees' choice of delivery systems and of specific
plans; (8) many large purchasers GAO interviewed recognize the
shortcomings of the cost, quality, and access criteria that have been
developed so far; (9) despite their shortcomings, these criteria are of
growing importance; (10) most purchasers are convinced that providing an
incentive for employees to be cost-conscious in their selection of plans
and use of health care is a key component of an effective purchasing
strategy; (11) they also recognize that lower copayments and deductibles
coupled with a richer set of benefits are probably insufficient
incentives in terms of achieving significant increases in the number of
employees who choose a managed care option; (12) for the purchasers in
GAO's sample, however, introducing effective and reasonable financial i*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-97-71
     TITLE:  Health Insurance: Management Strategies Used by Large 
             Employers to Control Costs
      DATE:  05/06/97
   SUBJECT:  Employee medical benefits
             Health insurance cost control
             Employee benefit plans
             Managed health care
             Competition
             Insurance premiums
             Evaluation criteria
             Health maintenance organizations
             Negotiated procurement
IDENTIFIER:  California
             Wisconsin
             Missouri
             Minnesota
             Oklahoma City (OK)
             NCQA Health Plan Employer Data and Information Set
             Washington
             Arizona Medicaid Program
             CalPERS
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Labor and Human Resources, U.S. 
Senate

May 1997

HEALTH INSURANCE - MANAGEMENT
STRATEGIES USED BY LARGE EMPLOYERS
TO CONTROL COSTS

GAO/HEHS-97-71

Health Insurance Purchasing Strategies

(101398)


Abbreviations
=============================================================== ABBREV

  BHCAG - Buyers' Health Care Action Group
  CalPERS - California Public Employees' Retirement System
  HEDIS - Health Plan Employer Data and Information Set
  HIPC - Health Insurance Plan of California
  HMO - health maintenance organization
  IPA - independent practice association
  NCQA - National Committee for Quality Assurance
  OSC - organized system of care
  PBGH - Pacific Business Group on Health
  PCP - primary care physician
  POS - point-of-service
  PPO - preferred provider organization
  RFP - request for proposal

Letter
=============================================================== LETTER


B-271083

May 6, 1997

The Honorable James M.  Jeffords
Chairman, Committee on Labor and
 Human Resources
United States Senate

Dear Mr.  Chairman: 

At your request, this report examines the strategies of large,
innovative purchasers who have attempted to stem the rapid escalation
in health insurance costs while maintaining or enhancing the quality
of care for their employees.  A better understanding of the
strategies and tools adopted by such purchasers should assist the
Congress in reforming public health insurance programs and in
identifying potential areas for coordinated approaches by government
and private sector purchasers. 

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date.  At that time, we will make copies available to
interested parties on request. 

If you or your staff have any questions, please call me at (202)
512-7114.  Major contributors to this report are listed in appendix
V. 

Sincerely yours,

William J.  Scanlon
Director, Health Financing and
 Systems Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

After several years of double-digit increases in the cost of employee
health insurance, the nation's larger firms, employer coalitions, and
even state governments entered the 1990s with an aggressive approach
to rein in employee health insurance costs.  The recent downturn in
health insurance premium growth--in which some large employers
actually experienced premium declines--is attributable, at least in
part, to some of these efforts.  Spending pressures in public
programs like Medicare and Medicaid also slowed, though not as
markedly as for most private purchasers. 

A better understanding of the strategies and tools adopted by large,
innovative purchasers should assist the Congress in reforming public
health insurance programs and in identifying potential areas for
coordinated approaches by government and the private sector.  For
this reason, the Chairman of the Senate Committee on Labor and Human
Resources asked GAO to examine the strategies of large purchasers
that have attempted to (1) stem the rapid escalation in health
insurance costs and, at the same time, (2) maintain or enhance the
quality of care for their employees.  The sample included 25 private
firms, purchasing coalitions, and state governments.  (App.  I
contains details about the sample.)


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Employers have an important stake in the cost, structure, and quality
of their employee health benefit programs.  Private business
expenditures for health services--dominated by health insurance
premiums for workers--now account for more than 5 percent of total
employee compensation compared with about 2 percent in 1970. 
Clearly, the incentive for constraining the growth in health care
costs has intensified over the past few decades.  Moreover, employers
recognize the pivotal role that health benefits play in attracting
and retaining employees and in maintaining productivity.  More
recently, this mixture of cost and workforce concerns led employers
to advocate health care delivery systems with better-integrated care
and to play a more active role in managing their health benefit
programs. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Several dominant themes emerged from GAO's examination of the health
benefit purchasing strategies of 25 large purchasers:  (1) an
emphasis on the delivery of services by better-integrated managed
care plans; (2) a focus on measuring and improving the quality of the
services provided; (3) a transition to the sharing of costs,
responsibility, and information with employees; and (4) a greater
reliance on competitive market principles.  Large purchasers use
their size and/or reputations--which gives them flexibility--to
fashion health care purchasing strategies responsive to their own
needs.  Some choose to adopt strategies that respond to specific
differences in the structure of health plans or employee
characteristics at their various locations across the country. 
Others choose a more uniform approach at all or most of their key
locations.  Flexibility with regard to timing permits some large
purchasers to choose between a radical but quick transformation or
the adoption of a more gradual transition.  Strategies are also
fashioned to respond to constraints such as unions or contract rules
and strengths like a younger, healthier workforce or market presence
in terms of a large number of employees at a particular location. 

The size of a workforce in a specific market can translate into
market leverage.  Large purchasers do not hesitate to use their
market power to make demands of potential health insurers or to
influence provider behavior.  Among the requirements that a large
purchaser can establish are that health plans justify and
substantiate premiums, submit performance and quality data, and offer
broad provider networks.  While market leverage is not necessarily
viewed as the most important or only dimension of a health care
purchasing strategy by large purchasers, they recognize that their
size makes a broader range of specific tools available in formulating
their overall strategy. 

The specific tools used by large purchasers in implementing their
strategies vary considerably but fall within three broad categories: 
(1) health plan evaluation criteria, including techniques to assess
premiums and foster competition among plans; (2) incentives to sway
employee behavior; and (3) overt marketing strategies to influence
employees' choice of delivery systems and of specific plans.  By no
means is there unanimity on the use of evaluation criteria.  Many
large purchasers GAO interviewed recognize the shortcomings of the
cost, quality, and access criteria that have been developed so far. 
Despite their shortcomings, these criteria are of growing importance: 
first, they provide purchasers with data that can be used to persuade
often skeptical employees about the quality of the health plans
offered; second, the criteria require competing health plans to
demonstrate to equally skeptical purchasers that managed care is
indeed a cost-effective choice. 

Most purchasers are convinced that providing an incentive for
employees to be cost-conscious in their selection of plans and use of
health care is a key component of an effective purchasing strategy. 
They also recognize that lower copayments and deductibles coupled
with a richer set of benefits are probably insufficient incentives in
terms of achieving significant increases in the number of employees
who choose a managed care option.  Directly tying the employee's
share of the premium to the cost of a health plan can become a much
more powerful incentive for employee choice and insurer behavior when
the differences are large enough to affect market share.  For the
purchasers in GAO's sample, however, introducing effective and
reasonable financial incentives was perhaps the most difficult aspect
of implementing a proactive purchasing strategy.  Factors that
limited purchasers' flexibility in this regard included unions or the
corporate culture's perspective on employee cost-sharing. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      PURCHASER FLEXIBILITY IS KEY
      TO EVOLUTION OF EFFECTIVE
      HEALTH CARE PURCHASING
      STRATEGIES
-------------------------------------------------------- Chapter 0:4.1

Large employers have made dramatic changes in the way they purchase
health insurance.  These changes, as well as the variations in the
approaches taken, are a testament to the flexibility of the private
sector--a characteristic that state governments appear to share. 
Some large employers have ceased to offer a fee-for-service indemnity
product or have significantly increased the share of premium for
employees who insist on greater freedom in choosing their own doctor,
the hallmark of such a health plan.  Others have substituted
point-of-service (POS) plans that resemble a health maintenance
organization (HMO), but also allow access to other providers outside
of the HMO network.  POS plans are seen by some purchasers as a way
to transition employees from the substantially free choice of
indemnity coverage to the more restrictive world of HMOs.  Most
employers have become selective about the HMOs they offer and are
focusing greater attention on persuading employees that such health
plans are a smart choice.  Often employers' decisions about the type
and mix of options are influenced by the differences in the markets
where they purchase coverage or in the characteristics of their
workforces.  An employer's freedom to change the number and mix of
health plans, however, is not without constraint.  For example,
unions and corporate culture can undermine the consistency among the
elements of a firm's purchasing strategy. 


      MARKET LEVERAGE IS A USEFUL,
      THOUGH NOT ESSENTIAL,
      COMPONENT OF MARKET
      STRATEGIES
-------------------------------------------------------- Chapter 0:4.2

Size can translate into influence and leverage in the marketplace. 
However, the market power of large private sector employers is often
exaggerated.  While a purchaser may be able to exert leverage over
health plans in a few local markets because of a relative
concentration of workers, the number of employees and covered lives
often masks the geographic fragmentation of the workforce.  For
example, one firm GAO interviewed has approximately 250,000 employees
eligible for benefits who are distributed across 19,000 zip codes. 
The largest number of employees in any one location is only about
5,000.  Such fragmentation was sometimes accentuated by allowing
different divisions of a corporation to purchase HMO coverage
separately.  To enhance their leverage, some firms have formed
purchasing coalitions, reduced the number of plans offered,
consolidated HMO purchasing at a central office, and relied on their
national reputations to attract health plans.  In markets with little
managed care penetration and a relatively small number of employees,
some firms choose not to devote resources to developing an effective
purchasing strategy.  The number of employees simply does not justify
the effort and cost involved.  States as purchasers of health care,
on the other hand, have substantial buying power.  For several years,
the California Public Employees' Retirement System has used the
market power of the state and local governments' almost 1 million
covered lives to demand HMO rate reductions. 


      PURCHASING CRITERIA USED TO
      JUSTIFY AND LIMIT NUMBER OF
      HMO OPTIONS
-------------------------------------------------------- Chapter 0:4.3

In the past, many large employers offered a choice between a standard
company indemnity product and a variety of HMOs.  Some firms told GAO
that HMOs were selected without any specific criteria or coordination
on a company-wide basis.  Nor were HMOs held accountable for actually
managing care, the presumptive benefit of such a delivery system. 
Moreover, since employers were not advocating HMOs, choice and
quality were not major issues with their employees in selecting
participating plans.  Today, many large firms have established
criteria to help them decide with which HMOs to contract.  Generally,
the effect of these criteria is to limit the number of HMOs offered. 
For example, some firms require that an HMO seek accreditation from
the National Committee for Quality Assurance and be able to report
data on customer satisfaction and service delivery.  However,
employers suggested that measures of quality are imperfect at best
and require some subjective judgment.  Most have pointed out the need
to develop a consistent set of outcome-oriented measures. 

For many firms, a key criterion in selecting HMOs is cost.  While the
debate continues over the degree to which large employers'
contracting decisions are or should be influenced by cost, there is
general agreement that enhancing competition is key in a health care
system that looks increasingly to managed care to help moderate
premium growth.  In the past, rather than obtaining HMO premiums
through marketplace competition, large firms were frequently price
takers--that is, they often paid the "sticker price" rather than
shopping for a lower or the best price.  HMOs practiced shadow
pricing, that is, they simply tracked the costs of alternative plans
and set the rates slightly lower to retain a competitive edge. 
Though often less expensive than indemnity coverage, HMOs had little
incentive to keep prices down. 

Today, most firms use a variety of techniques to obtain the best
price possible from HMOs.  Plans are asked to submit sealed premium
bids with the understanding that not all bids will be accepted and
that justification of and negotiation over increases is to be
expected.  Health plan bids are carefully scrutinized and analyzed,
sometimes with the assistance of outside consultants.  Employers
recognize, however, that it is difficult to determine the true cost
incurred by managed care plans because of inadequacies in the data
currently available from such plans.  During negotiations, plans are
often informed of their standing relative to competing plans and of
the impact of a proposed premium increase on the employee
contribution.  While purchasers stress that giving employees an
incentive to be cost-conscious in selecting a health plan fosters a
competitive framework, they do not believe that the resulting
competition reduces the importance of or eliminates the need to
negotiate. 

Access objectives, a final criterion used by many purchasers to
select HMOs, may actually work at cross-purposes with the goal of
selecting the most cost-efficient or highest-quality plans. 
Employers recognize that very broad networks affording the greatest
choice of physicians are generally not the most efficient and may
lack the management features that are the purported hallmark of a
managed care delivery system.  Because of the limited availability of
managed care in some markets, particularly rural areas where a
managed care option may not even exist, some employers continue to
offer indemnity-type products. 


      FINANCIAL INCENTIVES AND
      INFORMATION USED TO ADVOCATE
      HMO ENROLLMENT
-------------------------------------------------------- Chapter 0:4.4

Purchasers also phased in or incorporated financial incentives to
encourage employees to transition from high- to lower-cost products. 
Relatively few of the purchasers in GAO's sample have tied their
contribution to a low-cost HMO, requiring the employee to pay the
difference for a higher-cost alternative.  Most employers fall
somewhere in between the adoption of a low-cost formula and one that
provides no incentive to be cost-conscious.  Whatever the formula,
however, purchasers generally now ask employees to contribute more to
the cost of coverage, particularly for those who choose an indemnity
option.  On the other hand, a few firms use incentives to encourage
employees to enroll in the indemnity plan if demographics suggested a
lower use of health care services.  Such firms contend that HMOs can
be more expensive for healthy workers because under capitation,
services must be paid for even if they are never used. 

Because union agreements or corporate culture may impede the use of
such financial incentives and because of what purchasers referred to
as a constant stream of negative publicity ranging from gag rules to
maternity stays, information on the advantages of managed care has
assumed even more importance in influencing employee health benefit
decisions.  Firms have become advocates for managed care by stressing
the differences between indemnity and managed care products--no claim
forms, better preventive care services, increased continuity and
coordination of care, and lower out-of-pocket costs.  Before
implementing its current managed care strategy, one firm only
provided the names and phone numbers of available HMOs.  Now this
firm provides considerable information to employees on HMOs and, in
fact, emphasizes HMOs in its open enrollment literature.  During open
enrollment, some purchasers now routinely provide comparative
information on the managed care plans they offer, including (1) basic
information on the network such as size, participating hospitals, and
percentage of physicians accepting new patients; (2) the results of
customer satisfaction surveys; and (3) data on the delivery of
preventive services such as immunization or mammography screening
rates.  As reflected by the prominence of such data in the
information provided to employees, access is the single most
important issue for employees. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is making no recommendations in this report. 


   COMMENTS FROM PURCHASERS
---------------------------------------------------------- Chapter 0:6

The purchasers in our sample commented on a draft of this report. 
They generally agreed with our presentation of the information and
our observations.  They also provided technical suggestions, which we
incorporated where appropriate. 


INTRODUCTION
============================================================ Chapter 1

Large private sector purchasers we interviewed suggest that the
double-digit increases in the cost of health insurance common just a
few years ago have been controlled considerably in the last 2
years--a development they attribute, at least in part, to their more
active management of employee health benefit costs.  Virtually every
study of health care cost trends since 1990 corroborates the dramatic
slowdown in health care inflation.  For example, surveys of private
employers reported 1995 increases of 2.1 percent and 1996 increases
ranging from 2.5 percent to only .5 percent.\1 According to a Peat
Marwick survey, health maintenance organization (HMO) premiums
experienced the least fluctuation, growing by only four-tenths of a
percent in 1995 and followed by a decrease of the same magnitude the
next year.  It was the second straight year, the survey reported,
that the rate of increase in premiums was less than the growth in
three key indicators:  (1) overall inflation, (2) inflation in the
heath care sector, and (3) growth in workers' earnings.\2 Moreover,
some large purchasers have reported HMO premium decreases for several
years.  While Medicare and Medicaid have also experienced a slowing
of cost growth, these public programs have not been as successful as
the private sector in subduing program cost growth.  What remains
uncertain is whether this tempering of the rate of health care
inflation is a short-lived aberration or is due, at least in part, to
tangible changes in the way private and some state purchasers shop
for and offer health benefits to employees. 

In order to understand how changes in health benefit purchasing
strategies have contributed to cost control, we examined the
experience of a group of 25 large health insurance
purchasers--private firms, purchasing coalitions, and state
governments.  Many of these entities have opted for an approach to
purchasing that demands more analysis on the part of the buyer.  They
have developed and applied criteria in a competitive environment to
assist them in the selection of health plans.  Finally, they have
restructured their benefit programs to encourage employees to choose
less expensive or more efficient health care options. 


--------------------
\1 Foster Higgins and KPMG Peat Marwick conduct annual surveys of
employer-sponsored health benefits.  The former includes both large
and small employers from the private and public sectors (more than 10
employees), while the latter focuses on firms with 200 or more
workers. 

\2 Inflation is measured by the Consumer Price Index. 


   WHAT IS AN "ACTIVE" PURCHASING
   STRATEGY? 
---------------------------------------------------------- Chapter 1:1

The approach adopted by some large employers can be characterized as
an "active" purchasing strategy.  It is a systematic way of
identifying and offering a mix of health care options that meet a
purchaser's expectations in terms of access, quality, and price. 
Large purchasers use different terms to describe what is essentially
a similar approach.  For some, the concept of a "purchasing strategy"
is synonymous with "managed care"--a delivery system that some
believe has the potential to be more efficient than traditional,
noncoordinated indemnity coverage.  Others describe their strategies
as "managed competition,"\3 a blending of the competitive and
regulatory approaches that have coexisted for many years in the U.S. 
health care system.  Traditional economic theory suggests that market
forces are capable of promoting efficiency and responsiveness.  To
advocates of this strategy, however, managed competition connotes a
needed rationalization of the health care marketplace intended to
encourage cost-consciousness on the part of both health plans and
employees.  Finally, some describe their purchasing strategy as
"competitive" or "market-oriented," that is, harnessing choice among
plans vying for market share to promote greater efficiency in the
delivery of health care.  Whatever the terminology, these purchasing
strategies have one point in common--active intervention on the part
of buyers to encourage the development and acceptance of more
cost-effective health care delivery systems.  Two natural attributes
of the large purchasers in our sample assisted their transition to
active purchasing:  (1) the flexibility to adapt their benefit
programs to individual markets and other circumstances and (2) the
ability to harness the market leverage conveyed by their size. 


--------------------
\3 The economist Alain Enthoven proposed "managed competition" as a
way of addressing recognized flaws in the health insurance market, a
market in which purchasers lack the data necessary to make informed
decisions and in which health plans have an incentive to avoid
enrolling sicker and more costly individuals.  His concept advocates
the establishment of sponsors, sometimes referred to as health
insurance cooperatives or purchasing coalitions, to act as buying
agents for participating firms and individuals in each market area. 
Just as most large employers do today, the cooperative would enforce
the participation rules for both enrollees and health plans.  The
rules would include guaranteed access, risk-adjustment of premiums,
community rating, and standardized benefits/coinsurance.  Enrollees
would be offered a variety of health plans that compete not only on
price but also in terms of quality.  Thus, the cooperative would be
responsible for distributing standardized quality and outcomes data
on participating plans.  Enrollees could choose any plan during an
annual open season, but to encourage price sensitivity, an employer's
contribution toward premiums would be limited to the cost of the
lowest-price health plan.  Enthoven and others have refined and
rearticulated the concept since it was first introduced in the late
1980s.  Without embracing Enthoven's entire construct, some large
purchasers have adopted important elements of his managed competition
theory. 


   ACTIVE PURCHASING SHAPED BY
   EMPLOYEE PERSPECTIVE
---------------------------------------------------------- Chapter 1:2

An integral component of an active purchasing strategy is
responsiveness to employee concerns about managed care.  Benefit
managers we interviewed believe that this delivery system offers the
best value for the benefit dollar.  They also recognize that workers
are generally skeptical about managed care and about the motivation
for adopting a benefit management strategy that professes the
compatibility between efficiency, as reflected in lower premiums, and
quality.  Employees, we were told, are usually aware of the cost
issues underlying employer decisions about health benefits. 
Moreover, purchasers cited the constant barrage of negative publicity
as a reinforcer of employee anxiety about managed care--publicity
that one benefit manager described as focusing on single anecdotes to
characterize the total picture.  The negative publicity often
suggests that managed care

  -- promotes efficiency by denying needed services and

  -- impinges on the doctor-patient relationship. 

Table 1.1 characterizes the different viewpoints that sample
employers and their employees bring to the issue of managed care. 



                         Table 1.1
          
             Employer-Employee Perspectives on
                        Managed Care

          Employer perspective     Employee perspective
--------  -----------------------  -----------------------
Choice    Choice means choice of   Choice means "I can
          a plan or a delivery     continue to see my
          system.                  current doctor."

Quality   A delivery system that   Quality resides in
          actually manages care    ability of employee to
          is more likely to        shop freely for the
          result in an efficient   "best" provider;
          and high-quality         restrictions inherent
          product.                 in managed care are a
                                   threat to quality.

Price     Most cost-effective      Managed care sometimes
          delivery system may be   saves money by
          one that limits choice;  rationing services;
          low cost may reflect     employees are skeptical
          greater efficiency       that lower cost equates
          rather than poor         to higher quality.
          quality.
----------------------------------------------------------
These differing perspectives have helped shape the benefit management
strategies adopted by the employers in our sample.  Though they
remain convinced that managed care has the potential to deliver
higher quality at a lower price, purchasers understand the employee
retention value of competitive health benefits.  They recognize the
need to implement changes in ways that maintain good employee
relations, protect their ability to recruit workers, and enhance
productivity.  The attempt by purchasers to respond to concerns about
limited choice and poor quality are evident in (1) the articulation
of criteria designed to help evaluate health plans, (2) the mix of
plans actually offered to employees, and (3) the marketing strategies
used to address negative employee perceptions about managed care. 


   MANAGED CARE COMES IN MANY
   VARIETIES
---------------------------------------------------------- Chapter 1:3

Because of the different types of managed care plans available to
employers, managed care is perhaps most clearly defined by its
opposite, traditional indemnity coverage.  In contrast with managed
care, traditional indemnity coverage allows a free choice of
providers and reimburses physicians and hospitals with limited or no
review of the appropriateness of the services rendered.\4 On the
basis of a 1996 survey of health benefits offered by firms with 200
or more workers, only 3 percent of employees are enrolled in such a
traditional indemnity program.  Another 23 percent are in managed
indemnity plans that require precertification for inpatient services
and other forms of utilization controls.  And the remaining
three-quarters are enrolled in a variety of managed care plans,
including (1) several different types of HMOs, (2) preferred provider
organizations (PPO), and (3) point-of-service (POS) plans.\5

The rise in managed care enrollment has been swift.  Figure 1.1 shows
that since the late 1980s, managed care enrollment has nearly
tripled.\6

   Figure 1.1:  Change in
   Employer-Sponsored Managed Care
   Enrollment From 1987 to 1996

   (See figure in printed
   edition.)

Despite the variety of managed care plans, most include one or more
of the following common cost-control features:  (1) physician and
hospital networks with explicit criteria for inclusion, (2)
alternative payment methods and rates that often shift some financial
risk to providers, and (3) utilization controls over hospital and
specialist physician services.\7 A managed care plan's potential for
savings depends on the stringency of its cost-control features.  In
general, HMOs tend to use more stringent controls than PPO or POS
plans (see fig.  1.2).  However, there is variation within the
different types of managed care plans, and as a result, some HMOs
have weaker controls than PPO or POS plans. 

   Figure 1.2:  Spectrum of Health
   Care Plans

   (See figure in printed
   edition.)

  -- HMO:  There are several types of HMOs.  Staff- and group-model
     HMOs are the most tightly controlled managed care plans.  The
     former hires physicians directly, while the latter contracts
     with one or more large physician group practices.  Most
     physicians serve HMO enrollees exclusively, often practicing in
     clinics owned by the plan.  Physicians are either paid a salary
     or a fixed amount per enrollee, a practice referred to as
     capitation, for providing comprehensive health services.  A
     patient's care, especially referrals to specialists and
     hospitalization, is typically coordinated by a primary care
     physician.  A third type of HMO, the independent practice
     association (IPA), consists of networks of individual physicians
     that also serve non-network patients covered by other insurance. 
     Typically, IPAs contract with a large number of physicians, and
     their enrollees represent only a small portion of each
     physician's practice.  As a result, IPAs generally have less
     leverage over physicians' use of services than do staff or group
     model HMOs.  About as many IPA model HMOs reimburse their
     primary care physicians under a fee-for-service payment schedule
     as use capitation.  By 1996, about 33 percent of insured
     employees were enrolled in HMOs.\8

  -- PPO:  To compete with and provide an alternative to HMOs,
     insurers and employers began offering PPOs during the early
     1980s.  PPOs retain many elements of indemnity coverage but
     provide enrollees a financial incentive--lower cost-sharing
     (copayments)--to receive care from a network of providers that
     are normally reimbursed at a discounted fee-for-service rate. 
     PPOs vary in the size of their networks and in whether they
     employ a gatekeeper--a physician who controls referrals to
     specialists.  By 1996, about 26 percent of insured employees
     were enrolled in PPOs.\9

  -- POS:  POS plans are a hybrid combining features commonly
     associated with HMOs, PPOs, and, in some instances, indemnity
     coverage.  As denoted by the term, the condition under which
     medical services are provided is determined by the enrollee each
     time care is sought.  The HMO option often includes a
     gatekeeper.  The PPO option has higher cost-sharing but a larger
     network of providers.  Some POS plans even have a third
     option--free choice of providers with the employee responsible
     for paying an even larger share of the cost.  By 1996, about 16
     percent of insured employees were enrolled in POS plans.\10

Although the United States has had network-based managed care plans
since the 1940s,\11 much of the growth and development of such plans
has occurred more recently.  During the 1980s, sharply rising health
care costs encouraged rapid HMO enrollment growth and the emergence
of new types of managed care plans, including PPOs and POS plans. 
The most rapid growth in managed care enrollment has been in
IPA-model HMOs, PPOs, and POS plans.  Enrollment in staff- and
group-model HMOs, the managed care plans that most experts consider
to have the greatest potential to control cost growth, has been
relatively flat since the late 1980s. 


--------------------
\4 Another characteristic of traditional indemnity coverage is its
use of the fee-for-service payment mechanism to reimburse providers. 
Fee-for-service is also used in PPOs and to some extent in POS and
HMO plans.  For example, an HMO may pay fee-for-service for some
highly specialized procedures. 

\5 KPMG Peat Marwick, Health Benefits in 1996 (Vienna, Va.:  Oct. 
1996). 

\6 1987 employer survey conducted by the Health Insurance Association
of America. 

\7 For a description of the evolution and use of the term managed
care, see Managed Health Care:  Effect on Employers' Costs Difficult
to Measure (GAO/HRD-94-3, Oct.  19, 1993).  The traditional
distinctions among managed care plans are becoming outmoded as plans
rapidly evolve in response to marketplace demands.  For example,
Kaiser, a group-model HMO, now offers a POS product in certain
markets and sometimes contracts with non-Kaiser hospitals.  Moreover,
the broadening of HMO provider networks in some markets is
contributing to a blurring of the difference between some HMOs and
PPOs. 

\8 KPMG Peat Marwick, p.  23. 

\9 KPMG Peat Marwick, p.  23. 

\10 KPMG Peat Marwick, p.  23. 

\11 Kaiser-Permanente, a group-model HMO, began in California,
Washington, and Oregon in 1942. 


   TRANSITION FROM PAYERS TO
   PURCHASERS
---------------------------------------------------------- Chapter 1:4

In the past, large purchasers offered only indemnity coverage--the
pinnacle in terms of enrollee freedom of choice--and, at the time,
the solitary option for firms choosing to provide health insurance as
an employee benefit.  Several factors contributed to the decision by
purchasers to add a managed care option if an HMO was available. 
First, federal legislation enacted in 1973 required employers who
provided health benefits, paid the minimum wage, and had 25 or more
workers to offer a federally qualified HMO if one was available in
the employer's geographic area.\12 Second, employers in some markets
found that HMO costs were somewhat lower than the costs of their
traditional indemnity plans.  Third, in some markets with higher
managed care penetration, workers asked for HMO options.  As noted
earlier, other types of managed care plans were subsequently
developed with employer encouragement as alternatives to HMOs. 

By the 1980s, some firms offered a dozen or more HMOs, especially in
markets like California's.  They believed that offering a large
number would contribute to price competition that would in turn
stimulate greater efficiency.  Purchasers assumed that a broad choice
of HMOs would also serve as an inducement for employees to enroll.\13
Purchasers in our sample acknowledged, however, that they lacked a
systematic approach to or criteria for evaluating and selecting HMOs. 
Some firms did not even coordinate their purchasing, resulting in a
lack of consistency across the company.  Moreover, since firms were
not advocating HMOs, choice and quality were not major issues with
their employees in selecting participating plans.  Managed care was
simply seen as an additional option that saved some money and
expanded employees' choice.  The only selection criteria noted during
our interviews were price and expressions of employee interest in
joining a specific HMO. 

Between 1970 and 1990, employer expenditures on health benefits
climbed from 2 to 5.2 percent of total compensation and was still
growing.  Moreover, by the late 1980s, employers were experiencing
double-digit growth in indemnity premiums.  While HMOs in developed
markets were somewhat less expensive than indemnity coverage, their
premium increases mirrored indemnity cost growth.  Because of shadow
pricing--the practice of pegging premiums to just below the cost of
alternative plans--switching to an HMO might result in initial,
one-time savings followed by rapidly growing health care costs in
future years, although the premiums would be somewhat lower than
those for indemnity coverage.  The combination of spiraling indemnity
costs coupled with HMO shadow pricing contributed to the widespread
belief that a different approach to selecting and offering HMOs was
needed.  The advent of this active purchasing strategy coincided with
a period of increased competition among HMOs for market share. 


--------------------
\12 The HMO Act of 1973, P.L.  93-222.  To be federally qualified, an
HMO was required to provide comprehensive benefits, community-rated
premiums, and an annual open enrollment period.  Subsequently, these
requirements were amended to provide federally qualified HMOs with
additional rating flexibility.  The HMO requirement was designed to
promote the growth of such plans as a way of improving the capacity
and efficiency of the health care system.  This law was repealed
effective October 24, 1995 (see P.L.  100-517, sec.  7(b)). 

\13 James C.  Robinson, "Health Care Purchasing and Market Changes in
California," Health Affairs, Vol.  14, No.  4 (1995), pp.  119-20. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:5

To better understand how large, innovative purchasers have redesigned
their health benefit strategies to foster cost control, the Chairman,
Senate Committee on Labor and Human Resources, asked us to examine
(1) the design features of purchasing strategies that encourage price
competition among health plans, (2) the influence of different health
care markets on those strategies, (3) the efforts by purchasers to
ensure that quality is not sacrificed in order to achieve
cost-containment, and (4) the incentives used to encourage enrollment
in less expensive or more efficient health care options.  We focused
on large purchasers because they are credited with helping to slow
down the rate of health care inflation and with increasing health
plan accountability.  Moreover, their experience is frequently cited
as an alternative for reforming publicly funded health benefit
programs such as Medicare or Medicaid.  We believe that a clear and
objective understanding of the cost-control strategies of large
purchasers will be useful to policymakers in assessing reform
proposals. 

The Washington Business Group on Health helped us identify large,
innovative purchasers of health care from different sectors of
industry.  The firms selected (1) operate in a number of different
states and (2) offer workers a choice of different types of health
plans.  In addition to firms recommended by the Washington Business
Group, we identified others through a literature review and made
selections with the goal of obtaining adequate geographic
representation.  Predicated on earlier work, we also included a
number of recognized private sector purchasing coalitions in our
sample; these coalitions, with the pooled resources of member firms,
have significant purchasing power in some major markets.\14 Finally,
we selected several innovative public purchasers--government agencies
that are responsible for managing the health benefits of state
employees; county, municipal, and other public employees; and
sometimes other groups.  State purchasers often surpass the private
sector in terms of purchasing leverage and are second only to the
federal government in their ability to influence the evolution of
health care delivery in the United States.  Our sample is judgmental
and was not intended to be representative of the health care
purchasing activities of large employers, coalitions, or state
governments.  However, we believe that the selection criteria enabled
us to capture the experience of a group of purchasers that has the
most direct relevance to policymakers seeking to reform Medicare or
other publicly funded health insurance programs. 

In total, we visited and collected data on the health benefit
management strategies of 15 firms, 4 coalitions, and 6 state
government agencies.\15

Appendix I identifies the purchasers we interviewed and their
approximate size in terms of employees eligible for health benefits
(in the case of firms) and covered lives (in the case of the
coalitions and state purchasers).  Using a standard interview
protocol, we met with the health benefit manager or other appropriate
staff for each purchaser to gain insights on the evolution of its
management strategy.  In addition, we examined pertinent material
relating to each purchaser's health benefit program, such as requests
for proposal, published performance standards, employee benefit
handbooks, annual open enrollment material, and report cards on HMO
performance provided to employees. 

We also provided a draft of this report to the purchasers in our
sample, who generally agreed with our presentation of the information
and our observations.  They provided us with technical suggestions,
which we incorporated where appropriate.  Our review was conducted
between January and December 1996 in accordance with generally
accepted government auditing standards. 


--------------------
\14 Access to Health Insurance:  Public and Private Employers'
Experience With Purchasing Cooperatives (GAO/HEHS-94-142, May 31,
1994). 

\15 One of the firms in our sample, Mervyn's, is a division of
another employer we interviewed, Dayton Hudson.  Although they were
not formally a part of our sample, we included pertinent information
on the Medicaid purchasing strategies of Arizona and Florida, two
state governments that have incorporated competitive market
principals into their programs. 


FLEXIBILITY AND LEVERAGE: 
ATTRIBUTES OF LARGE PRIVATE AND
PUBLIC PURCHASERS
============================================================ Chapter 2

Propelled by the dramatic rise in the cost of providing health
coverage, the large firms and state governments in our sample have
(1) revamped their benefit programs and (2) placed greater emphasis
on managed care in the mix of health plans they offer to employees. 
While their particular situations varied considerably, these
purchasers shared two natural attributes that played a key role in
their transformation from passive payers to active purchasers of
managed care products:  flexibility and leverage.  These attributes
have served as a foundation for launching benefit management
strategies aimed at increasing the accountability of managed care
plans for the cost and quality of the services they deliver. 

Benefit managers we spoke with stressed the value of flexibility in
developing and implementing an effective health benefit management
strategy.  The term flexibility conveys a mix of nimbleness,
latitude, and adaptability in that a purchaser is able to (1)
incrementally or suddenly change the mix and type of health plan
options, (2) create employee incentives within its benefit system,
and (3) implement a strategy either uniformly or differently in the
various markets in which it operates.  In our sample, the private
sector demonstrated the broadest flexibility.  That flexibility,
however, is not without bounds.  On the other hand, the state
purchasers we interviewed appear to have more flexibility than that
normally associated with the public sector, a latitude some have used
to fashion innovative health benefit strategies. 

Leverage is a concept that may be more easily described than
flexibility, but in our sample, it was less clearly demonstrated. 
Also called "market power," it relates to a purchaser's ability by
virtue of size or reputation to exert anticompetitive pressure on
health plans to obtain a desired outcome.  Large purchasers can also
take advantage of the economies of scale conveyed by their size, a
factor that should translate into lower administrative costs for
operating their benefit programs.  While private firms demonstrated
the value of their size, it was not something they were able to
exercise on their own in many locations.  In contrast, state
governments in our sample seldom had to rely on purchasing coalitions
to establish or augment their already considerable market power. 


   FLEXIBILITY:  THE FOUNDATION OF
   AN ACTIVE PURCHASING STRATEGY
---------------------------------------------------------- Chapter 2:1

Purchasers we interviewed believe that flexibility is key to
revamping both the way they purchase managed care products and the
operation of their benefit programs.  The variation in the approaches
taken reflects the ability of large purchasers to make changes where
and when they believe it is appropriate.  Such flexibility, however,
did not always translate into wholesale, dramatic changes.  Instead,
flexibility allowed firms to make changes that were either
incremental or limited by geographic, organizational, and even
demographic boundaries.  While flexibility is generally assumed to be
an inherent private sector trait, the firms in our sample were not
always completely free to exercise it.  These firms were constrained
by a variety of factors, such as labor agreements; paternalistic
corporate cultures that limit the extent of employee cost-sharing; or
a disinclination to alienate employees skeptical about managed care,
especially those plans with a more limited choice of providers. 


      FLEXIBILITY PERMITS DRAMATIC
      CHANGE, BUT SOME PURCHASERS
      CHOOSE INCREMENTAL STRATEGY
-------------------------------------------------------- Chapter 2:1.1

Many purchasers in our sample have redesigned their health benefit
programs to encourage employee migration into managed care plans. 
Some employers made significant changes over relatively short time
frames, such as introducing new delivery systems or altering the
components within an existing system, such as incentive structures. 
In some cases, the purchaser believed rapid change was necessary
because of its own poor financial performance or that of its
self-funded indemnity plan; others made changes in response to what
they viewed as failures in the local health insurance marketplace. 
Some purchasers, however, chose to implement changes incrementally,
recognizing that they could not implement a managed care strategy
overnight. 

In 1989, Southern California Edison abandoned its fee-for-service
indemnity health plan and embarked on a well-publicized new strategy
involving considerable infrastructure investment.  Edison established
a PPO wholly owned and managed by the company.  Just 6 years later,
Edison discontinued the PPO plan and turned over the operation of its
network of clinics to a medical group.  The PPO was replaced with a
self-insured POS option and some HMOs.  Several state governments in
our sample also made rapid and dramatic changes in their health
benefit programs.  Both Wisconsin and Missouri adopted a managed
competition system in 1983 and 1994, respectively.  In Wisconsin, the
impetus was the imminent bankruptcy of the state's self-funded
indemnity plan; the Missouri change was prompted by a series of
deficits in its indemnity option.  In both states, the employee
contribution for indemnity coverage jumped considerably with the
introduction of a contribution formula based on the lowest-cost plan. 
The result was a dramatic increase in HMO enrollment.  Private sector
firms we interviewed have also relied on financial incentives to
encourage migration to more efficient/lower-cost plans.  Over the
course of a year, one firm eliminated the subsidy for its indemnity
plan, which, along with utilization-based increases, resulted in more
than a 250-percent increase in the cost of the employee contribution. 
This change contributed to a significant drop in the number of
employees opting for indemnity coverage and an increase in HMO
enrollment from about 30 percent to 60 percent.  This firm plans to
eliminate the indemnity option in 1997 in areas where no POS plan is
available. 

The structure of a particular market can also encourage large
purchasers to make dramatic changes.  Concern over consolidation,
overlap in networks, and shadow pricing by managed care plans in the
Minneapolis health care market led the Buyers' Health Care Action
Group (BHCAG), a purchasing coalition, to make a significant
change.\16 BHCAG decentralized the management of care for its members
by dropping the PPO model originally offered in 1992 and contracting
with 15 individual "care systems"--groups made up of medical
practices, clinics, and hospitals.  Enrollment in the new care
systems began in January 1997.  With this new approach, BHCAG members
essentially contract directly with providers.  Moreover, for the
purposes of the BHCAG contracts only, the primary care physicians are
locked into exclusive arrangements with one care system.  This new
approach represents a major change in the administration of benefits
and the focus of control for the actual management of care but allows
the employees of BHCAG firms to continue with their current providers
almost undisturbed.  Although the primary reason state health
insurance purchasing agencies have joined private coalitions is to
participate in their quality initiatives, the Minnesota Department of
Employee Relations--the state's health benefit administrator--is
exploring the possibility with its unions of offering the BHCAG care
systems to state employees by 1999.  The state's consideration of
joint purchasing through BHCAG appears to be motivated by a shared
concern over marketplace consolidation. 

While many purchasers in our sample want employees to migrate into
HMOs, some recognized that they could not implement such a dramatic
change overnight.  Instead, they chose to make incremental changes to
their health benefit programs.  Some of these employers told us that
they viewed POS plans as a bridge between traditional indemnity
coverage and an HMO.  (POS plans are essentially HMOs that offer an
out-of-network option.) Employers hope that the POS option will allow
employees to become familiar and comfortable with managed care,
leading to eventual enrollment in an HMO.  The incentives--lower
copayments, no deductible, and lower limits on out-of-pocket
expenses--are designed to attract employees to the HMO network while
still offering employees the option, albeit a more expensive one, of
broader physician choice.  One firm that implemented a POS option
reported that out-of-network services only accounted for about 10
percent of total plan costs.  Surveys, we were told, have shown that
most firms implementing a POS plan have had a similar experience.  A
benefit manager suggested that unlimited choice is frequently desired
but infrequently used when accompanied by a higher price tag. 

Some firms are deliberately phasing in their managed care strategy. 
Avoiding use of the term HMO, one purchaser is slowly introducing
what it referred to as the next generation of managed care plan.\17
To date, it has only identified nine plans with the potential to meet
its criteria for information systems and care management.  In many
markets, even some with mature HMOs, no such plans are available. 
Over the long term, however, this purchaser hopes to be able to offer
"next-generation" plans to all employees.  During the transition, the
firm continues to rely on its self-funded PPO as well as existing
HMOs to cover the majority of its workers.  Another firm has phased
in HMOs in four states where such plans already enjoy a relatively
high degree of acceptance.  This firm plans to add HMOs in other
states as managed care capacity in these markets matures. 

Regardless of the nature or pace of change, the private firms in our
sample often use their innate flexibility to advocate specific
delivery systems and occasionally even individual health plans that
they believe offer the best value.  While some avoided any direct
endorsement of a plan, they do provide considerably more information
about favored plans than about others that they also offer.  One firm
developed and implemented a substantial internal marketing strategy
to dispel what it believed to be myths about managed care and to
encourage employees to enroll in one of the available HMOs. 


--------------------
\16 BHCAG has 24 employer members and began joint purchasing in 1992. 

\17 See cg.  3 for a more detailed description of what this purchaser
refers to as organized systems of care. 


      FLEXIBILITY PERMITS
      ADAPTATION TO MARKET
      REALITIES AND OTHER FACTORS
-------------------------------------------------------- Chapter 2:1.2

To many of the firms in our sample, flexibility also means being able
to adapt the benefit strategy to market conditions and to treat
specific groups of employees differently.  Such differentiation makes
it possible to focus management resources in areas with large
concentrations of employees--and where a firm spends a large
percentage of its benefit dollars.  Differences may also stem from a
firm's decision to manage benefits by division rather than
centralizing administrative functions in a single benefit staff. 
Finally, in some cases, the differentiation takes advantage of a
perceived variation in the cost of covering certain demographic
groups. 

Market conditions often leave a clearly identifiable mark on the
benefit strategy of a large purchaser.  California purchasers told us
that currently there is heightened competition among a large number
of undifferentiated managed care plans with broad overlapping
networks.  This provider overlap led one coalition we interviewed to
characterize the state's HMO products as "commodities." Convinced
that there is excess capacity and inefficiency in the managed care
delivery system, the Pacific Business Group on Health (PBGH), a
coalition of 33 West Coast employers, continues to pressure HMOs to
lower prices and to justify any increases with demonstrable quality
and service improvements.  Minnesota, on the other hand, has
experienced considerable market consolidation over the past several
years.  Only four plans control over 80 percent of the market. 
Managed care plans, we were told, are aggressively buying physician
practices.  As described above, this apparent march toward monopoly
led BHCAG to a dramatic turnaround in its purchasing strategy. 

Finally, certain markets have little managed care or are only
beginning to see its development.  Moreover, purchasers believe that
some of these markets are not receptive to the development of HMOs. 
For example, in some rural markets, providers, especially hospitals,
have actively blocked the entry of managed care by refusing to
contract with such plans.  One purchaser cited the evolution of
managed care in Oklahoma City as typical of emerging HMO markets. 
Several years ago, this market only offered purchasers the choice of
an inefficient plan that resembled an HMO.  Premiums were high, care
was not really managed, and every doctor was in the plan.  The entry
of two large managed care plans has introduced competition, a
development that is helping to transform the local market. 

For a variety of reasons, purchasers do not offer HMOs at all
operating locations.  Thus, some purchasers introduce managed care
plans on the basis of the degree of employee concentration or the
extent of HMO penetration, or both.  In certain markets, they have
too few employees to justify the administrative effort.  In others,
because of the immaturity of the market, HMOs are more expensive than
an indemnity product and are not offered.  Finally, HMOs are often
unavailable in rural areas.  Even the state governments in our
sample, which generally strive to offer HMOs to all employees, are
unable to do so in some rural markets. 

A purchaser that adopted extensive quality criteria to screen out
unacceptable plans and to monitor performance told us that the
administrative burden precludes the firm from applying these criteria
in every market where it has employees.  Rather, the purchaser
focuses its attention on areas with high concentrations of employees. 
In such markets, it (1) monitors HMO performance against published
requirements, (2) works with health plans to build more efficient
processes, (3) plans to produce a report card based on the Health
Plan Employer Data and Information Set (HEDIS) measurements, and (4)
analyzes HMO rates by component.  In areas with 500 or fewer
employees, we were told, such extensive monitoring is not economical. 
In these markets, the firm still offers HMOs, but relies on the
National Committee for Quality Assurance (NCQA) accreditation as a
proxy for health plan quality. 

One firm in our sample decentralized management of its benefit
program along internal company lines.  We were told that creating a
single strategy for the firm's separate operating divisions would
have been inappropriate given the potential for disruption that would
accompany a centralization effort.  Lack of profitability in one
division led to the adoption of an HMO strategy, but benefit managers
were hesitant to adopt this strategy for a different division that
was financially strong.  According to benefit managers, it was not
worth disrupting the workforce at the latter division even if it
saved the company money.  Consequently, it was possible for employees
working in the same state, but in different divisions, to have
completely different health care options.  On the other hand, another
firm is in the process of centralizing responsibility for HMOs in
order to introduce greater consistency across its operating divisions
for screening and selecting such plans. 

Employee demographics can also play a role in designing a health
benefit program.  Two of the firms in our sample targeted specific
coverage options at their younger, unmarried employees.  Believing
that these employees are generally healthy, these firms wanted to
encourage the selection of their self-insured indemnity plan in which
the company only pays for the services used, rather than an HMO with
a monthly capitation rate that must be paid even if the enrollee is
never sick.  For example, one firm has an indemnity option called the
"Single Person's Plan"; this option is free and pays 100 percent of
the first $600 of covered medical expenses; the employee is
responsible for the next $500 in expenses before cost-sharing kicks
in.  While this option and others are not limited to younger, single
employees, the firm's intent is to encourage those who do not fit
this demographic profile to select alternative plans. 


      STATE GOVERNMENTS ALSO
      DEMONSTRATE FLEXIBILITY
-------------------------------------------------------- Chapter 2:1.3

Legislatures have frequently given the governing boards and agencies
that purchase health care for state employees and other groups wide
latitude in designing and managing the benefit program.  The
authorizing legislation often provides a general framework but leaves
important operational decisions to others.  In some states in our
sample, employee unions also play an active role in defining
benefits, incentives, and how the program actually operates. 

Many of the state purchasing agencies we visited have the authority
to determine the number and type of participating plans and the
benefits offered.  Moreover, like benefit managers in private firms,
they often have the authority to negotiate premiums with
participating plans.  The legislation establishing the Health
Insurance Plan of California (HIPC) is broadly drawn and gives the
governing board considerable discretion.\18 The HIPC board initially
considered the possibility of severely limiting the number of plans
offered; eventually, the board settled on a strategy of offering a
large number of competing health plans.  In 1987, Minnesota amended
authorizing legislation and gave the agency that manages state
employee benefits the power to exclude any health plan from the
program.  Previously, any licensed carrier had to be offered.  In
some states, the governing board or agency that manages employee
benefits has standardized HMO benefits.  HIPC's governing board
actually designed the benefit package. 

In 1992, Missouri passed legislation creating a new public employer
purchasing organization known as the Missouri Consolidated Health
Care Plan, with a governing board to manage health benefits for state
employees and other government entities.  The legislation was
prompted by deficits in the state's self-funded indemnity plan and by
a recognition that purchasing leverage was not being maximized under
the current approach.  We were told that the authorizing legislation
gives the governing board significant flexibility to adapt its health
care approach to the continual evolution of the health insurance
marketplace.  After selling its indemnity plan, the board
subsequently included the plan's fee-for-service PPO in a competitive
bidding process along with insured HMOs, and instituted a managed
competition system.  In 1995, the board was also given some
negotiating authority with health plans.  Flexibility allowed the
board to adapt to market conditions in 1995 that resulted in
significant reductions in HMO premiums. 


--------------------
\18 As part of 1992 insurance market reforms, California established
HIPC--the first government-sponsored voluntary purchasing coalition
for small employers. 


      FLEXIBILITY IS NOT WITHOUT
      CONSTRAINTS
-------------------------------------------------------- Chapter 2:1.4

Looking across our sample, the flexibility of purchasers to develop
wide-ranging variations on a health benefits management strategy is
clear; the constraints that helped shape each purchaser's strategy
are less obvious.  Several factors, such as concern about the
potential disruption of employees' relationships with their doctors,
individual corporate cultures, labor agreements, and the nature of
the health care markets in which the firms are located, have limited
the degree to which any particular strategy has been implemented. 

Purchasers recognize that (1) employees do not necessarily share
their enthusiasm for managed care and (2) a managed care strategy
could be disruptive to employees' medical care and adversely affect
their morale.  A variety of approaches have been used to minimize the
impact on employees, but in some instances, these approaches may
actually be at cross-purposes with the efficiency goal that underlies
the adoption of such a strategy.  In order to address employee
concerns about disturbing existing relationships with physicians,
many firms insist that participating HMOs include broad provider
networks.  At the same time, benefit managers acknowledge that such
networks are difficult to manage and are therefore generally less
efficient.  One firm conducted a "provider disruption analysis" to
determine the extent to which employees' physicians participated in
the networks of various HMOs.  This firm told us that it ended up
contracting with two HMOs that were more expensive but that had also
scored well in its analysis. 

Once a benefit management strategy is adopted, corporate culture and
labor contracts may limit a firm's ability to create incentives for
employees to move from indemnity to managed care plans.  One of the
strongest incentives, requiring employees to pay a portion of the
cost of the health plans they select, is essentially unavailable to
firms that have a history of paying the full cost of coverage or to
firms that face stiff competition for employees.  One employer told
us that it operates under the paternalistic notion that an employee
choosing single coverage should not have to contribute to the
cost.\19 In other firms, the zero-premium benefits negotiated by
labor unions have a spillover effect on the rest of the company.  One
employer told us that it offers benefits free to nonunion employees
so as not to encourage greater unionization of its workforce. 

A strong union presence affects not only the cost of health care
coverage to employees but also the pace with which changes can be
made.  Any significant changes in the structure of the health
benefits for these purchasers must be included in the collective
bargaining process, which may occur only once every 2 or 3 years. 
The insistence of unions on maintaining a free indemnity option has
limited the ability of some purchasers we interviewed, especially
those in the private sector, to implement a uniform managed care
strategy for their entire workforce.  However, two firms in our
sample, U S WEST and Southern California Edison, were able to
negotiate the substitution of a POS option for more traditional
indemnity-type coverage.  In the case of U S WEST, the POS plan is
free.  Two state purchasers we interviewed still offer either
traditional indemnity or PPO coverage but have been more successful
than the private sector firms in negotiating labor contracts that
require employee cost-sharing, that is, targeting the state's
contribution to the least expensive managed care plan.  The state of
California, on the other hand, has been discussing a new cost-sharing
formula with its unions since the early 1990s and, as of August 1996,
had been unable to reach an agreement with most bargaining units.  We
were told that agreement on a new cost-sharing formula could enhance
the leverage of the agency that manages employee benefits for the
state--the California Public Employees Retirement System
(CalPERS)--during negotiations with health plans.\20

Characteristics of individual markets can also constrain private
firms as they attempt to implement new health care strategies. 
Market-based constraints, in their most basic form, may prevent
purchasers from even offering managed care products.  For example,
few very rural areas are served by HMOs.  Market characteristics may
also dictate the type of benefits an employer offers.  One firm in
our sample said that the structure of benefits first popularized by
the automotive industry in the metropolitan Detroit area makes it
difficult to retain employees without offering first-dollar coverage. 
That is, most services are provided with no or minimal copayment or
deductible. 


--------------------
\19 This same paternalism often does not apply to coverage of
dependents.  Missouri pays about 55 percent of the cost of health
benefits for children, but only 28 percent for a spouse and 36
percent of family coverage.  These percentages were increased in
recent years, utilizing savings realized through the managed
competition process adopted for the state employees' health benefit
program.  Washington offers free coverage for children in all but the
most expensive plans, but the employee must always pay for coverage
of a spouse.  Xerox has adopted a policy of basing total compensation
(benefits and pay) less on family status and more on the employee's
contribution to the business.  As a result, it is gradually
increasing its allowance for workers choosing employee-only coverage
and decreasing the amount for those selecting family coverage. 
However, the allowance is still so generous that an employee can
purchase full family coverage, including prescription drugs, in an
efficient HMO with little or no out-of-pocket costs. 

\20 Since 1967, other public agencies in the state have been allowed
to join CalPERS. 


   IMPORTANCE OF MARKET LEVERAGE
   OFTEN OVERSTATED
---------------------------------------------------------- Chapter 2:2

According to the conventional wisdom, large purchasers have a natural
advantage in the health insurance marketplace.  Health plans value
their business not only for the number of covered lives but also for
the prestige that is associated with having a well-known employer as
a client.  In turn, these two factors allow a health plan to attract
more, higher-profile providers, which in turn attracts more business. 
Some of the private sector purchasers in our sample believe that
their size or reputation has been instrumental in obtaining favorable
rates from health plans.  However, some employers also admit that (1)
they do not have leverage in many markets in which they have
employees and (2) acting alone, they may not even have a significant
amount of leverage in markets where they have large concentrations of
employees.  Compared with the private sector, some state purchasers
we interviewed are second only to the federal government in terms of
the number of covered lives in a specific market area. 


      SEVERAL FACTORS CAN REDUCE
      THE LEVERAGE OF LARGE
      PURCHASERS
-------------------------------------------------------- Chapter 2:2.1

Large private sector employers appear to be taking advantage of their
size in purchasing health care coverage in some markets.  However,
given the size of their payrolls, they generally have less leverage
than conventional wisdom would suggest.  Factors such as the
geographic distribution of employees, large numbers of part-time
employees ineligible for benefits, and decentralization of the
management of health benefits reduce employer leverage.  PepsiCo has
approximately 450,000 employees nationwide.  Because a large number
of them are part-time employees, only about 250,000 are eligible for
health benefits.  About 170,000 are hourly restaurant workers; they
are eligible for a specialized health plan, but few elect to enroll
despite the modest contribution required.  As a result, PepsiCo only
purchases standard health coverage for 85,000 workers.  Moreover,
benefit-eligible employees are located in all 50 states and
distributed across 19,000 zip codes.  The firm's largest
concentration of employees in a single state is 5,000, and the next
largest concentration is only 2,000, in Southern California.  Some
firms are organized along product lines or divisions, which purchase
health care coverage independently.  Different philosophies in the
sales and manufacturing divisions of one firm in our sample result in
decentralized health care purchasing.  Another firm, with some
demographic differences among its operating divisions, has
decentralized health care administration along divisional lines. 
Employee demographics led another firm to divide its workforce into
separate groups for the purpose of health care purchasing.  While
such arrangements may demonstrate flexibility, they come at the
expense of purchasing power. 


      LITTLE CONSENSUS ON NUMBER
      OF EMPLOYEES NEEDED TO HAVE
      LEVERAGE
-------------------------------------------------------- Chapter 2:2.2

There was little consensus among benefit managers on the number of
employees needed in a given market to wield significant buying power. 
Some firms were confident that they had leverage at least in the
state where they were headquartered and often had their largest
concentration of employees.  One large regional firm in our sample
told us that it has employees in every state but only has a
significant concentration of employees in about 14 states.  In
several of these 14 states, the firm has between 7,000 and 17,000
workers and believes it has negotiating leverage.  The firm's benefit
manager noted, however, that whether a purchaser is one of the top
employers at a location can sometimes be more important than its
actual number of employees.  Other benefit managers looked to
purchasing coalitions to enhance their market power--even where their
corporate headquarters were located.  In areas where firms had small
numbers of employees, the managers admitted that they had little
leverage and frequently were price-takers. 

State purchasers have considerable buying power, and some, like
CalPERS, have used their leverage to obtain favorable rates.  They
are often the largest employer in a state, and their workforce is
concentrated in a smaller area, that is, usually within the confines
of state boundaries.  As a result, they appear to have sufficient
negotiating leverage on their own without joining coalitions.\21

CalPERS represents about 425,000 employees and nearly 1 million
covered lives generally concentrated in the state of California.  As
noted earlier, PepsiCo, the largest private employer in our sample,
had 450,000 employees, but only 85,000 were enrolled in the company's
health benefit program.  Since 1994, CalPERS has used its buying
power to demand rate reductions and improved data collection from
HMOs.  Moreover, several states are taking steps that could further
enhance their buying power.  Thus, Washington and Minnesota are
attempting to coordinate the purchase of managed care benefits by
different state agencies such as Medicaid. 

Firms without a major presence in any particular market believe that
large purchasers do have significant leverage--leverage that
translates into better rates at the expense of smaller buyers.  For
example, two of California's largest purchasing groups--PBGH and
CalPERS--have seen HMO rates decrease in recent years.  The benefit
manager from a California firm that had seen rate increases over the
same time period suggested that health plans are shifting the cost of
these discounts to smaller purchasers. 


--------------------
\21 CalPERS and HIPC are members of the Pacific Business Group on
Health, but they only participate in the coalition's quality
initiatives, not in its separate negotiating alliance. 


      FIRMS USE VARIETY OF
      TECHNIQUES TO ENHANCE
      LEVERAGE
-------------------------------------------------------- Chapter 2:2.3

Faced with limited purchasing power resulting from the geographic
distribution of employees and other factors, some firms in our sample
have sought to enhance their leverage through a variety of techniques
such as joining coalitions, relying on their national reputations,
and limiting the number of health plans with which they contract. 

Even in metropolitan areas, the large private sector firms in our
sample often constituted only a small percentage of the potential
business available to a health plan.  As a result, about half of the
firms in our sample have joined purchasing coalitions.\22 While some
BHCAG member firms have fewer than 4,000 employees in the Minneapolis
area, the coalition consists of 24 major local employers, including
firms with a national reputation such as 3M, Dayton Hudson, and
General Mills; the firms represent about 400,000 covered lives--15
percent of the metropolitan area market.  The PPO product offered to
member firms through the end of 1996 attracted 100,000 enrollees,
giving the coalition considerable market power.  Similarly, the
minimum number of employees required for a firm to join the PBGH
negotiating group is only 2,000.\23

Altogether, however, this group represents 18 employers with about
400,000 active employees and dependents.  All the members of the
negotiating group we interviewed told us that they obtain lower HMO
rates by jointly negotiating through the coalition. 

While coalition administrators believe that there are still
significant efficiencies to be gained in the health care market, it
is not clear that mature coalitions will continue to achieve rate
discounts.  For example, after 2 years of rate decreases, 1997 rates
for PBGH were flat.  To further its purchasing goals, PBGH is looking
for ways to strengthen its market power, such as recruiting new
member firms or reducing the number of health plans with which it
negotiates.  This latter tactic could result in more aggressive plan
bids because of the potential gain in new enrollees.  Several firms
in our sample that are not members of a purchasing coalition also
cited the benefits of reducing the number of HMOs offered.  This
tactic not only rewards health plans that bid aggressively but also
reduces the administrative cost of managing a benefit program.  As
with flexibility, maximizing buying power by reducing the number of
available plans does not come without a cost.  Thus, purchasers may
find it difficult to eliminate health plans because of the impact on
employees.  One purchaser noted that it would like to drop plans with
high prices and poor quality, but the firm's corporate culture is to
not disrupt employees.  In some cases, agreement with unions may be
needed to drop a plan. 

In areas where no local coalition exists, firms use every means at
their disposal to negotiate favorable rates.  Like brand-name
products, large firms frequently have a national reputation. 
Association with such an employer can be valuable to a health plan,
even when the firm may only have a few hundred employees in the area. 
The value of such an association increases when it is a firm with a
national reputation for innovation in health care purchasing. 
Benefit managers at PepsiCo, a large employer with a reputation for
focusing on quality issues, told us that the firm has benefited from
its reputation in markets where it only has a small number of
employees.  Other approaches used by firms in our sample that are
trying to increase their market power include (1) establishing the
National HMO Purchasing Coalition--an organization of large employers
that have joined forces to buy coverage in markets where they each
have too few employees to possess any leverage, (2) purchasing
coverage from a limited number of insurance carriers that operate
nationwide, and (3) using benefit consultants who also work with
other large purchasers.  Because of their relationship with and
knowledge of premiums being quoted to other purchasers, benefit
consultants may exert some market leverage over health plans on
behalf of their clients. 

Labor contracts or disagreement with what they referred to as the
"cost focus" of some coalitions prevented a number of private sector
firms from joining together with other employers to increase their
purchasing leverage.  Citing its labor agreements regarding benefit
plan design as an impediment to joint purchasing, Southern California
Edison only participates in PBGH quality initiatives.  Other firms in
our sample are more interested in driving changes in how the managed
care industry operates than in obtaining discounts.  For example,
Xerox is philosophically opposed to negotiating discounts because of
the potential for cost-shifting.  Several firms told us that such
discounts only represent a short-term phenomenon and that market
power would be better used by insisting on improvements in the way
health plans manage care, that is, data collection, analysis, and
reporting.  Firms with such views, however, may still join a
purchasing coalition in order to participate in customer satisfaction
surveys or other quality initiatives. 


--------------------
\22 One coalition's executive director noted that even firms that
have leverage on their own in a particular location may join a
coalition because it provides access to a broader range of data on
the local health care market. 

\23 Not all PBGH member firms are part of the negotiating group.  For
the 1997 benefit year, 18 of the coalition's 32 members participated
in the coalition's joint purchasing initiative. 


PURCHASERS USE EVALUATION CRITERIA
TO PURSUE PRICE, QUALITY, AND
ACCESS GOALS
============================================================ Chapter 3

Flexibility and market leverage are often considered to be natural
attributes of the private sector--a foundation that some large
purchasers have used effectively in their transformation from passive
to active buyers of health benefits.  However, flexibility and
leverage alone are insufficient to achieve the accountability,
increased efficiency, and quality improvements being sought by many
large purchasers.  For this reason, buyers have turned to a number of
additional tools to help achieve their goals. 

We have grouped these tools into three general categories:  (1)
health plan evaluation criteria, including techniques to assess
premiums and foster competition among health plans; (2) incentives to
sway employee behavior; and (3) overt marketing strategies to
influence both the choice of delivery systems and of specific plans. 
This chapter focuses on health plan evaluation criteria; a subsequent
chapter looks at how purchasers attempt to persuade an often
reluctant workforce that a managed care strategy is also in their
best interest. 


   TENSION BETWEEN NEED FOR AND
   ADEQUACY OF EVALUATION TOOLS
---------------------------------------------------------- Chapter 3:1

The adoption of a strategy that encourages employees to join managed
care plans contributed to, if not necessitated, the development of
health plan evaluation criteria to help select HMOs.  Price alone was
no longer a sufficient criterion given employee reservations about
choice and quality.  The criteria, though imperfect and still
evolving, serve several purposes.  First, they help both employers
and employees to compare health plans.  Second, the criteria serve as
improvement and development goals for the plans themselves.  Third,
employers use the criteria and the information collected from
participating plans to justify their choices to employees.  Finally,
some employers use the criteria to select plans and/or to limit the
number of HMOs offered in a given market. 

Generally, the HMO evaluation tools developed by the purchasers we
interviewed can be grouped into three broad categories:  (1) price,
(2) health plan quality, and (3) employee access to a choice of
physicians.  Many purchasers have not only articulated criteria that
they expect health plans to meet, they have gone a step further and
actually specified their requirements in a request for proposal (RFP)
and/or in published ï¿½performance measures.ï¿½ These criteria not only
set forth a variety of performance thresholds but also require plans
to demonstrate their level of performance by providing reliable data
in specified formats.  A few purchasers use the data to monitor the
health plans with which they contract and impose sanctions if these
goals are not met. 

Some purchasers view their health plan evaluation criteria,
especially those pertaining to price and quality, as works in
progress, that is, rudimentary and imperfect.  For example, one firm
pointed out that the criteria are too process-oriented, too focused
on what is measurable when the most important factors still cannot be
quantified.  This benefit manager characterized the firm's standards
as ï¿½indemnity measures.ï¿½ Others even categorized some of their
criteria as subjective.  Furthermore, purchasers recognized that few
plans could meet all of the criteria.  As a result of these
shortcomings, firms told us that they applied the criteria flexibly,
using them more as goals than as absolute requirements.  As research
yields increasingly sophisticated measures of quality and efficiency,
these purchasers expected to institute better and more rigorous
requirements. 


   PRICE:  TOOLS USED TO EVALUATE
   PREMIUMS AND ENHANCE
   COMPETITION
---------------------------------------------------------- Chapter 3:2

In the past, widespread shadow pricing by HMOs had often resulted in
premiums that bore little relation to actual health plan costs--a
fact that, according to purchasers we interviewed, HMOs readily
acknowledge.  Rather than pursuing efficiency and passing the savings
on to purchasers, HMOs competed at the employee level:  they offered
enrollees richer benefits with lower out-of-pocket costs and
emphasized types of preventive care that appealed to younger and
healthier individuals.  In seeking to transform themselves from
price-takers into active purchasers of health benefits, the large
purchasers we interviewed have adopted a number of tools to encourage
health plans to become more efficient and to ensure that savings
accrue to the purchaser of health care. 

Among the tools frequently cited as enhancing price competition at
the purchaser level are (1) analyzing and negotiating premiums, (2)
using a structured bidding process to solicit premiums, and (3)
joining coalitions and eliminating plans to increase leverage. 
Purchasers told us that these tools have been successful in actually
reducing premiums or in constraining premium growth.  The variety of
ways that large purchasers use and integrate these tools, however,
makes it difficult to attribute their recent cost experience to any
single tool or combination of tools.  Moreover, some purchasers
recognize that the context of fierce competition among HMOs for
market share and the downturn in costs normally associated with the
underwriting cycle clouds the entire issue of HMO pricing.  As a
result, other factors may be more important determinants of
purchasers' recent cost experience than the specific tools used to
enhance health plan competition. 


      DESPITE DIFFICULTIES,
      PURCHASERS EVALUATE PREMIUMS
      AS A PRELUDE TO NEGOTIATIONS
-------------------------------------------------------- Chapter 3:2.1

Though cost is sometimes characterized as more transparent than
quality, purchasers have had mixed experience in assessing the
reasonableness of capitation payments requested by HMOs.  As with
quality indicators, some purchasers characterized current premium
assessment techniques as rudimentary.  Nonetheless, many view them as
an essential prelude to subsequent negotiations.  Some approaches are
essentially analytical--a process one benefit manager characterized
as akin to the delicate and difficult process of peeling back the
layers of an onion.  Others, however, rely on more subjective
indicators, such as a ï¿½reading of market conditionsï¿½ or evaluating
the salaries of health plan executives.  Often, purchasers seek
assistance from consulting firms and actuaries.  The purchasers in
our sample said they used the following premium assessment techniques
either alone or in combination:  (1) adjusting for differences among
the age and gender of employees (risk adjustment), (2) reviewing plan
rate development methodologies, (3) comparing premiums with a
standard or benchmark, (4) requesting utilization data from health
plans, (5) examining health plan financial indicators, and (6)
assessing market conditions. 


         RISK ADJUSTMENT
------------------------------------------------------ Chapter 3:2.1.1

There can be significant differences in the cost of providing health
insurance to different groups of individuals.  Risk adjustment looks
for demographic, geographic, health status, and other characteristics
that can help predict the use of medical services.\24 Two common
characteristics used by the purchasers in our sample were
demographic, that is, age and gender.  While the easiest to adjust
for, they only partially account for differences in the health
expenditures of different groups of employees.  Several purchasers
told us that they believed other factors might be more important
predictors of the use of medical services, such as education level
and nature of employment (sitting at a desk versus engaging in
physical labor).  Consequently, one health benefit manager asserted
that it was ï¿½inappropriateï¿½ to base negotiations on an analysis of
workforce demographics.  Use of demographics is common, she
maintained, not because of its predictive capability but because
there are so few other widely accepted analytical tools.  This same
benefit manager also noted that health plans often do not have the
capacity to prove otherwise when an employer asserts that the youth
of its workforce justifies a rate reduction. 

While demographic analysis may not be the most sophisticated means of
assessing the risk of a population, when used in conjunction with
other tools, it can highlight apparent inconsistencies in a health
plan's rate methodology.  One firm told us that it has retained a
consultant who has extensive data on the costs of delivering care by
zip code.  This consultant analyzes HMO premiums on the basis of age,
gender, and geographic location.  No HMO data on the actual
utilization of services by enrollees is employed in this assessment. 
If analysis suggests that premiums are too high, the results are used
during negotiations to obtain a reduction.  Both PBGH and the Gateway
Purchasing Association\25 analyzed members' premiums for differences
in benefits and risk and found a lack of correlation with the rates
actually charged.  Thus, some firms with low-risk employees paid
higher premiums than those with high-risk employees.  Moreover,
premiums did not appear to correspond to the volume of business.  In
short, some prices appeared arbitrary and too high across the board. 
At the same time, several members of the coalition we interviewed
emphasized that PBGH is currently unable to determine the true cost
of benefits delivered by contracting HMOs. 


--------------------
\24 Health Care Reform:  Considerations for Risk Adjustment Under
Community Rating (GAO/HEHS-94-173, Sept.  22, 1994). 

\25 Gateway represents 30 St.  Louis area firms. 


         REVIEW OF RATE-SETTING
         METHODOLOGIES
------------------------------------------------------ Chapter 3:2.1.2

Several purchasers told us that they either engage consultants and
actuaries to examine health plan rate-setting methodologies or
perform the assessment themselves.  The Minnesota state government's
focus is on whether the plan's methodology is sound and accurate and
whether any subjective elements are reasonable.  For example,
Minnesota found that one plan calculated its premium for family
coverage by multiplying the single rate by 2.8--a significantly
higher ratio than is commonly used.  The plan, we were told, was
trying to discourage more expensive families from joining.  The state
has since mandated use of a standard ratio of 2.5 by all plans.  When
Minnesota officials first began to ask plans to substantiate their
rate-setting methodologies, some carriers were not well prepared to
do so.  This process uncovered significant errors that would have
been costly to the state, but plans now do a better job and changes
are less prevalent.  Like Minnesota, Wisconsin and HIPC reported
similar benefits from their reviews of health plan rate-setting
methodologies. 


         BENCHMARKING
------------------------------------------------------ Chapter 3:2.1.3

Evaluation of premiums often involves comparison with some standard
or reference point.  The types of benchmarks used by the purchasers
in our sample include (1) indemnity or POS cost experience for which
they often have considerable utilization data, (2) trends in health
care premiums over several recent years, (3) premiums paid by
employers with similar workforce demographics, and (4) rates charged
by health plans that are judged as both efficient and of high
quality. 

The Washington Health Care Authority estimates the per-member-
per-month cost of enrolling all of its employees in the self-funded
PPO plan.  This analysis is facilitated by the similarity between PPO
benefits and those that participating HMOs are required to offer. 
The Washington Health Care Authority told us that it then asks each
HMO to bid using the assumption that all state employees would be
enrolled in the bidder's plan.  Minnesota, Wisconsin, and the Arizona
Medicaid program also develop target premiums on the basis of the
extensive data that managed care plans are required to submit.  A
Wisconsin official noted that this process alerts the state to
underpricing by large plans trying to buy market share and prepares
the state for subsequent negotiations if bids appear to be higher
than they need to be.  Since BHCAG members paid their self-funded PPO
under a fee-for-service arrangement, they had several years of claims
data to assess the reasonableness of the bids received from 15
so-called care systems.  Purchasers also told us that HMO bids should
be lower than their indemnity costs because such plans are known to
attract healthier and therefore less expensive individuals than
options that offer an unfettered choice of providers. 

A different type of benchmark identified by purchasers we interviewed
is reliance on trends in premiums over the past several years.  Firms
told us that they tend to challenge large premium increases.  On the
other hand, some purchasers are more inclined to go along with a
proposed rate increase if it seems consistent with their recent
experience.  One firm said that it had seen some HMO rate increases
in the neighborhood of 3 percent, which it views as reasonable and is
willing to pay.  On the other hand, many of the purchasers we
interviewed told us that they have experienced actual HMO premium
decreases in certain markets--a fact that may establish a different
expectation. 

Some firms told us that in markets where they are not a member of a
coalition, they rely on consultants to tell them how well they are
doing.  For example, in return for sharing data on claims, premiums,
and quality indicators, one consultant provides firms feedback on the
average and best rates in a given market, adjusted for workforce
demographics.  A benefit manager said that prior to participating in
this survey, the firm had no idea how well it was doing outside of
California.  Similarly, a coalition told us that its consultant has a
large database on HMO rates that allows the coalition to compare its
bids with the rest of the market.  Since the levels of benefits
provided by purchasers differ, such comparisons only provide a rough,
but nonetheless useful, indicator. 

In addition to comparing proposed premiums with indemnity costs,
trends, and the experience of other firms, purchasers told us that
they use the premiums of an HMO that they believe serves as a
benchmark in terms of both cost and efficiency.  Thus, PBGH told
other plans that they had to meet Kaiser's rates.  Similarly, another
purchaser noted that many California HMOs see Kaiser as a market
trendsetter.  Thus, we were told, a rumor in April that Kaiser would
drop its rates sent tremors throughout the market. 


         HEALTH PLAN UTILIZATION
         DATA
------------------------------------------------------ Chapter 3:2.1.4

Many state governments, coalitions, and firms in our sample require
HMOs to submit data on the utilization of services by their
employees, information also referred to as encounter data. 
Reflecting a typical viewpoint, one health benefit manager told us
that his firm wants to pay a fair rate that can be substantiated by
documentation that employees have actually received medical services. 
Both firms and coalitions noted, however, that the quality of the
data submitted by HMOs was often variable.  CalPERS told us that
staff-model HMOs or those that are claims-driven tend to have better
data; on the other hand, larger, more loosely managed plans and those
that are heavily capitated have poorer data.  The vagueness or
incompleteness of the data was attributed to plans simply lacking the
information or not wanting to share it.  California purchasers also
cited the increased use of capitation within HMOs as having a
negative impact on the availability of data.  One firm said it was
close to freezing enrollment in a plan whose move to capitate its
hospitals had diminished the integrity of its data.  Finally, a HIPC
official told us that HIPC had to limit its risk-adjustment
methodology to inpatient encounter data because many HMOs could not
provide outpatient statistics.  However, several plans admitted to
HIPC that they even had trouble collecting the inpatient data.  A
California HMO noted that it is developing an outpatient database
that is clinically, rather than claims-oriented.  Thus, there may be
a disconnect between the type of data systems plans are developing to
effectively manage care and the type of data purchasers perceive they
need. 

Some private coalitions have put health plans at financial risk for
poor results on performance measures, including the provision of
data, customer service, and quality.  For example, PBGH has
negotiated individual HMO performance targets, and HMOs have agreed
to put 2 percent of their premium at risk.  Gateway Purchasing
Association in St.  Louis negotiated a similar arrangement.  HIPC
currently has the authority to fine a plan if data are turned in late
and commented that it would also be helpful if it could penalize
plans that submit poor-quality data.\26


--------------------
\26 Effective in July 1997, HIPC will no longer require HMOs to
submit utilization data.  Instead, HMOs will be asked to provide
audited HEDIS data that in turn will be reported to enrollees
beginning with the May 1998 open season. 


         FINANCIAL INDICATORS
------------------------------------------------------ Chapter 3:2.1.5

Some purchasers told us that they look at financial indicators on
plan profitability, loss ratios, administrative margins, and the
salaries of top executives.  In some cases, the purchaser's RFP
requires the submission of such data.  CalPERS said that it would
like to see administrative expenses, including profit, at about 10 to
12 percent.  Similarly, its goal is for health plans to spend at
least 86 percent of premium revenues on medical care--the so-called
loss ratio.  Digital also negotiates on the basis of a variety of
financial indicators, including plan overhead.  A company official
told us that when premiums include a 15 to 20 percent charge for
administrative costs, it establishes performance goals to reduce this
component over time.  Finally, purchasers expressed concern about the
high salaries of health plan executives; such salaries, along with
other financial indicators, suggested to them that more could be done
to improve health plan efficiency without adversely affecting
quality.  An official at HIPC, however, sounded a note of caution
about the reliability of plan financial data.  He said that HIPC
would like to use encounter data to calculate loss ratios but that it
is not possible now because the data are simply too "hazy."


         MARKET EXPECTATIONS
------------------------------------------------------ Chapter 3:2.1.6

Assessments of the extent and nature of competition in a given market
can also influence the stance that a purchaser takes during premium
negotiations.  One coalition that characterized competition in its
market as "fierce" approached 1996 negotiations with the expectation
that further rate concessions were still possible.  Moreover, the
coalition did not believe that it had reached the point where quality
had been adversely affected by premium decreases.  A coalition in a
different market, however, cited the fact that plans were losing
money as a factor that would make additional rate concessions
difficult to obtain.  Finally, officials at the Missouri Consolidated
Health Care Plan, a coalition that represents state employees as well
as other local government workers, benefited from what it
characterized as a ï¿½market-share-buying" temperament among health
plans in its 1996 bidding strategy. 


      NEGOTIATIONS SEEN AS
      ESSENTIAL TO CONTROLLING
      GROWTH IN HMO PREMIUMS
-------------------------------------------------------- Chapter 3:2.2

The extent to which purchasers in our sample--from both the private
and public sectors--rely on negotiations to supplement structured
bidding or a managed competition framework suggests that these
approaches are either insufficient by themselves or that purchasers
lack confidence in them as cost-containment tools.  In fact, one
state that added negotiation several years after it adopted a managed
competition system now emphasizes that negotiation is a critical
component of a competitive framework.  Only one firm we interviewed
characterized itself as a ï¿½price-taker,ï¿½ rejecting negotiation with
health plans because the process simply extracts a discount while
shifting costs to other purchasers. 

During our interviews, we observed two basic strategies for
negotiating with health plans.  The primary emphasis of purchasers
appears to be either market leverage or analysis of premiums.  The
two approaches, however, are not mutually exclusive.  In markets
where they believe they have sufficient size, purchasers may rely
more on their leverage, while in others, they may see analysis as
more appropriate.  And, at times, the distinction between the two
strategies is blurred as firms or coalitions adapt to market context
or other circumstances.  Regardless of the strategy used, purchasers
(1) approach the negotiating table with a shared skepticism about
health plan premiums and (2) often resort to similar tactics during
their face-to-face meetings with health plans. 


         SKEPTICISM:  FOUNDATION
         FOR NEGOTIATIONS
------------------------------------------------------ Chapter 3:2.2.1

Purchasers told us that they generally approach HMO premiums with
skepticism--an attitude reinforced by past shadow pricing.  One
coalition told us that HMO pricing was still irrational.  The benefit
manager at another firm said that the pricing process appeared to be
arbitrary--it looked as if plans decided what rates they wanted to
charge and then backed in the costs to justify them.  A few
purchasers noted that the frequency with which errors are detected
has not convinced them that HMO rate-setting methodologies are sound. 
Several years of premium decreases for some purchasers have probably
reinforced skepticism about the actual basis for HMO rates,
especially since these same purchasers do not believe that the
quality of care has been adversely affected.  The analysis conducted
by both PBGH and the Gateway Purchasing Association noted earlier
lends support to this general skepticism over the fairness of HMO
rate-setting methodologies. 


         NEGOTIATION:  CONTINUUM
         RANGING FROM MARKET POWER
         TO ANALYSIS
------------------------------------------------------ Chapter 3:2.2.2

Perhaps the most publicized advocate of the use of market power is
CalPERS.  CalPERS began to exert its market power when it sought a
zero increase in premiums for the 1992 contract year.  Citing the
state's worsening fiscal crisis, it asked HMOs to freeze rates and
benefits at the 1991 levels.  When Kaiser refused to accede to this
strategy, CalPERS froze new enrollment for 8 months, sending a
powerful message to California HMOs about the seriousness of its
negotiating demands. 

Starting with the 1994 contract year, CalPERS adopted an even bolder
tactic:  each year it has publicly announced, in advance of
negotiations, that it was seeking a specific percentage reduction in
premiums.  And during three consecutive negotiating sessions with
HMOs, CalPERS has achieved premium reductions.  An official at
another coalition noted that CalPERS has a ï¿½huge hammerï¿½ when it
negotiates with health plans--for many, CalPERS is their largest
single customer.  For example, about one-third of CalPERS enrollees
are in Kaiser, and CalPERS' members represent about 7 percent of
Kaiser enrollment in California, a statistic few private purchasers
can rival. 

The PBGH Executive Director also characterized the coalition's
current approach to negotiations as one based on the use of market
leverage--the size of the purchasing pool--to rein in prices.  Like
CalPERS, PBGH has threatened sanctions when plans appeared reluctant
to offer rate concessions, a tactic one firm characterized as
essential in shaping the outcome of negotiations.  After 2 years of
HMO premium decreases, however, the coalition was unable to gain
further concessions in 1996, though that was clearly its intent. 
According to member firms, the coalition is now considering options
to enhance its leverage--including expanding its membership and
eliminating some health plans.  The National HMO Purchasing Coalition
has pursued an exclusionary policy from the outset.  A coalition
official attributed its success in obtaining several years of rate
reductions not to analysis but to the policy of telling bidders up
front that it only intends to contract with two to four HMOs in each
market.  Firms we interviewed criticized some purchasers as too
focused on price.  However, officials at PBGH, CalPERS, and Gateway
Purchasing Association are convinced that continued pressure on HMOs
to lower prices and to justify any increases will force plans to
become more efficient, encouraging competition based on quality
rather than on price.  As one coalition director explained, "plans
won't focus on quality if employers are not tough on price.  Nothing
breeds innovation like necessity."

For some large or influential purchasers, it is difficult to isolate
the role of analysis from the context in which negotiations occur--a
large purchaser whose business is important to a health plan asking
informed questions about proposed premiums.  As demonstrated by
Gateway and PBGH, analysis of HMO premiums can be a powerful
negotiating tool.  Though PBGH, as it is currently configured,
appears to have exhausted its market power, the coalition's initial
negotiating success may have relied more on its finding that
differences in member premiums were not always correlated to firm
size or risk pool. 

Some purchasers we interviewed are motivated less by a concern over
price concessions and more by a desire for fair and reasonable
premiums that accurately reflect the utilization of their employees. 
And these same purchasers are convinced that in the long run an
emphasis on quality will do more to restrain cost increases than a
short-range focus on prices.  These purchasers generally rely on the
analytical approaches outlined earlier in this chapter.  For example,
Minnesota uses the negotiating process to go over the results of its
actuarial analysis of health plan bids.  During these meetings, it
may seek additional information and, where appropriate, ask for
reasonable changes to the rates.  Similarly, Wisconsin meets with
plan representatives if its analysis suggests that proposed premiums
are higher or lower than the target estimated by its actuary.\27 The
target is developed on the basis of a review of plan-specific
demographic, charge, and utilization data.  The state asks all plans
to submit a ï¿½best-and-finalï¿½ offer.  Finally, a number of purchasers
appear to combine the use of market power--albeit on a different
level compared with CalPERS--with reliance on analytical tools.  For
example, HIPC not only looks at health plan rate-setting
methodologies and utilization data, it also asks health plans whether
the proposed rate is commensurate with HIPC's importance to their
group of clients in the small-group market. 


--------------------
\27 A premium lower than the actuary's estimated target can alert the
state to underpricing by a plan trying to buy market share. 
Unrealistically low premiums can give way to very large increases in
subsequent years. 


         FEEDBACK PROVIDES
         OPPORTUNITY FOR PLANS TO
         RECONSIDER BIDS
------------------------------------------------------ Chapter 3:2.2.3

Regardless of the emphasis placed on market leverage versus analysis,
many purchasers use a common set of tactics during negotiations.  In
general, negotiations are an opportunity to provide feedback to
health plans on their respective bids.  The objective is not to
disclose the premiums of competitors but rather to give each plan an
opportunity to reconsider its initial bid in the context of
additional information. 

Thus, Gateway Purchasing Association tells plans in general terms how
they are positioned relative to the competition--high, low, or in the
middle.  Similarly, HIPC meets individually with health plans and
gives them an overall evaluation of where their bids fall in relation
to others in a specific market area.  For example, during 1993
negotiations, HIPC informed one plan that its premiums were
40-percent higher than the lowest-priced competitor.  Though it did
not tell health plans that they were too expensive or that they had
to reduce their prices, one-third of the plans lowered their premiums
after these meetings.  Providing feedback, however, does not
guarantee that a plan will change its bid.  For example, BHCAG told
us about one Minneapolis plan that bid high in order to test
community loyalty to its hospital.  The plan believed this bid was
worth the risk because it was already at capacity and BHCAG only
represented about 5 percent of its business. 

Purchasers commented that they also found it useful to provide
feedback on the possible employee reaction to price increases.  Thus,
HIPC conducted an analysis of enrollees who changed plans during open
season.  During negotiations, it pointed out that 41 percent of
enrollees changed health plans because of price and that one plan
lost 16 percent of its enrollment after it raised prices 8 percent. 
Another coalition said it often sees price reductions after informing
plans that their bids will result in employees having to pay more
than they would for plans offered by competitors. 

Some purchasers suggested that it is a mistake to accept the first
price proposed by any health plan:  asking for a second or even a
third bid is just common sense.  One benefit manager told us that had
the firm not asked for best-and-final offers, it would have left
about $500,000 on the table.  Another health benefit manager
acknowledged that some, but not all, plans "game the system" by
bidding high initially in expectation of lowering the bid during
negotiations.  The executive director of one purchasing coalition
emphasized the importance of arranging a one-on-one meeting with a
key decisionmaker at each plan in order to ensure that the plan
understands its competitive position.  Using this and other
techniques, this director said that the coalition is able to move
rates down from initial bids.  We were told, however, that it is
critical not to let a plan lower its bid once negotiations are
completed.  Plans should be forced to live with the consequences of
their decision on premiums until the next round of bidding and
negotiations.  Finally, in accepting best-and-final offers, one
purchaser told us that it will only accept new bids from the same
plan that are lower than the initial offer. 


      BIDDING USED TO STRUCTURE
      HEALTH PLAN COMPETITION
-------------------------------------------------------- Chapter 3:2.3

Many of the purchasers we interviewed are now using some form of
bidding to select health plans and to help determine HMO capitation
payments.  Bidding is often used in conjunction with evaluation and
negotiation.  Plans are invited to submit sealed bids according to
rules set forth in an RFP.  The RFP also stipulates requirements for
a plan to be considered qualified to bid.  Generally, the purchasing
coalitions and state governments in our sample re-solicit bids
annually or on some other regular basis; individual firms, on the
other hand, may use a bidding process to make their initial plan
selections but not periodically rebid contracts unless a problem
arises, such as employee complaints or dramatic price increases.\28

The underlying assumption of a bidding process is that competition
among plans for market share will result in premiums that reflect
costs plus a normal rate of profit.  There is, however, no single,
patented design for competitive bidding, and research does not
indicate which attributes would clearly constitute the best system. 
In fact, competitive bidding is commonly associated with commodities
whose costs and quality are easier to evaluate than the delivery of
health care. 


--------------------
\28 One firm that is playing an instrumental role in establishing a
new purchasing coalition told us that no matter how good relations
are with the contracting HMOs, soliciting bids every several years
helps to restrain premium growth. 


         CONSENSUS ON KEY FEATURES
------------------------------------------------------ Chapter 3:2.3.1

Although there is potential for considerable variation in the design
of a bidding system, the purchasers in our sample cited the following
general features as critical to eliciting more competitive bids:  (1)
standardized benefits, (2) employee incentives, (3) negotiation, and
(4) flexibility. 

Standardized Benefits.  State governments and purchasing coalitions
standardized benefits in the late 1980s and early 1990s, which
contributed to their ability to undertake a rough comparison of
premiums from competing HMOs.\29 In fact, benefits standardization
may be a precondition to collective purchasing by private
coalitions.\30 A second major advantage of standardization is that it
constrains the ability of plans to compete or avoid risk on the basis
of the benefits they offer.  Some purchasers in our sample may lack
the market power--that is, a sufficient number of employees in an
area--to insist that all competing HMOs offer the same or roughly
similar benefit packages.  Another factor that may inhibit
standardization for some firms is mandated state benefits that result
in variations in covered services from state to state. 

Employee Incentives.  Purchasers understand that providing a
financial incentive for employees to be cost-conscious in their
selection of health plans can be a powerful inducement for greater
competition among HMOs.  As discussed in the next chapter, however,
purchasers vary in the extent to which they have implemented
effective incentives.  Only a few purchasers have adopted what some
consider to be the most effective employee incentive--tying the
employer contribution to the lowest-cost plan offered.  The losses in
health plan enrollment that can result when a plan bid requires a
greater out-of-pocket contribution from employees can send a strong
message to health plans.  Although the structure of Medicaid prevents
the use of financial incentives, since it is offered largely free of
charge to beneficiaries, Arizona exercises the option of assigning
the approximately 50 percent who fail to select a health plan to
lower-cost bidders. 

Negotiation.  All but one of the bidding systems we examined assume
that negotiation is an integral part of the process.  Initially,
however, one of the states in our sample did not negotiate with plans
that submitted bids.  Rather, this state's officials assumed that the
competitive framework itself, coupled with heightened employee price
sensitivity as a result of incentives, would help to control premium
increases.  A resumption of rapid price increases and concern about
shadow pricing necessitated a modification of the original design. 
Wisconsin now sees evaluation of health plan bids and direct
negotiation as integral to the design of its managed competition
system.  Unlike Wisconsin, CalPERS had previously discussed premium
increases with health plans.  However, pressure to contain costs
became critical in 1991 when California froze the state contribution
to premiums, magnifying the impact of rate increases on state
employees.  As a result, CalPERS began aggressive negotiations with
health plans in 1992. 

Flexibility.  Purchasers in our sample believe that flexibility is
key to maintaining and nurturing a successful bidding system. 

  -- As noted earlier, Wisconsin's response to anticompetitive
     behavior was the introduction of negotiations.  According to
     BHCAG, the 1996 care system bids resulted in a 9.5-percent
     reduction in per-member-per-month incurred claim costs--without
     negotiations.  However, the coalition's Executive Director
     commented that he would not rule out negotiations in the future
     if the current approach showed signs of not working. 

  -- Arizona Medicaid's competitive bidding process has continually
     evolved since its inception in 1982.\31 Thus, the state's most
     recent RFP, issued in February 1997, contains a number of
     departures from past practice intended to increase competition
     and lower costs.  First, bids will be solicited for a 5-year
     period rather than for 3 years.  Second, the state has
     consolidated the 12 rural counties into 6 geographic areas and
     intends to maintain its policy of awarding a minimum of only two
     contracts for each area.  This consolidation could eliminate
     some health plans.  Finally, in one urban county, the state's
     target is to contract with six rather than eight plans. 

  -- As an incentive to bid competitively, Digital adopted a policy
     of allowing only its benchmark plan (in terms of quality and
     price) to offer a POS option to its employees.  A company
     official added that this opportunity can be taken away from a
     plan if either its cost or quality performance slips.  And, he
     noted, such slippages have caused Digital to change POS
     partners. 

  -- In 1996, the Washington Health Care Authority switched from a
     1-year to a 2-year contract period.  An official told us that
     health plans realized that if they did not attract a large
     enrollment base with their bid, they would not be able to
     recover for 2 more years.  A board member on the Missouri
     Consolidated Health Care Plan told us that the board believes
     its approach to multiple-year bids is unique.  In 1994, it
     solicited bids that locked in rates for 5 years with a maximum
     yearly increase tied to the medical Consumer Price Index. 
     However, because a buyer's market persisted and new entrants
     were willing to bid, it has tested the waters every year since
     then by calling for new bids.  If an existing plan rebids, the
     board retains the right to accept the new bid if it beats the
     5-year guaranteed rate or stick with the guaranteed rate through
     a renewal if the new bid is higher.  In 1995, it did the former,
     while in 1996, the latter.  Rebids also permitted the state to
     insert additional contract terms, which would not have been
     possible with a straight renewal. 


--------------------
\29 The degree of standardization ranges from identical benefits in
Wisconsin to roughly comparable benefits in Minnesota.  CalPERS
allows health plans to offer several supplementary benefits. 
Washington Health Care Authority has a roughly comparable benefit
design that applies to both its self-funded PPO and its HMO, albeit
with different limits, copayments, and deductibles.  Thus, both the
PPO and HMOs cover preventive care.  However, the state allows HMOs
to waive inpatient hospital copayments of $100 per admission. 
Gateway Purchasing Association has focused considerable energy on
standardizing the benefit exclusion policies of contracting HMOs. 

\30 Private sector coalitions may accept bids on a standard benefit
package but allow member firms to vary the mix of benefits that they
actually offer to employees. 

\31 Analysts familiar with the Arizona program have stressed the
importance of allowing the bid process to change as the marketplace
in a community changes.  At some times, it may be important to
stimulate entry by relaxing plan participation requirements.  At
other times, it may be important to ensure the stability of the
program by requiring strict financial or other criteria for entry. 
See Lynn Paringer and Nelda McCall, "How Competitive Is Competitive
Bidding," Health Affairs (1991), p.  229. 


         MAJOR DIFFERENCES
         OBSERVED AMONG BIDDING
         SYSTEMS
------------------------------------------------------ Chapter 3:2.3.2

Two major differences surfaced among the bidding systems we examined: 
(1) the number of winning bidders and (2) the criteria used to select
them. 

Number of Winning Bidders.  Whether or not they belong to a
purchasing coalition, the firms we interviewed are less likely than
state governments to offer a large number of HMOs to their employees. 
They are concerned that fragmentation of their workforce among a
large number of HMOs will reduce their leverage, not only in markets
where they have a large presence but also in those where they have a
small number of workers and there is no active purchasing group.  In
contrast, the state governments in our sample appear to have
sufficient leverage on their own.\32

They are often the largest employer in a state, and their risk pool
is concentrated in a smaller area, that is, usually within the
confines of state boundaries.  Their large workforce allows them to
negotiate with and actually offer more HMOs without fear of
fragmenting their risk pool and diminishing their leverage.  A
CalPERS official told us that such a strategy might not be viable for
smaller purchasers.  For them, narrowing the competition might be a
better approach. 

Although there was no consensus on the optimal number of plans needed
to maintain competition, a number of private firms suggested that, at
a minimum, two plans should be required.  Offering only one HMO, a
benefit manager told us, opens up the possibility of becoming "a
captive of that plan." The number of plans typically offered is a
"market-by-marketï¿½ decision.  Some markets have no competing HMOs,
others are only beginning to experience competition, and some have
undergone a consolidation that restricts competition.  Thus, one
coalition noted that the two to three dominant plans in a mature HMO
market area refused to submit bids unless they were guaranteed that
only one plan would be selected.  The coalition refused to go along. 
A few firms did indicate that they only contract with a single HMO in
certain market areas.  According to one such firm, a consultant had
advised it to add a second HMO in a particular market because
offering only one plan had adversely affected its negotiating
position.  This firm now thinks competing plans is a better way to
go.  Another firm recounted that rates fell by 30 percent when it
added a second HMO. 

While firms may only contract with a handful of HMOs in a given
market, some of the private coalitions in our sample appear to
believe that competition and leverage are enhanced by accepting bids
from a large number of plans.  For the first round of negotiations in
1994, all HMOs in California were invited to submit bids.  More
recently, PBGH negotiated with and offered its members a choice of 15
HMOs for benefit year 1996.  However, no member firm offers employees
all of the plans and most contract with four or fewer.  The inability
of the coalition to obtain a third straight year of price reductions
from participating HMOs has led PBGH to consider a number of options
to enhance its market power, including expanding its California
membership, moving into other nearby states, and excluding some HMOs
from the negotiation process.  We were told that the HMOs themselves
suggested that further premium concessions might be possible if the
market share of participating plans was increased. 

Selection Criteria.  In addition to price, many bidding systems
incorporate quality and access criteria.  The final section of this
chapter describes how the purchasers in our sample integrate these
three criteria to arrive at a decision. 


--------------------
\32 CalPERS and HIPC are PBGH members, but they only participate in
the coalition's quality initiatives, not in its separate negotiating
alliance.  A HIPC official, however, told us that one motivation for
joining PBGH was to observe the coalition's negotiating strategy and
evaluate it for approaches applicable to HIPC. 


   QUALITY:  SOME EMPLOYERS
   HESITANT ABOUT USING QUALITY
   CRITERIA
---------------------------------------------------------- Chapter 3:3

Ensuring the quality of health plans, particularly HMOs, poses a
formidable challenge to purchasers--one for which past experience
with indemnity coverage provides limited guidance.  Nonetheless, the
private sector has been on the cutting edge in exploring and mapping
this new frontier.  Capitation, a key characteristic of HMOs,
underscores both the importance of purchaser-sponsored quality
initiatives and the extent of the challenge.  HMOs are usually
prepaid a fixed per capita amount rather than reimbursed after the
fact for each service rendered--an arrangement that some analysts
believe creates an incentive to underserve.\33 Moreover, capitation
negates what had previously served as a proxy for quality--the
itemized invoice that gave indemnity insurance its fee-for-service
nickname.  Without claim forms, how are employers to assure
themselves that employees are indeed gaining access to medical
services?  The overwhelming response to what is frequently referred
to as the HMO "black box" can be summarized in one
word--accountability. 


--------------------
\33 On the other hand, reimbursement for each service, as in
fee-for-service plans, may create an incentive to provide unnecessary
medical treatment. 


      LARGE PURCHASERS DEVELOPED
      MANAGED CARE ACCOUNTABILITY
      TOOLS
-------------------------------------------------------- Chapter 3:3.1

Large private sector purchasers have driven the development of two
interrelated approaches to fostering accountability among managed
care plans--accreditation and the Health Plan Employer Data and
Information Set, commonly known as HEDIS.  Accreditation involves a
review of a health plan's quality assurance system against 50
standards.  The standards look for evidence that a health plan has
the structures and processes in place to report on and continually
improve effectiveness.  HEDIS, on the other hand, actually measures
performance in specific areas.  The most well-known HEDIS measures
focus on the ability to deliver a set of preventive services,
including mammography, childhood immunizations, and cholesterol
screening, to enrollees.  While accreditation and HEDIS are closely
related, accreditation is perhaps the easiest of the two criteria to
interpret.  An HMO is in one of three categories:  (1) seeking or not
seeking accreditation, (2) fully or provisionally accredited, or (3)
denied accreditation.  HEDIS data, on the other hand, demands more
analysis and explication, particularly if an employer is attempting
to compare a number of health plans across all 63 indicators. 

Appendix II describes the origins of HEDIS and contains background
information on the accreditation process.  Appendix III summarizes
the type of quality-related data that purchasers we interviewed
typically expect from HMOs.  The summary is based on performance
goals published by Southern California Edison in 1995.  Edison's
goals fall into four broad categories:  (1) structure and philosophy,
(2) service to enrollees, (3) clinical quality, and (4) finance and
information.  An Edison official told us that putting the goals in
writing and using them during contract negotiations frequently
strengthens the positions of individuals in health plans, such as
medical directors, who have been stressing quality issues for a long
time but have not received sufficient attention.  In establishing its
goals, Edison consulted with Digital Equipment Corporation, a
founding member of the HEDIS initiative, and with NCQA.  Though the
specific measures parallel the 63 indicators found in HEDIS, Edison,
like other employers, has customized the performance goals to reflect
its own focus on patient-centered care in an organized, accountable
delivery system. 


      HOW PURCHASERS USE QUALITY
      INDICATORS
-------------------------------------------------------- Chapter 3:3.2

Given the range of quality standards and measures available, which
indicators do firms find the most useful?  Two minimum requirements
for contracting with managed care plans were frequently mentioned by
the purchasers we interviewed--NCQA accreditation status and a
willingness to collect and report HEDIS data. 

Many purchasers told us that they give considerable weight to NCQA
accreditation status.\34 Some view accreditation as an essential
criterion for a plan to be offered, while others view it as a minimum
proxy for quality.  Thus, one purchaser added a particular HMO in
order to send a message to other plans that it was serious about
quality:  This firm explained that the new plan's "strongest suit"
was its NCQA accreditation.  Though many of the private purchasers in
our sample said they would refuse to contract with an HMO that has
been denied accreditation, they continue to contract with HMOs
seeking or making progress toward accreditation.  In 1996, Xerox
suspended new enrollment in 10 HMOs that it believed had not made
sufficient progress.  A Xerox official also told us that it
threatened to freeze enrollment in a highly regarded HMO who argued
that its reputation justified being exempted from the requirement. 
The plan in question is now well on the path to accreditation. 

The second key indicator for the firms in our sample is a health
plan's willingness to report HEDIS indicators or to provide other
data.  Some purchasers told us that health plans were initially
reluctant to comply but that most now recognize it as a fundamental
requirement for contracting with many large purchasers.  Purchasers
vary in the extent to which they actually use the data available from
plans.  It appears that, as with accreditation, some firms use the
ability and willingness to report data as a proxy for quality.  Thus,
a benefit manager told us that although the firm lacked the resources
to analyze health plan data, the plans themselves had to have
HEDIS-type data to effectively manage care.  Other firms, however,
look beyond the mere ability to report data, and evaluate a plan's
responsiveness to partnering with purchasers to continuously improve
quality.  For example, at a minimum, one firm conducts annual site
visits to assess performance against its written goals and may
schedule other visits to discuss ongoing projects directed at
improving performance in the future.  A coalition's executive
director told us that it uses contract negotiations to provide plans
comparative feedback on issues such as physician credentialing and
compensation of doctors. 

Some of the purchasers we interviewed are concerned about the
integrity of the HEDIS data they receive from health plans.  The
Gateway Purchasing Association pointed to the discrepancies between
plan-reported enrollee satisfaction and the results of an independent
survey that it commissioned.  While plans reported 90 percent or
better satisfaction, Gateway's survey showed a range of satisfaction
from 60 percent to 80 percent.  Gateway also hired a consultant to
audit four randomly selected preventive care measures.  Gateway's
Executive Director told us that data are more likely to be reliable
if a plan believes that it might be audited.  PBGH also uses
independently verified data on preventive care measures in its
quality reports and conducts its own annual satisfaction survey. 
Some purchasers, however, accept self-reported data and pass it on to
their employees. 

Recognizing that plan-level data may conceal performance differences
among medical groups in large, broad network-model HMOs, several
purchasers told us that they have recently been encouraging such
plans to report data by medical group as well as for the plan as a
whole.  According to one firm, however, few plans are now willing to
share such information.  PBGH is also focusing on the differences
between medical groups and is conducting its first survey that looks
at enrollee satisfaction at the medical group level.  Its sample is
drawn from enrollees in 55 participating physician groups.  PBGH
hopes to use the data to gain a more complete understanding of the
impact of health plan and medical group selection on satisfaction. 


--------------------
\34 The Joint Commission on Accreditation of Health Care
Organizations, a private, not-for-profit organization, also accredits
HMOs. 


      PURCHASERS EMPHASIZE NEED
      FOR PLANS TO MANAGE CARE
-------------------------------------------------------- Chapter 3:3.3

Purchasers we interviewed are convinced of the potential for managed
care to out-perform indemnity coverage in terms of quality.  One firm
told us that even in immature markets lacking well-developed HMOs,
such plans deliver higher-quality care than traditional indemnity
coverage.  The Executive Director of Gateway Purchasing Association
told us, however, that purchasers want more clinical management, more
integration, and more differentiation among the HMO products
available.  Though they see today's HMOs as a step in the right
direction, this view does not connote satisfaction with the plans
currently offered.  Gateway requires health plans to sign an
indemnification affirming that they are actually organized to manage
the care delivered to enrollees.  Although several large insurers had
reservations about this contract provision, they eventually
acquiesced. 

Another coalition observed that the majority of HMOs do not currently
have the integrated information systems necessary to manage care. 
Instead, HMOs manage cost--not care.  Gatekeepers, we were told, too
often limit access to more expensive services, rather than
facilitating receipt of the care actually needed.  The coalition's
observations are based on medical reviews directed at identifying
whether plans have the systems in place to (1) identify immediately
the enrollees who are in need of care and (2) manage that care
appropriately.  The review itself consists of an examination of a
random sample of high-cost cases to determine how the HMO responded. 
The coalition uses a staff of doctors and experts to review plan
records.  The focus is on the adequacy of the systems and procedures
rather than on the outcomes themselves.  The rationale for
highlighting high-cost cases rather than more routine ones is
statistical:  a tiny percentage of individuals account for a
disproportionate amount of health care costs.  To become more
efficient, we were told, purchasers and plans need to focus more
attention on what actually generates costs rather than on
easier-to-measure preventive services. 

Benefit managers at another firm told us that they had come to a
similar conclusion:  sometimes an HMO tries to limit services at the
front end--frustrating healthy people and delaying necessary
treatment for people who are sick.  Rather than continuing to hold
premiums down by adding members, they suggested that HMOs need to
make fundamental improvements in the way care is managed.  Though
this firm offers employees a choice of HMOs, where available, it is
seeking to develop partnerships with plans that it identifies by a
new acronym--OSC, or organized system of care.\35 The firm hoped that
its OSC program will push health plans to reevaluate the way that
they deliver care.  An OSC, we were told, is what an HMO should
aspire to be--that is, a plan that integrates the financing and
delivery of a full continuum of care and is held clinically and
fiscally accountable for the outcomes and health status of its
enrolled population.  Though such care systems do not actually exist
today, the firm was attempting to identify plans that have the
potential to evolve into OSCs because of their operating
philosophies, information systems, and physician alignments. 
Eventually, the firm plans to drop its PPO and nonqualifying HMOs and
contract exclusively with such care systems.  The number of potential
OSCs identified has grown from one in 1995 to nine in 1997.  Benefit
managers at this firm do not believe that some markets currently
exhibit the innovation necessary to produce potential care system
partners.  Even a mature HMO market like Minneapolis, we were told,
is not close to the point at which any plan would be considered a
potential OSC. 


--------------------
\35 Company officials told us that they adopted the concept from the
Washington Business Group on Health.  Digital also now looks to the
HMO to provide its services as an organized system of care. 


   ACCESS:  EMPLOYERS ACCOMMODATE
   EMPLOYEE CONCERNS ABOUT CHOICE
---------------------------------------------------------- Chapter 3:4

Employers and employees often use different criteria in evaluating
access.  Employers look at access in terms of the implications for
health plan efficiency and the adequacy of an HMO's physician and
hospital network, that is, its mix of physicians and their proximity
to the population served.\36 Some purchasers we interviewed suggested
that more tightly controlled HMOs with smaller networks are the most
likely to yield efficiently delivered, high-quality health care. 
However, purchasers recognize that workers are still likely to judge
access by their ability to maintain a relationship with a particular
physician or by how easily they can obtain referrals to specialists
of their choice. 

Ensuring access to employees' physicians has become a major criterion
in selecting HMOs.  The firms we interviewed frequently stated that
they like to offer HMOs with large networks, preferably ones that
operate statewide.  Such HMOs are often made up of numerous,
independent medical groups or independent physicians operating
throughout the state.  One firm told us that its preference for
statewide HMOs had led it to drop what it referred to as "mom and
pop" plans that were only available in regional markets.  In general,
firms believe it is unnecessary to offer a large number of
broad-based networks.  Thus, most of the California purchasers in our
sample offer only four HMOs to in-state workers, including at least
one smaller, group-model HMO.  One argument used to justify offering
fewer HMOs is the overlapping networks of large plans.  Because many
physicians or physician groups contract with multiple HMOs, including
additional plans with broad networks accomplishes little.  One firm
that wants to reduce the number of HMOs it contracts with told us
that it will target such plans. 

State purchasers, on the other hand, generally contract with a larger
number of HMOs.  For example HIPC, Washington, Wisconsin, and CalPERS
each contract with between 9 and 24 HMOs.\37 Moreover, they are more
likely to offer small, local plans or staff-model HMOs that operate
in some but not all counties.  A motivating factor is the desire to
extend the HMO option to all enrollees, an option that is often
considerably less expensive than the indemnity-type alternatives.  In
fact, an explicit criterion used by both CalPERS and HIPC for adding
an HMO is the plan's ability to expand coverage to underserved
areas.\38

Consequently, CalPERS has reduced to only one the number of counties
without an HMO option.  Similarly, Minnesota has cut in half the
number of rural counties that have only one health plan option. 

The states in our sample also offer employees a choice of broad
network-model HMOs.  Questioning whether such plans really compete
against one another, Minnesota has a long-standing policy against
expanding the number of broad network "look-a-likes." When state
employees disenroll into another IPA-model HMO, they are often able
to continue seeing the same physician--a factor that reduces plan
control over provider behavior.  However, when an employee leaves a
staff-model HMO, the patient also leaves the provider.  A HIPC
official told us that it was hard to justify additional broad-network
HMOs since 90 percent of physicians in California now participate in
the plans it offers.  In fact, HIPC has dropped one of its original
access criteria:  Does the plan bring in a new medical group not
currently available through some other HMO?  BHCAG is making a direct
attack on broad-based networks.  Starting in 1997, it will contract
with 15 separate care systems.  The RFP requires that primary care
physicians contract with no more than one participating care system. 
Overall, however, the number of participating physicians will be
larger than under the coalition's previous PPO product. 


--------------------
\36 For example, one of the purchasers we interviewed requires
contracting plans to have at least two primary care physicians and
two hospitals within 10 miles of 90 percent of its employees at a
given location.  Other purchasers have similar standards. 

\37 The number of HMOs offered by CalPERS varies considerably among
California's 58 counties:  40 have between 4 and 11 HMOs; 5 have
between 2 and 3; 12 have only one; and 1 county has no HMO option. 

\38 For the benefit year beginning August 1995, CalPERS began
offering National HMO to state employees.  National HMO is available
in 13 counties, including three that had previously lacked an HMO
option. 


   APPLICATION OF CRITERIA VARIES
---------------------------------------------------------- Chapter 3:5

We found that the purchasers we interviewed varied considerably in
(1) the significance that they attach to a given criterion; (2) how
they integrate access, quality, and cost criteria to arrive at a
decision; and (3) their willingness to eliminate a plan on the basis
of specific criteria.  Purchasing coalitions and state governments,
in particular, appear to be more reluctant than private purchasers to
use quality indicators to select or eliminate HMOs.  In general, the
use of criteria by many purchasers we interviewed appeared to be
subjective.  One coalition that expressed confidence in the outcome
of a quantification of bids acknowledged that the evaluation was
subjective rather than scientific in some areas. 

Few of the large purchasers we interviewed told us that price is
their most important selection criterion.  However, a recent study
conducted jointly by a benefits consulting firm and the Washington
Business Group on Health found that virtually all of the 368 large,
medium, and small firms it sampled listed cost as their most
important health plan selection and evaluation criterion.\39

Other highly-rated criteria were satisfaction with services,
availability of utilization data, and access by employees.  The
survey noted that comparatively few used available quality assessment
tools such as HEDIS, plan sponsorship of practice protocols, audited
report cards, health outcomes, or accreditation status to evaluate
health plans.  These information tools were ranked at the bottom in
terms of usefulness.  The study concluded that while employers are
interested in quality-based purchasing, they rate existing measures
as less helpful than measures related to cost and service.  The
survey emphasized, however, that employers of various sizes use the
available assessment tools differently.  For example, large
purchasers with more than 10,000 employees are far more likely than
small employers to use HEDIS or report cards and to have adopted
health plan accreditation criteria.  Moreover, the study projected a
significant increase in the use of these assessment tools over the
next few years, especially by large employers. 

Xerox, Digital, and Southern California Edison exemplify a
large-employer approach that separates the consideration of quality
from price.  Both Digital and Edison have published the extensive
performance measures that they use to evaluate plans and accept bids
only from health plans that meet these quality standards.  Digital
told us that it only applies the performance measures to about
one-half of the HMOs with which it contracts.  It is difficult, an
official explained, to impose standards on health plans in a market
where the firm only has a small number of employees.\40 Though it has
no published performance standards, Xerox develops a quality ranking
for each plan with which it contracts.  The ranking includes a large
number of variables, such as accreditation, and involves assigning a
numerical score for each variable.  A benefit manager told us that
Xerox shares these quality rankings with HMOs to let them know where
they stand.  The firm is considering eliminating plans that fail to
meet an acceptable threshold.  As noted earlier, Xerox does not
negotiate with health plans and considers itself a price-taker. 
Though Xerox will contract with plans that are considerably more
expensive than its benchmark plan, employees must pay the difference. 

Access is clearly an important criterion--one that appears to have
had an unintended effect on the size and efficiency of health plans. 
Although some employers emphasized that they want plans to compete on
the basis of the quality and efficiency of the medical groups in
their networks, many acknowledged that they prefer plans with
broad-based networks.  The plans themselves, we were told, believe
that they compete at the consumer level, where paramount importance
is attached to maintaining ties to one's own doctor.  As a result,
some plans attempt to recruit as many medical groups as possible. 
One purchaser we interviewed conducted an access study to help it
select HMOs.  The rationale behind the study was that employees would
be more inclined to join an HMO if they did not have to change
doctors to do so.  The firm's health benefit manager told us that two
of the HMOs selected had higher costs, but the best access scores. 
Other purchasers, we were told, also based their selection of HMOs on
access studies. 

Finally, some purchasers took a quantitative approach to evaluating
health plan bids.  For example, the National HMO Purchasing Coalition
and the Arizona Medicaid programs assign a weight of about 70 percent
to quality and access criteria, and 30 percent to cost.  The
coalition's goal is to identify two to four HMOs in each market.  In
1997, it will contract with 134 of the 380 HMOs that submitted bids. 
Arizona awarded contracts to 14 of the 21 health plans that submitted
bids in 1994, selecting fewer contractors in rural areas than in
urban centers.  Florida Medicaid is also about to adopt a
quantitative evaluation methodology.  Although plans that do not
achieve a minimum quality and access score will be eliminated,
Florida plans to contract with all qualified bidders.  Enrollment
will be allocated among plans on the basis of their overall ranking. 
Plans with higher scores will be rewarded with larger enrollment. 
Cost accounts for 20 percent of the total score. 

Given the difficulty of distinguishing among HMOs using today's
state-of-the-art techniques, some purchasers use criteria to
establish a minimum threshold for health plan participation and to
evaluate and monitor HMO performance.  In some instances, a
purchaser's market power allows it to dictate the minimum
requirements for the plans it contracts with.  Some of these
purchasers tend to view any narrowing of the market as premature,
given the preliminary nature of some of the criteria.  The root of
this caution is the difficulty of measuring an HMO's efficiency, true
cost, and quality of services.  Is one HMO less costly than another
because it has healthier enrollees, rations care to save money, or
puts effective systems in place to actually manage care? 

The Executive Director of the Gateway Purchasing Association in St. 
Louis referred to this minimum threshold as the ï¿½ground-rulesï¿½ for
health plan participation.  Plans that want to contract with Gateway
must be licensed HMOs, be willing to provide data, agree to the
coalition's benefits designs, and be willing to undergo performance
measurement audits.  State governments also have such minimum
thresholds.  Adopting minimum requirements, however, does not mean
that such purchasers contract with every qualified health plan or
that they forsake the use of specific criteria to eliminate health
plans.  Thus, as described earlier, HIPC, CalPERS, and Minnesota have
specific criteria that they apply in deciding whether to expand
employee health benefit options. 


--------------------
\39 Washington Business Group on Health and Watson Wyatt, Worldwide,
Is Cost Everything?  Getting Value for Your Health Care Dollar
(Washington, D.C.:  Feb.  1996). 

\40 Digital estimates that between 80 and 85 percent of employees are
enrolled in plans subject to its performance standards. 


PLAN OPTIONS, INCENTIVES, AND
MARKETING USED TO SWAY EMPLOYEE
BEHAVIOR
============================================================ Chapter 4

As of 1994, 19.5 percent of Americans were enrolled in HMOs;
enrollment in HMOs by state ranged from over 35 percent in 5 states
to less than 5 percent in 11 others.  Measured against this standard,
a representative group of purchasers in our sample has achieved
significantly higher rates of HMO enrollment, even among unionized
workers and retirees who are often exempt from requirements placed on
active, nonunion employees.  For example, only two purchasers have
fewer than 50 percent of their active employees enrolled in HMOs,
while 7 out of 11 purchasers have over 70 percent of such employees
enrolled in HMOs.  Table 4.1 summarizes, for a representative group
of employers in our sample, changes in HMO enrollment that occurred
after implementing major changes in their purchasing strategies. 
More recent statistics for some purchasers show how HMO enrollment
has changed over time. 



                         Table 4.1
          
            HMO Enrollment for Purchasers in GAO
              Sample Before and After Changing
                    Purchasing Strategy

                    (Numbers in percent)

                                HMO enrollment
                    --------------------------------------
                     Before changes in    After changes in
                            purchasing          purchasing
Purchaser                     strategy            strategy
------------------  ------------------  ------------------
State purchasers
----------------------------------------------------------
CalPERS active               84 (1993)           84 (1996)
 employees
CalPERS retirees             50 (1993)           49 (1996)
Minnesota active             51 (1989)       48 (1993), 72
 employees                                          (1996)
Missouri active              32 (1994)           75 (1997)
 employees
Washington total             66 (1995)           77 (1996)
 employees
Washington active                   70                  83
 employees
Washington                          46                  52
 retirees
Wisconsin active             20 (1983)       55 (1984), 83
 employees                                          (1996)

Private sector purchasers
----------------------------------------------------------
American Express             29 (1993)       62 (1994), 74
                                                    (1995)
Digital                      28 (1990)       60 (1992), 66
                                                    (1996)
NYNEX total                  31 (1993)           46 (1996)
 employees
NYNEX union                  34 (1993)           40 (1996)
 employees
NYNEX management             24 (1993)           64 (1996)
Safeway                      21 (1992)       37 (1995), 63
                                                  (1996)\a
U S WEST total               12 (1991)           42 (1996)
 employees
U S WEST union           Not available           45 (1996)
 employees
U S WEST nonunion        Not available           33 (1996)
 employees
Xerox                        40 (1990)           80 (1997)
----------------------------------------------------------
\a Projected. 

To what factors do these purchasers attribute increased enrollment in
HMOs or in other forms of managed care?  The purchasers in our sample
identified three basic tools that they believe had a major impact on
employee health plan selections:  (1) the type and mix of health
plans offered, (2) financial incentives, and (3) the information
provided on health plan options. 


   EVOLUTION IN EMPLOYEE BENEFIT
   OPTIONS
---------------------------------------------------------- Chapter 4:1

The movement toward a managed care purchasing strategy is reflected
in the type and mix of health plans offered by the purchasers in our
sample.  In some cases, however, purchasers told us that the current
list of options is only an interim step in the direction of increased
reliance on HMOs to serve the health care needs of their
employees--albeit HMOs from which they expect improved management and
accountability for the delivery of care.  The range of plans offered
reflects (1) a willingness to accommodate the high priority employees
attach to selecting a physician and (2) the lack of alternatives to
indemnity products in some markets.  Few of these purchasers have
abandoned plans that allow access to a wider choice of physicians,
specialists, and hospitals.  And still fewer offer only the most
restrictive type of managed care--the staff-model HMO that employs
its own doctors, operates its own hospitals, and uses a gatekeeper to
regulate access to specialists.\41 Instead, what has evolved often
strikes a middle ground by restricting, but not eliminating, the
right to select a physician and by addressing concerns about having
too few physicians from which to choose. 

Table 4.2 summarizes the health plan options for a representative
group of purchasers in our sample. 



                         Table 4.2
          
               Health Care Options Available

                                        Type and mix of
Purchaser                               plans offered
--------------------------------------  ------------------
State purchasers
----------------------------------------------------------
CalPERS                                 PPO and HMO

Minnesota                               PPO and HMO

Missouri                                PPO, POS, and HMO

Washington                              PPO and HMO

Wisconsin                               Indemnity, PPO,
                                        and HMO


Private sector purchasers
----------------------------------------------------------
American Express                        Indemnity, PPO,
                                        and HMO

Digital                                 Indemnity,\a POS,
                                        and HMO

NYNEX                                   Indemnity, POS,
                                        and HMO

Safeway                                 PPO,\a POS, and
                                        HMO

U S WEST                                POS and HMO

Xerox                                   Indemnity and HMO
----------------------------------------------------------
\a Effective in 1997, Digital's indemnity option will be available
only in areas with no POS plan.  Safeway's PPO option is no longer
available in 1997. 


--------------------
\41 As noted earlier, the distinctions among managed care plans are
becoming outmoded as plans rapidly evolve in response to marketplace
demands.  For example, Kaiser, a group-model HMO, now offers a
point-of-service product in certain markets and sometimes contracts
with non-Kaiser hospitals. 


      INDEMNITY
-------------------------------------------------------- Chapter 4:1.1

Although purchasers in our sample still offer an indemnity option,
they have often introduced elements of managed care into their plan
designs.  Hybrid "managed indemnity" products now include features
such as (1) utilization review; (2) mandatory case management of
expensive services; (3) precertification for surgery,
hospitalization, certain tests, and inpatient mental health
treatment; and (4) centers of excellence renowned for treating
certain diseases.  Escalating costs have also persuaded some of the
purchasers we interviewed to place special restrictions on some
services--especially mental health.  One company has even required
precertification for substance abuse treatment.  Some purchasers are
worried about the continued viability of their indemnity option
because of the tendency for higher utilizers of care to choose plans
with fewer restrictions on selecting providers.  In many markets,
especially rural areas, there is no real alterative to an indemnity
option. 


      PREFERRED PROVIDER
      ORGANIZATION
-------------------------------------------------------- Chapter 4:1.2

Some purchasers have substituted a PPO--a somewhat narrower network
of doctors and hospitals--for their indemnity option.  For example,
the CalPERS PPO includes 83 percent of physicians in California,
while the PPO offered to Washington State employees includes 85 out
of 89 hospitals.  Some PPO designs even incorporate an out-of-network
option that provides employees with a safety valve back to
traditional indemnity coverage.  As with indemnity coverage,
purchasers have introduced similar management features to help
control costs.  The introduction of a management feature can be
triggered by employee demographics or analysis that identifies a
high-cost area.  For example, analysis by one firm with a
predominately young workforce suggested that maternity costs were its
biggest expense.  To help identify potential prenatal problems, this
employer instituted a voluntary nurse advocate hotline.  In
Minnesota, state employees must now select a primary care physician
gatekeeper, a feature often associated with HMOs, if they elect to
enroll in the state's self-funded PPO.  The use of gatekeepers is
often associated with more restrictive HMOs.  CalPERS developed a
second, self-funded PPO product that was first offered in 1993.  It
was intended as a more affordable option for members who want fewer
restrictions on their choice of providers.  Its lower premiums are
offset by higher out-of-pocket costs for enrollees.  Minnesota also
developed a second, more restrictive self-funded product in order to
respond to an HMO with a self-referral option that was competing with
the state's PPO product.  A state official referred to this new
option as an "HMO clone."\42 It consists of a high-performance
network of doctors and clinics that were handpicked because they were
good at managing care.  The only difference between the larger PPO
network and this new option is that it eliminates the self-referral
option still available through the larger network. 


--------------------
\42 Although not licensed or regulated as an HMO, a state official
told us that this option operates like an HMO with a closed panel of
physicians. 


      POINT-OF-SERVICE
-------------------------------------------------------- Chapter 4:1.3

Some purchasers have replaced indemnity or PPO plans with a
point-of-service (POS) option--a less contentious move, from the
standpoint of employee relations, than adopting an HMO-only strategy. 
POS is a hybrid design that can have elements of an HMO, a PPO, and
even a traditional indemnity product.  Employees may decide which
tier to utilize each time they seek medical services.  Several
purchasers told us that they view POS as a bridge from indemnity
plans to HMOs.  A few purchasers in our sample offer POS in
conjunction with either traditional indemnity or a PPO option.  In
some instances, an indemnity-type option is only available if a POS
plan is not offered in a particular market.  Some purchasers,
however, offer no middle ground between indemnity coverage and an
HMO.  HMO enrollees of one such firm have an out-of-network option
for certain serious procedures, such as transplants. 


      HEALTH MAINTENANCE
      ORGANIZATION
-------------------------------------------------------- Chapter 4:1.4

As discussed in chapter 3, most private sector purchasers emphasize
broad-network HMOs that operate statewide and provide access to a
wide choice of primary care physicians, specialists, and hospitals. 
State purchasers, on the other hand, are more likely to contract with
smaller, local health plans in an attempt to provide an HMO option to
as many employees as possible. 


   DEVELOPING FINANCIAL INCENTIVES
   POSES CHALLENGES FOR PURCHASERS
---------------------------------------------------------- Chapter 4:2

Purchasers we interviewed believe that financial incentives are an
important tool in facilitating acceptance of HMOs by employees.  They
are often inherent in the design of a managed care or HMO option in
the form of lower premiums, copayments, and deductibles coupled with
a richer set of benefits.  Such incentives, however, were generally
viewed by the purchasers in our sample as less effective than ones
that focus on the amount deducted from an employee's paycheck--that
is, the employee share of the cost of health care coverage. 

Before purchasers adopted a managed care strategy, employees were
insulated from the true costs of their health care.  To a greater
extent than in the past, the purchasers we interviewed are exposing
workers to the financial implications of their choices.  The ability
of purchasers to adopt stronger financial incentives, however, is
often limited by a common set of constraints, including the extent to
which workers are unionized or the corporate culture's perspective on
employee cost-sharing. 


      THE THEORY BEHIND
      CONTRIBUTION FORMULAS
-------------------------------------------------------- Chapter 4:2.1

Most employers pay a fixed percentage of an employee's health plan
premium.  Table 4.3 uses hypothetical monthly premiums for four
health plan options to demonstrate the impact of different
cost-sharing formulas on employee out-of-pocket expenses.  For each
option, the firm pays 90 percent of the premium according to the
specified formula and the employee pays the remainder.  For example,
under the option 3 formula, the employer contribution is based on the
cost of the benchmark plan\43 --in this instance, HMO A--and totals
$108 (90 percent of $120).  An employee selecting HMO A pays the
remaining 10 percent ($12).  On the other hand, an employee electing
to enroll in the most expensive plan is responsible for 46 percent of
the premium, and one choosing the least costly option pays nothing. 

Moving across the table from left to right, each successive formula
provides a stronger financial incentive for an employee to consider
cost in choosing between indemnity and managed care options.  So when
an employer pays 90 percent of the cost of any plan (option 1), the
employee only faces a $10 differential between the low-cost HMO and
the indemnity option.  If, on the other hand, the employer's
contribution is tied to 90 percent of the low-cost plan (option 4),
an employee considering the indemnity option must contribute $100
more each month compared with the least expensive HMO.  In addition
to widening the cost gap between indemnity and managed care options,
each successive formula also forces an employee to take a closer look
at the cost differential among managed care options.  In our
examples, HMO A is designated as a benchmark HMO because of
outstanding quality.  Under option 2, HMO A is free; however, under
option 4, which uses a low-cost formula, the employee's share of the
premium is $30--$20 more than HMO B, an acceptable, but less
expensive, HMO. 



                         Table 4.3
          
          Hypothetical Firm-Employee Contribution
            Options (Single Coverage/Per Month)

               Formula: Firm pays 90% of (employee pays
                              remainder)
            ----------------------------------------------
                         Option 2:
                           Average   Option 3:   Option 4:
             Option 1:     cost of    Cost for    Cost for
              Cost for    all plan   benchmark    low-cost
              any plan     options   plan (HMO   plan (HMO
              selected      ($124)     A/$108)      B/$90)
----------  ----------  ----------  ----------  ----------
Indemnity: premium = $200
----------------------------------------------------------
Firm pays         $180        $124        $108         $90
Employee           $20         $76         $92        $110
 pays

Point-of-service: premium = $130
----------------------------------------------------------
Firm pays         $117        $124        $108         $90
Employee           $13          $6         $22         $40
 pays

Benchmark HMO A: premium = $120
----------------------------------------------------------
Firm pays         $108        $120        $108         $90
Employee           $12          $0         $12         $30
 pays

Low-cost HMO B: premium = $100
----------------------------------------------------------
Firm pays          $90        $100        $100         $90
Employee           $10          $0          $0         $10
 pays
----------------------------------------------------------
The strength of any financial incentive is also influenced by a
number of other factors, including (1) the magnitude of the
difference among health plan premiums, (2) employer generosity, and
(3) the characteristics of the workforce.  The closer premiums are
clustered together, the less incentive an employee has to
discriminate among plans due to cost differences.  Similarly, an
employer electing to pay a higher percentage of the premium may
reduce employee cost-sensitivity.  Finally, a young, relatively
healthy workforce will probably be more responsive to small changes
in price than one that is older and sicker.  Generally, however, a
fairly significant price differential may be required to convince
employees to switch to a managed care plan with a more restrictive
choice of physicians. 


--------------------
\43 The term "benchmark" is associated with Xerox and Digital, which
screen the HMOs that they offer to employees on explicit quality
criteria.  Generally, the benchmark HMO is the lowest-priced plan in
that market that year. 


      EMPLOYEES ASKED TO SHARE
      MORE OF HEALTH CARE COSTS
-------------------------------------------------------- Chapter 4:2.2

We were told that in the past many employers targeted their
contribution to higher-cost plans, reducing the incentive for an
employee to choose a less expensive alternative.  Although some
purchasers in our sample continue to use higher-cost plans as a
reference point in determining the level of employee cost-sharing,
others have adopted contribution formulas that more explicitly
encourage migration to what they consider efficient health plans. 
Only one firm told us that it did not believe in using financial
incentives to influence employee choice.  As noted earlier, the
specific formula adopted, cost differentials between plan options,
and employer generosity all influence the effectiveness of
incentives.  Whatever formula is used, however, purchasers we
interviewed generally now ask employees to contribute more to the
cost of coverage, particularly employees who choose an indemnity
option.  Table 4.4 describes the employee contribution formulas of a
representative group of purchasers in our sample and provides a rough
comparison of employee out-of-pocket costs if the employee elects to
enroll in an indemnity-type product. 



                         Table 4.4
          
              Financial Incentives Adopted by
                         Purchasers

                                     Monthly employee
              Financial incentives   share of family
              (for active employees  coverage under
Purchaser     only)                  indemnity-type option
------------  ---------------------  ---------------------
State governments
----------------------------------------------------------
CalPERS       Incentive for state    Ranges from $80 to
              employees based on     $256 for state
              California's freezing  employees, depending
              its contribution at    on the PPO option
              the 1991 level.        chosen.

Minnesota     Low-cost plan formula  $84 in the
              introduced in 1989.    Minneapolis area (PPO
              Low-cost plan is free  enrollment in 1996
              for full-time          was about 27%).
              employees.

Missouri      Low-cost plan formula  $266 in the Jefferson
              introduced for state   City area for the PPO
              employees in 1995.     option. In contrast,
              Low-cost plan is free  the lowest-cost HMO
              for employees.         is $112.

Washington    First introduced       $36 (Enrollment in
              cost-sharing in 1996.  the state's self-
              PPO is benchmark for   funded PPO dropped
              cost-sharing.          35% with the
                                     introduction of cost-
                                     sharing).

Wisconsin     Low-cost formula       Ranges from about $75
              introduced in 1984.    (where there are no
              State pays the lesser  low-cost
              of 90% of indemnity    alternatives) up to
              option or 105% of      $333.
              qualified lowest-
              cost plan.


Private sector
----------------------------------------------------------
American      Gradually moving to    Unavailable.
Express       benchmark plan
              formula by 2001. The
              benchmark is the
              local HMO with the
              highest value
              measured in terms of
              quality (70%) and
              cost (30%) and is
              usually, but not
              always, the lowest-
              cost plan. 1994
              increase in HMO
              enrollment attributed
              to promoting HMOs in
              open season
              literature.

Digital       Introduced a           $623.92 in the Boston
              benchmark plan         area (less than 6%
              formula in 1991 in     are in the indemnity
              which firm pays 85%    option in 1997); 16%
              of plan that meets     are in POS in 1997.
              its cost and quality
              criteria. The
              benchmark plan is
              usually, but not
              always, the lowest-
              cost plan in an area.

NYNEX union   No incentive--free.    Indemnity option is
                                     free.

NYNEX         Cash-back incentive    Ranges from $214 to
management    increased              $340, depending on
              significantly in       the employee's
              benefit year 1994 for  location.
              employees electing to
              join an HMO.

Safeway       First introduced       Replacing PPO with
              cost-sharing in 1994.  POS in benefit year
              Starting in 1996,      1997. PPO enrollment
              will pay 90% of        dropped by 50%
              average-cost plan.     between 1994 and
                                     1996.

U S WEST      Limited incentive--    Indemnity no longer
union         POS and low-cost HMO   offered.
              are free; employee
              pays difference for
              higher-cost HMOs.

U S WEST      Limited incentive--    Indemnity no longer
management    POS and low-cost HMO   offered.
              are free; employee
              pays difference for
              higher-cost HMOs.

Xerox union   No incentive--         Unavailable.
              indemnity option is
              free to employee.

Xerox         Benchmark plan (low-   $201.
management    cost) is free, and,
              in addition, employee
              gets cash back.
----------------------------------------------------------
Relatively few of the purchasers in our sample--only six--elected to
target their contribution to the low-cost or benchmark plan.  The two
firms that use a benchmark formula screen plans using explicit
quality criteria before offering them to employees.  In adopting this
approach, purchasers need not penalize individuals living in markets
with limited managed care alternatives.  Thus, in rural areas with
few HMOs, Wisconsin and Minnesota designate their indemnity and
fee-for-service PPO plans as the low-cost option.  In rural
Wisconsin, a state employee pays only $75 monthly for family coverage
under the indemnity plan, while in areas with competing HMOs, the
same plan costs as much as $333. 

The impact of a low-cost plan formula on employee choice can be
dramatic.  For example, Digital saw enrollment in HMOs double in one
year from about 30 to 60 percent--a level where it appears to have
stabilized.  Xerox's enrollment in HMOs now stands at about 80
percent.  Digital, unlike Xerox, offers a POS alternative that has
attracted a steady 15 to 16 percent enrollment.\44 HMO enrollment by
Wisconsin State employees went from 20 to 55 percent the year after
it adopted a low-cost contribution formula that only offered a choice
between HMOs and an indemnity plan. 

On the other hand, Minnesota implemented a low-cost plan option in
1989.  By 1993, HMO enrollment by Minnesota State employees had
actually decreased slightly, from 51 percent to about 48 percent. 
During this period, the cost differential between the low-cost plan
and the state's self-insured, fee-for-service PPO remained fairly
constant.  Officials attributed the recent growth in HMO enrollment,
which now stands at 72 percent, to a widening of this cost
differential.  In 1995, an HMO with a self-referral option and a
network that closely resembles the state's fee-for-service PPO
product cut its rates by 25 percent.  Since this HMO was now
substantially cheaper, the state fee-for-service PPO lost 10 percent
of its enrollment.  The actual amount of an employee's share of the
premium for alternative types of coverage also helps explain the
impact of a low-cost formula on plan enrollment.  For example, in
1996, a Minnesota State employee in the Minneapolis area who elects
fee-for-service PPO coverage for his family paid about $64 a month
more than for the lowest-cost HMO.  Minnesota still has about 27
percent of state employees in its PPO option.  In contrast, a Digital
worker in the Boston area who chose indemnity coverage for his family
paid about $560 per month more than for the lowest-cost HMO.  Not
surprisingly, only about 5 percent of Digital employees are still
enrolled in the company's indemnity plan. 

Over time, the already strong, low-cost incentive can become
stronger:  Those remaining in indemnity plans tend to be higher
utilizers of health care services, increasing the cost per enrolled
employee and the associated premium.  But a firm may choose to
subsidize its indemnity option to prevent this adverse selection
"death spiral." The incentive structure of such firms is based on the
assumption that younger, single individuals use little health care
and are thus cheaper to insure under an indemnity option.\45 Thus,
single employees at two firms in our sample pay nothing for
indemnity, while families are given a greater financial incentive to
join an HMO.  A different firm, on the other hand, has removed most
of the subsidy for the indemnity option.  Its goal is to eventually
replace this option with a POS alternative. 

The Missouri Consolidated Health Care Plan, which manages health
benefits for public employees, adopted a low-cost formula for state
workers in 1995.  A board member suggested that purchasers who
self-insure their indemnity plan often find it difficult to be
neutral about the plan's success or failure, including the extent to
which employees share in ever-rising costs.  Self-insurance, he
argued, clouds a purchaser's view of competing plans, a factor that
contributed to the board's decision to sell its indemnity product and
offer a fee-for-service PPO option through an independent carrier. 
The logic behind the decision is that an insurance company is more
likely to take the necessary steps to make such a plan competitive
and to charge realistic premiums that ensure profitability.  Another
program for state employees, the Washington Health Care Authority,
has been directed by the state legislature to study the advantages of
selling off its fee-for-service PPO product. 

One purchaser we interviewed adopted a more radical and costly
approach to increasing HMO enrollment.  Initially, a management-level
employee paid nothing for the low-option indemnity plan and, in fact,
got money back.  To increase HMO enrollment, the firm required single
employees to contribute toward the cost of this indemnity option and
offered what the firm's benefit manager characterized as a ï¿½hugeï¿½
managed care incentive--$2,000 to $3,000 cash back.  Its popularity
has forced the company to gradually scale back the value of the
incentive.  Over a 3-year period, the firm's nonunion HMO enrollment
grew from 24 percent to 64 percent.  Firms that pay 100 percent of
coverage have also adopted a cash-back incentive model to increase
participation in certain types of health plans.  Another firm offers
employees additional benefit options, such as dental and vision,
rather than cash when they choose less expensive options. 

The contribution formulas used by most of the purchasers we
interviewed fall somewhere between a low-cost formula and one that
pays a fixed percentage of any plan selected.  Some of the approaches
adopted include

  -- average cost of all plans, including the indemnity option,

  -- use of a PPO as a benchmark,

  -- grouping plans into low- and high-cost tiers, and

  -- freezing the employer contribution at the 1991 level. 

BHCAG employers have agreed to group care system bids into three
tiers and to base the contribution for each tier on the average
premium.  Employees choosing a plan in the first tier would pay the
lowest cost for single coverage, but selecting a plan in the third
tier would cost the employee the most.  Moreover, some BHCAG members
told us that they may eliminate some or all of the other plans
currently offered to employees.  Other purchasers we interviewed
recently implemented or are in the process of phasing in stronger
financial incentives.  One firm is moving toward the low-cost plan
approach over a period of 7 years.  Other purchasers we interviewed
also phased in stronger employee contribution formulas. 

Purchaser failure to periodically review and update the contribution
formula can water down its impact on employee behavior, especially
when premiums are rising slowly or even declining in some markets. 
Such trends also lessen the urgency for a purchaser to strengthen
incentives.  For example, until 1991, the state of California based
its contribution for active employees under the CalPERS program on
the cost of the four most popular plans, which were also among the
most expensive.\46 Since then, the monthly contribution level has
been frozen at $410 for family coverage.  Although the goal was to
establish a new contribution formula through collective bargaining,
as of August 1996 no agreement had been reached for most of the
bargaining units.  The pressure to agree on a new formula may have
been undercut by the fact that (1) many HMO premiums are now less
than they were in 1993 and less than the state's "frozen"
contribution level, (2) the most popular PPO has experienced a modest
price increase of only 4.5 percent over 4 years, and (3) an
alternative PPO option fell nearly 20 percent in cost since 1993. 
Chevron negotiates a fixed-dollar contribution with its employees
every 3 years.  With the decline in California HMO rates through its
participation in PBGH, HMOs are now free to employees.  Since the
cost of the firm's POS alternative has also decreased, we were told
that there is now little incentive for employees to join an HMO. 

Purchasers also use financial incentives to steer employees toward
specific health plans.  Xerox announced that it would give employees
a $120 price break for joining HMOs that were fully accredited by
NCQA.  Members of the National HMO Purchasing Coalition meet annually
by region with contracting HMOs and ask plans to set their own
performance standards.  Subsequently, one coalition member surveyed
employees to measure health plan progress against these self-defined
standards.  Depending on the survey results, this firm will increase
or decrease its contribution for the plan by up to 20 percent. 


--------------------
\44 As of January 1, 1997, Digital managed care enrollment stood at
82 percent:  66 percent of employees are enrolled in an HMO and 16
percent in a POS plan. 

\45 This group also tends to be sensitive to smaller cost
differentials. 

\46 Under the CalPERS program, California still uses the average
weighted cost of the four most popular plans to calculate the premium
contribution for state retirees.  In 1996, the state's monthly
contribution fell from $410 to $369.  If this formula had still
applied to active state employees, family coverage in the most
popular HMO would have been about $15 a month rather than free. 


      CONSTRAINTS ON EMPLOYEE
      COST-SHARING
-------------------------------------------------------- Chapter 4:2.3

Corporate culture, collective bargaining, and the low salaries of
some workers limited the ability of firms in our sample to share the
cost of health insurance coverage with their employees.  The
corporate culture of some firms in our sample is paternalistic toward
employees, placing limits on the extent to which employees could be
asked to contribute toward the cost of health care.  One firm told us
that it had a huge internal debate over employee cost-sharing and the
adoption of a low-cost contribution formula.  For years, the firm had
told employees that it did not choose health plan partners on the
basis of cost.  Thus, switching to a low-cost contribution formula
would have directly contradicted 10 years of emphasis on partnering
with plans.  The firm adopted a more modest cost-sharing formula, but
the benefit manager was not sure that the differential between the
plan options was significant enough to encourage migration into HMOs. 

Other firms had a significant portion of their workforce covered
under labor agreements that prohibit cost-sharing for traditional
indemnity, PPO, and even POS plans.  One company not only offers many
of its plans free to union employees but also feels compelled to do
the same for management-level staff to avoid making a union
attractive to nonunion employees.  The benefit manager of this firm
commented that a larger percentage of union than management-level
staff had enrolled in HMOs.  All of the company's executives are in
the POS plan, and there is not much encouragement from top management
to develop stronger incentives for HMO enrollment.  A few firms,
however, have been able to persuade their unions to accept a POS plan
in lieu of a PPO option.  Benefit managers told us that a relatively
small percentage of their POS costs were attributable to enrollees
who sought services outside the HMO tier, that is, the PPO or
indemnity tiers. 

Finally, some purchasers are limited in their ability to impose
cost-sharing by the character of their workforce.  A firm told us
that even though it kept the premium contribution low, few of its
hourly employees signed up for health benefits.  One factor was low
wages.  This firm said that if it charged more than $50 a month for
single coverage, few, if any, employees would sign up.  Another
factor, we were told, was the youth of many employees, who would
"rather spend the money on a car stereo instead." Those who did
enroll tended to be married and planning to have children. 


      RELATIVE IMPORTANCE OF
      INCENTIVES SOMETIMES
      DIFFICULT TO DISCERN
-------------------------------------------------------- Chapter 4:2.4

The relative importance of financial incentives versus other factors
that influence an employee's choice of health plans is difficult to
distinguish.  Clearly, workforce demographics, degree of HMO
penetration, or dislike of the paperwork often associated with
indemnity plans can also affect employee plan selection.  Union
employees are a case in point.  Many of these workers have no
explicit financial incentive to join an HMO other than copayments and
deductibles, since indemnity coverage is often free.  Yet purchasers
told us that many union employees have chosen HMOs.  Some firms
attributed the high HMO enrollment of unionized workers, in part, to
dislike for the indemnity claim forms and "red-tape."\47

HMO penetration in a given market is another factor affecting the
behavior of union workers.  Thus, when Xerox began to implement its
benchmark HMO strategy for management-level employees in 1990, the
firm already had 40 percent HMO enrollment--largely among its union
workers in Rochester, New York.  According to Xerox, HMOs have long
been accepted in Rochester and include almost every doctor in the
area.  In the early 1990s, HMOs provided insurance to more than half
of the city's residents.\48 In general, the purchasers in our sample
have more employees enrolled in HMOs in areas with significant HMO
penetration. 


--------------------
\47 One employer, whose no-cost indemnity option for union employees
had a $250,000 lifetime limit, told us that many such employees chose
an HMO not because of this low limit but to avoid the indemnity
paperwork hassle. 

\48 Health Care:  Rochester's Community Approach Yields Better
Access, Lower Costs (GAO/HRD-93-44, Jan.  29, 1993), p.  8. 


   FIRMS TRY MARKETING TO OVERCOME
   RESISTANCE TO MANAGED CARE
---------------------------------------------------------- Chapter 4:3

The most serious obstacle to the health benefit management strategies
described in this report is often the negative employee perception of
managed care.  This general antipathy for restricted choice and
apprehension about the quality of care have been heightened over the
past several years by what purchasers characterize as a constant
stream of negative publicity ranging from gag rules to maternity
stays.\49 Employers have used three basic tools to help sway employee
opinion and to assuage specific employee concerns about managed care. 
First, as discussed in chapter 3, they articulate and explain the
criteria used to select managed care plans.  Second, they now more
prominently feature HMOs in their open enrollment literature. 
Finally, they provide employees specific comparative data about the
quality of the available health plan options.  The purchasers in our
sample are not merely supplying relevant information; their role
during the annual open season is sometimes one of advocate rather
than neutral broker. 


--------------------
\49 The typical comments about HMOs from a focus group conducted by
one purchaser were (1) "the care is inferior," (2) "I don't think my
doctor participates," and (3) "top-quality physicians aren't
available through an HMO."


      OPEN ENROLLMENT SEASON
      OFFERS OPPORTUNITY TO
      PROMOTE HMOS
-------------------------------------------------------- Chapter 4:3.1

The purchasers in our sample give employees an opportunity to
reassess their health plan selections annually during what is
commonly referred to as an "open season." American Express told us
that after switching to an HMO strategy, it began to devote more
space to the managed care options in its open season literature. 
Previously, this material had zeroed in on the company's indemnity
plan, leaving it up to the employee to take the initiative to learn
more about participating HMOs.  The open season brochure merely
provided plan names and phone numbers.  According to a benefit
manager, the firm was more knowledgeable about and comfortable with
how its own indemnity plan worked, and the open season literature
simply reflected this fact.  It was much harder to describe HMO
benefits, since they differed from plan to plan. 

Some purchasers we interviewed now routinely provide employees with
basic information about the HMOs they offer.  Although the specific
data vary from employer to employer, the following categories of
information usually were included: 

  -- General:  Description of how an HMO works, including an
     explanation of the difference between group/staff and IPA model
     plans, the role of the primary care physician, and how to obtain
     referrals to specialists. 

  -- Plan-specific data:  How long the plan has been operating,
     whether it is for- profit or not-for-profit, the number of
     enrollees it has, the growth or decline in enrollment over time,
     and the percentage of fellow employees who have selected each
     plan. 

  -- Physician data:  Physician turnover, the number of
     board-certified specialists and primary care physicians, and the
     percentage of primary care physicians accepting new patients. 

  -- Hospital:  Hospitals affiliated with the plan and those most
     frequently used. 

  -- Accreditation:  NCQA accreditation status. 

Some purchasers in our sample give employees a context for
interpreting the data provided, such as including a benchmark or goal
for evaluating the physician turnover rate.  Xerox informs employees
how plan premiums have changed over the last few years and suggests a
goal of less than 4 percent over a 3-year period. 

As shown by the prominence of such data in this list, access may be
the single most important issue for employees.  One firm told us that
it put together a special brochure to educate employees on the
differences between Kaiser and several new IPA-model HMOs that were
being offered for the first time.  It wanted to be sure that
employees understood that the new plans were different from Kaiser,
which is a staff-model HMO with a much narrower choice of physicians
and hospitals.  This firm, as well as other purchasers, told us that
employees are more willing to choose an HMO or other managed care
product when they know that their doctors and local hospitals
participate.  While it is relatively simple to provide a list of
affiliated hospitals, the names of network providers are generally
only available from individual health plans.  One purchaser, however,
went a step further.  HIPC now publishes a semiannual list of
participating providers and the health plans with which they are
affiliated.  When a provider is available through several plans, as
is often the case in California, it gives employees an opportunity to
focus on other selection issues. 

Some purchasers are also attempting to provide information on HMO
benefits and exclusions in their open season material.  This task was
simplified for those purchasers who have adopted standardized HMO
benefits.  Standardized benefits, however, do not mean that the
policies and procedures of each HMO are identical.  For example,
Wisconsin furnishes additional information on each plan regarding the
policy on maternity stays, the operation of the drug formulary,
procedures for dispensing drugs, covered outpatient mental health
services, and how to obtain disposable diabetic supplies.  For other
purchasers we interviewed, however, explaining HMO benefits is
complicated by the lack of standardization.  Despite the difficulty,
some firms do provide comparative information on HMO copayments and
limits for various services, while others still refer their employees
to each health plan. 


      QUALITY IS FOCUS OF SOME
      DATA, ESPECIALLY REPORT
      CARDS
-------------------------------------------------------- Chapter 4:3.2

Generally, purchasers recognize that they cannot advocate enrollment
in managed care plans without addressing a fundamental employee
concern--the suspicion that cost, not quality, is the motivating
factor for adopting a managed care strategy.  Some of the basic
information just described touches indirectly on the issue of health
plan quality--like the percentage of board-certified physicians and
accreditation status.  What are commonly referred to as "report
cards" are an attempt to tackle the quality issue head on.\50

About half of the purchasers in our sample currently provide
employees a report card on the HMOs that they offer, and others are
planning to do so in the near future.  These report cards focus on
the results of employee satisfaction surveys and, to a lesser extent,
health plan performance in delivering HEDIS preventive services such
as immunizations or cancer screening.  Purchasers offered a number of
explanations for not putting greater emphasis on HEDIS measures.  One
firm that was involved in the development of HEDIS told us that it
had doubts about sharing these data with employees because the
attempts to measure quality are in their infancy.  This firm is only
issuing its first report card for the 1997 benefit year.  Another
purchaser noted that employees are not interested in HEDIS
performance data; employees only wanted to know what the firm was
doing to ensure that the "right" plans, that is, high-quality plans,
were offered.  Finally, research suggests that individuals have
greater confidence in and attach more weight to the opinions of
peers.  A purchasing coalition that tested its report card on a focus
group told us that individuals were unimpressed with the HEDIS data
and were more likely to rely on the member satisfaction results. 

As with other information on managed care plans, some purchasers try
to help employees understand and use the report card data.  Thus,
rather than merely reporting a raw score, some report cards rank
plans as either above or below average, making it easier for
employees to compare plans and draw conclusions from the data.  Xerox
publishes a goal or standard for most satisfaction and performance
measures.  CalPERS actually includes a worksheet and encourages
employees to use the report card data to compare plans and highlight
areas of concern.  Minnesota tells state employees how the
satisfaction results for each plan have changed in targeted areas
since the last survey.  A few purchasers also include results on
their own self-funded indemnity plan or the POS option, giving
employees an opportunity to see how their peers rate satisfaction
among the different types of plans available


--------------------
\50 See Health Care Reform:  "Report Cards" Are Useful but
Significant Issues Need to Be Addressed (GAO/HEHS-94-219, Sept.  29,
1994). 


      MARKETING STRATEGY:  USING
      INFORMATION TO ADVOCATE
      MANAGED CARE
-------------------------------------------------------- Chapter 4:3.3

The purchasers we interviewed believe that managed care offers the
best "value"--the right combination of price and quality--for
employees.  Moreover, some are convinced that choosing a health plan
is seldom a rational decision based on good information or even on
the right information.  Although they hesitate to recommend or
endorse a particular plan, these purchasers are not bashful about
advocating enrollment in particular types of managed care plans that
they offer.  And they use information both to support their position
and to encourage employees to be more analytical about their health
care options.  According to one benefit manager, however, large
purchasers are careful to make sure employees understand both the
pros and the cons of managed care; they prefer not to deal with angry
individuals who subsequently decide that this option is not for them. 

Communications can be a powerful tool, because a purchaser has the
latitude to either minimize or maximize the exposure it gives to a
health plan in the plan's interactions with employees.  One firm told
us that it was using compelling arguments and information to interest
employees in a new class of managed care plans.  When it first
introduced these plans--without a lot of fanfare--only about 1
percent of those eligible signed up.  It attributed a large
enrollment increase the following year to an intensive marketing
effort.  Though written information played a role, the firm believes
that meetings with employee groups was also a key factor in promoting
these plans.\51 A second firm implemented a sophisticated marketing
strategy with similar results.  This firm used employee focus groups
to develop a video script; the video was produced with professional
actors and a local physician, who responded to employee concerns and
observations.  The firm credited a significant jump in HMO enrollment
to use of this video and to time spent talking with employees about
HMO quality. 


--------------------
\51 A different firm told us that during open enrollment, it asks
participating HMOs to bring in medical group representatives to talk
to employees.  Plans tend to bring in their best medical groups,
which makes them more attractive to employees. 


OBSERVATIONS
============================================================ Chapter 5

Our work suggests that some large purchasers and state governments
have taken a more aggressive role in managing their employee health
benefit costs.  Double-digit premium increases common a few years ago
have been controlled considerably in the last 2 years, a development
attributable, at least in part, to more active management of health
insurance costs.  Some common elements distinguish these purchasers'
benefit management strategies:  (1) advocacy of managed care; (2) the
application of competitive market principles to purchasing decisions;
and (3) increased sharing of costs, responsibility, and information
with employees.  Despite common elements, a diversity of approaches
is also evident--a diversity fostered by institutional flexibility
and the willingness to pursue and wield purchasing leverage. 


   ADVOCACY OF MANAGED CARE
---------------------------------------------------------- Chapter 5:1

Advocacy of managed care, particularly HMOs, is the linchpin of the
active purchasing strategies we examined.  In response to employee
skepticism, labor constraints, or the immaturity of HMOs in certain
markets, some purchasers have introduced hybrid or less restrictive
forms of managed care as a bridge to future HMO enrollment.  The
purchasers we interviewed have either incorporated elements of
managed care in their indemnity products or replaced them with a
fee-for-service PPO product.  Their explicit promotion of HMOs
contributed to, if not necessitated, other common elements of an
active purchasing strategy:  (1) the development of evaluation
criteria based on price, access, and quality goals and (2) the
adoption of financial incentives and information strategies to
influence employee behavior.  The criteria serve both employers and
employees in comparing and contrasting plans and in justifying their
selections. 


   COMPETITIVE MARKET PRINCIPLES
---------------------------------------------------------- Chapter 5:2

Large purchasers have spurred the development of explicit criteria to
help them evaluate and select competing health plans.  Often, these
criteria are spelled out in a request for proposal used to solicit
bids.  The criteria range from quality benchmarks such as National
Committee on Quality Assurance accreditation or the ability to report
HEDIS data, to standardized benefits that simplify a cost comparison
among plans.  Today, few of these purchasers would describe
themselves as price-takers.  Some closely analyze proposed premiums
to help assure themselves that price quotations are based on the
demographics and utilization experience of their workforce.  Most
actively negotiate with health plans and some use their market power
to extract discounts. 

Some employers do not hesitate to use their relative size to
influence health plan behavior--a purchasing tool unavailable to a
small firm or individual.  Thus, size--either innate or attained by
joining like-minded employers--allows some purchasers to demand that
health plans negotiate or adopt a particular approach to quality
assurance.  However, market leverage stemming from a firm's size or
reputation is probably oversold as key to an effective health care
purchasing strategy.  Indeed, the firms we reviewed were more likely
to adopt strategies that rely on competition among a number of health
plans as opposed to strategies that would maximize a firm's market
power by demanding concessions from a single health care plan.  To
some extent, the development of employer coalitions, which combine
the purchasing power of a number of large firms, appears to be an
attempt to magnify a firm's leverage.  But even such coalitions
appear to rely more heavily on setting up a competitive framework
among rival plans.  The public purchasers in our sample--often the
largest single employer in a state--have also focused on developing a
competitive framework. 

By no means is there unanimity on the use of evaluation criteria. 
Many large purchasers we interviewed recognize the shortcomings of
the cost, quality, and access criteria that have been developed so
far.  Thus, some told us that today's quality criteria are too
process oriented and incapable of distinguishing the plans that
produce the highest-quality outcomes.  Similarly, despite efforts to
analyze proposed premiums, many purchasers acknowledged that they
still have little idea of the true cost of providing coverage through
HMOs.  Though some are comfortable with using one or more criteria to
eliminate health plans from contention, others see the criteria more
as improvement and development goals for the plans themselves. 

The purchasers in our sample generally believe that efficiency and
quality are closely linked:  in a situation in which care is, in
fact, managed, lower cost is compatible with higher quality.  Some
are convinced that continued pressure on HMOs to lower prices and to
justify any increases will force plans to become more efficient,
encouraging competition based on quality rather than price.  Others,
however, are concerned that employers and coalitions are so focused
on cost that they are doing little to ensure that health plans are
taking the necessary steps to become more efficient.  While the
debate continues over the degree to which large employers'
contracting decisions are or should be influenced by cost, there is
general agreement that enhancing competition is key in a health care
system that looks increasingly to managed care to help moderate
premium growth. 


   INFLUENCING EMPLOYEE BEHAVIOR
---------------------------------------------------------- Chapter 5:3

The negative public perception of managed care has played an
important role in shaping purchasers' attempts to influence employee
behavior.  Employees, we were told, have been convinced by a barrage
of unfavorable publicity that managed care achieves lower costs, not
efficiency, by denying needed services and impinges on the
doctor-patient relationship.  In addition, employees are usually
aware of the cost issues underlying employer decisions about health
benefits.  As a result, purchasers have used three basic tools to
sway employee opinion and to assuage specific concerns about managed
care.  First, purchasers articulate and explain their criteria for
selecting managed care plans; second, they now more prominently
feature such plans in the open season material; finally, they attempt
to provide employees specific comparative data about the quality of
the available options. 

Intuitively, financial incentives would appear to be a more powerful
tool than communication in influencing an employee's health plan
selection.  For the purchasers in our sample, however, introducing
effective and reasonable financial incentives was perhaps the most
difficult aspect of implementing an active purchasing strategy.  Few
have adopted what is said to be the strongest financial incentive to
select a managed care plan--targeting the employer contribution to
the lowest-cost option.  Most employers fall somewhere in between the
adoption of a low-cost formula and one that provides no incentive to
be cost-conscious.  Whatever the formula, however, the purchasers we
interviewed are generally now asking employees to contribute more to
the cost of coverage, particularly for those who choose an indemnity
option. 


   COMMON ELEMENTS, YET DIVERSITY
   OF APPROACHES
---------------------------------------------------------- Chapter 5:4

Despite these common elements, a diversity of approaches more aptly
characterizes the individual strategy and specific tools adopted by
each of the purchasers in our sample.  They have used the flexibility
inherent in the private market to fashion strategies that are
contingent on the unique characteristics of their workforce and the
health markets where their employees reside.  Their flexibility has
temporal, locational, and structural dimensions.  Thus, we observed
firms that opted to make marginal changes and, in some cases,
radically revised their strategies just a few years later.  Firms can
choose to employ a uniform strategy across all their plant locations
or tailor their strategy to the characteristics of particular
markets.  Indeed, many firms choose to develop a benefit management
strategy only in those markets where they have a reasonable
expectation of gain. 

These organizations face some important constraints in developing
effective health benefit management strategies.  Their approaches
must be developed within the context of (1) labor-management
negotiations and collective bargaining agreements; (2) the health
care market structure in the firm's major locations; and (3)
corporate cultures, which may require uniformity of benefits or
cost-sharing by employees.  These differing constraints are another
factor that demands flexibility and contributes to the diversity of
strategies by these large purchasers. 


CHARACTERISTICS OF PURCHASERS IN
GAO SAMPLE
=========================================================== Appendix I



                                        Table I.1
                         
                             Characteristics of Private Firms

                                  Number of                Year current
                               active, U.S.                      health
                                  employees                     benefit
                               eligible for                  purchasing  Purchases
               Primary               health  Headquarters  strategy was  through
Firm           business            benefits  location           adopted  coalition
-------------  ------------  --------------  ------------  ------------  ----------------
American       Financial             51,000  New York, NY          1993  Yes (National
Express        services                                                  HMO Purchasing
                                                                         Coalition)

Bank of        Banking               60,000  San                   1994  Yes (Pacific
America                                      Francisco,                  Business Group
                                             CA                          on Health)

Chevron        Oil and               30,000  San                   1993  Yes (Pacific
               natural gas                   Francisco,                  Business Group
                                             CA                          on Health)

Dayton Hudson  Retail               110,000  Minneapolis,          1991  Yes (Buyers'
                                             MN                          Health Care
                                                                         Action Group)

Digital        Computers             27,000  Maynard, MA           1991  No
Equipment
Corp.

General Mills  Food                   9,500  Minneapolis,          1992  Yes (Buyers'
               processing                    MN                          Health Care
                                                                         Action Group)

Mervyn's \a    Retail                15,000  Hayward, CA           1994  Yes (Pacific
                                                                         Business Group
                                                                         on Health)

NYNEX          Telecommunic          62,000  New York, NY          1994  No
               ations

Pacific Bell   Telecommunic          48,000  San Ramon,            1988  Yes (Pacific
               ations                        CA                          Business Group
                                                                         on Health)

PepsiCo        Beverages,           250,000  Purchase, NY          1989  No
               snack foods,
               and
               restaurants

Safeway        Supermarkets         8,000\b  Pleasanton,           1994  Yes (Pacific
                                             CA                          Business Group
                                                                         on Health)

Southern       Utilities             14,000  Rosemead, CA          1995  No
California
Edison

Toyota Motor   Automobiles            5,400  Torrence, CA           Not  No
Sales                                                        applicable

U S West       Telecommunic          60,000  Englewood,            1991  No\c
               ations                        CO

Xerox          Office                49,000  Stamford, CT          1991  No
               equipment
-----------------------------------------------------------------------------------------
\a Mervyn's is a division of Dayton Hudson. 

\b Safeway has about 85,000 employees.  However, all but about 8,000
are union members whose health benefits are managed by a Taft-Hartley
Trust. 

\c In 1997, U S WEST plans to purchase coverage for employees in
Arizona through the Pacific Business Group on Health. 



                                        Table I.2
                         
                          Characteristics of Private Purchasing
                                        Coalitions

                                                               Date activities initiated
                                                               --------------------------
                   Headquarters                Covered
                   location      Member firms  lives\a              Quality    Purchasing
-----------------  ------------  ------------  --------------  ------------  ------------
Buyers' Health     Minneapolis             24  100,000                 1992          1992
Care Action Group

Gateway            St. Louis               30  114,000                 1995          1996
Purchasing
Association

National HMO       New York                 9  Unavailable             1993          1993
Purchasing
Coalition

Pacific Business   San                   18\b  280,000\b             1989\b          1994
Group on Health    Francisco
-----------------------------------------------------------------------------------------
\a Represents employees and dependents insured through options
negotiated by the coalition.  Member firms frequently offer employees
and their dependents health benefit options other than those jointly
negotiated through the coalition.  For example, Gateway firms employ
100,000 workers, for a total of 260,000 covered lives.  However, only
about 114,000 employees and dependents have enrolled in the HMOs with
which Gateway negotiates. 

\b Thirteen additional firms plus CalPERS and the Health Insurance
Plan of California also participate in the coalition's quality
initiatives.  Altogether, the 33 firms and state agencies involved in
quality initiatives represent about 2.5 million covered lives. 



                         Table I.3
          
            Characteristics of State Government
                          Programs

                                          Year
                                      strategy
                           Covered  implemente  Coalition
              Location       lives           d  membership
------------  ----------  --------  ----------  ----------
CalPERS       Sacramento  1,000,00        1992  Pacific
              , CA               0              Business
                                                Group on
                                                Health\a

Health        Sacramento   123,000        1993  Pacific
Insurance     , CA                              Business
Plan of                                         Group on
California                                      Health\a

Minnesota     St. Paul,    150,000        1989  Buyers'
Dept. of      MN                                Health
Employee                                        Care
Relations                                       Action
                                                Group

Missouri      Jefferson    115,000        1994  None
Consolidated  City, MO
Health Care
Plan

Washington    Olympia,     290,000        1996  None
Health Care   WA
Authority

Wisconsin     Madison,     209,000        1983  None
              WI
----------------------------------------------------------
\a Does not participate in the Pacific Business Group on Health
subgroup that jointly negotiates premiums. 


BACKGROUND ON HEDIS AND NCQA
ACCREDITATION
========================================================== Appendix II

The Health Plan Employer Data and Information Set (HEDIS) is the
result of a 3-1/2-year cooperative endeavor between representatives
of major employers and a combination of both large and small health
plans.  Employers had been searching for credible tools to help them
identify, and demonstrate to others, the "value" resulting from
premiums paid to HMOs.  Their specific objective was to develop
standardized performance measures that would help purchasers evaluate
the quality of services across the managed care plans with which they
contract.  In 1991, a draft set of HEDIS performance measures known
as version 1.0 was presented to several business coalitions and
health care organizations for their use.  When it became apparent
that further revisions and refinements were necessary, HEDIS 1.0 was
turned over to a committee of health plan representatives and
corporate purchasers under the auspices of the National Committee for
Quality Assurance (NCQA)--an independent, nonprofit institution that
reviews and accredits managed care organizations.\52 The result was
HEDIS 2.0, which was released in October 1993.  HEDIS 3.0, the latest
iteration, has over 60 indicators that describe performance in five
key areas.\53

NCQA only reviews health plans that are fully licensed and have been
operational for at least 18 months.  The typical review for a
50,000-member HMO is conducted by a team of three physicians and an
administrative reviewer who spend 2 to 4 days meeting with key
personnel and reviewing health plan records in six areas:  (1)
quality improvement, (2) provider credentialing, (3) utilization
management,\54 (4) members' rights and satisfaction, (5) preventive
health services, and (6) medical records.  Since NCQA began
accrediting managed care plans in 1991, it has reviewed over 40
percent of the nation's approximately 574 HMOs.  Table II.1
summarizes the results of those reviews. 



                         Table II.1
          
          Status of NCQA Accreditation Reviews as
                      of December 1996

                                 Number of
Accreditation status                 plans         Percent
--------------------------  --------------  --------------
Full (3-year)                          115            46.0
1-year                                  86            35.0
Provisional                             21             8.5
Denied                                  26            10.5
Under review                            21
Scheduled for review                    65
----------------------------------------------------------
Plans receiving a 1-year accreditation meet most standards and are
reviewed again after a year to determine whether they should be
granted full accreditation.  Provisional accreditation means that a
plan meets only some standards.  According to NCQA, each of the plans
denied accreditation was state-licensed and, in some instances,
federally qualified as well. 


--------------------
\52 NCQA was founded in 1979 by two trade associations that represent
the managed care industry.  It became independent in 1990 and now
represents the interests of purchasers and consumers, as well as
health care organizations. 

\53 Compared with earlier versions, HEDIS 3.0 moves quality
measurement closer to an outcomes perspective by including more
standardized, relevant, useful measures than its predecessors. 

\54 Does the plan use a reasonable and consistent process when
deciding what health care services are appropriate for individuals? 
When the plan denies payment for services, does it respond to member
and physician appeals? 


SUMMARY OF SOUTHERN CALIFORNIA
EDISON PERFORMANCE MEASURES
========================================================= Appendix III

                               Service to                              Finance and
Structure and philosophy       enrollees           Clinical quality    information
-----------------------------  ------------------  ------------------  ------------------
Goals
-----------------------------------------------------------------------------------------
Assess plan commitment to      Assess plan         Assess plan         Assess plan
principals of total quality    ability to meet     ability to meet     ability to manage
management/continuous quality  enrollee needs.     goals for           resources
improvement.                                       providing medical   efficiently and
                                                   and behavioral      monitor/improve
                                                   services.           data processes,
                                                                       integrity, and
                                                                       reporting.


Criteria
-----------------------------------------------------------------------------------------
Demonstrate and document       Provide choice of   Conduct systematic  Use integrated
results of quality             primary care        assessment of       information
improvement initiatives.       physicians (PCP)    doctor/medical      systems to provide
                               that are a          groups against      high-quality care
                               reasonable          accepted standards  more cost-
                               distance from       for referrals,      effectively.
                               Edison enrollees    clinical
                               and maintain low    performance,
                               PCP turnover rate.  utilization, use
                                                   of protocols, and
                                                   so on.

Possess integrated             Provide reasonable  Credential and      Provide per-
information systems to track   appointment         recredential        member-per-month
improvement initiatives,       availability for    physicians          trend data by
clinical outcomes, and         nonurgent, urgent,  following NCQA      category of
enrollee satisfaction.         and emergency       standards.          service for
                               care.                                   administrative and
                                                                       medical costs/
                                                                       revenues for (1)
                                                                       all plan enrollees
                                                                       and (2) Edison
                                                                       enrollees.

Achieve full NCQA              Ensure accurate/    Develop clinical    Pursue management
accreditation.                 timely              guidelines and      goals that provide
                               communication with  disease-specific    for efficient
                               enrollees about     programs to reduce  collection and
                               how plan operates,  variation in        reporting of all
                               for example,        practice patterns.  HEDIS data.
                               referrals,
                               copayments, PCP
                               selection, and
                               grievances.

                               Conduct annual      Conduct health
                               satisfaction        risk assessments
                               survey and/or       that promote
                               focus groups.       prevention, for
                                                   example,
                                                   cholesterol
                                                   testing and
                                                   prenatal care.

                                                   Ensure hospital
                                                   affiliations
                                                   result in
                                                   coordinated care.

                                                   Provide care that
                                                   integrates
                                                   treatment of
                                                   mental health/
                                                   substance abuse
                                                   under PCP.
-----------------------------------------------------------------------------------------
Note:  Most criteria are backed up by specific standards.  For
example, PCP access criteria specify time and distance requirements,
the availability of obstetricians/gynecologists and pediatric PCPs,
and direct access to gerontologists. 


CHANGES IN HMO ENROLLMENT, PLAN
OPTIONS, AND FINANCIAL INCENTIVES
========================================================== Appendix IV

                               HMO enrollment for active
                                  employees (percent)
                               --------------------------
                                                           Monthly
                               Before                      employee share  Financial
                               making                      of family       incentives
                               changes in                  coverage under  (for active
                 Type/mix of   purchasing    After         indemnity       employees only
Purchaser        plans         strategy      changes       option          )
---------------  ------------  ------------  ------------  --------------  --------------
Public purchasers
-----------------------------------------------------------------------------------------
CalPERS          PPO and HMO   84 (1993)     84 (1996)     Ranges from     Incentive for
                                                           $80 to $256     state
                                                           for state       employees
                                                           employees       based on
                                                           depending on    California's
                                                           the PPO option  freezing its
                                                           chosen.         contribution
                                                                           at the 1991
                                                                           level.

Minnesota        PPO and HMO   51 (1989)     48 (1993),    $84 in the      Low-cost plan
                                             72 (1996)     Minneapolis     formula
                                                           area. 1996 PPO  introduced in
                                                           enrollment was  1989. Low-
                                                           about 27%.      cost plan is
                                                                           free for full-
                                                                           time
                                                                           employees.

Missouri         PPO, POS,     32 (1994)     75 (1997)     $266 in the     Low-cost plan
                 and HMO                                   Jefferson City  formula
                                                           area for the    introduced for
                                                           PPO option. In  state
                                                           contrast, the   employees in
                                                           lowest-cost     1995. Low-
                                                           HMO is $112.    cost plan is
                                                                           free for
                                                                           employees.

Washington       PPO and HMO   70 (1995)     83 (1996)     $36.            First
                                                           Enrollment in   introduced
                                                           the state's     cost-sharing
                                                           self-funded     in 1996. PPO
                                                           PPO dropped     is benchmark
                                                           35% with the    for cost-
                                                           introduction    sharing.
                                                           of cost
                                                           sharing.

Wisconsin        Indemnity,    20 (1983)     55 (1984),    Ranges from     Low-cost
                 PPO, and HMO                83 (1996)     about $75       formula
                                                           (where there    introduced in
                                                           are no low-     1984. State
                                                           cost            pays the
                                                           alternatives)   lesser of 90%
                                                           to $333.        of indemnity
                                                                           option or 105%
                                                                           of qualified
                                                                           lowest-cost
                                                                           plan.


Private sector purchasers
-----------------------------------------------------------------------------------------
American         Indemnity,    29 (1993)     62 (1994),    Unavailable.    Gradually
Express          PPO, and HMO                74 (1995)                     moving to
                                                                           benchmark plan
                                                                           formula by
                                                                           2001. The
                                                                           benchmark is
                                                                           the local HMO
                                                                           with the
                                                                           highest value
                                                                           measured in
                                                                           terms of
                                                                           quality (70%)
                                                                           and cost (30%)
                                                                           and is
                                                                           usually, but
                                                                           not always,
                                                                           the lowest-
                                                                           cost plan.
                                                                           1994 increase
                                                                           in HMO
                                                                           enrollment
                                                                           attributed to
                                                                           promoting HMOs
                                                                           in open season
                                                                           literature.

Digital          Indemnity,\a  28 (1990)     60 (1992),    $623.92 in the  Introduced
Equipment Corp.  POS, and HMO                66 (1996)     Boston area     benchmark plan
                                                           (less than 6%   formula in
                                                           were in the     1991 in which
                                                           indemnity       firm pays 85%
                                                           option in       of plan that
                                                           1997);          meets its cost
                                                           16% were in     and quality
                                                           POS in 1997.    criteria. The
                                                                           benchmark is
                                                                           usually, but
                                                                           not always,
                                                                           the lowest-
                                                                           cost plan in
                                                                           an area.

NYNEX total                    31 (1993)     46 (1996)

NYNEX union      Indemnity,    34 (1993)     40 (1996)     Indemnity       No incentive-
                 POS, and HMO                              option is       -free.
                                                           free.

NYNEX nonunion   Indemnity,    24 (1993)     64 (1996)     Ranges from     Cash-back
                 POS, and HMO                              $214 to $340    incentive
                                                           depending on    increased
                                                           the location    significantly
                                                           of the          in benefit
                                                           employee.       year 1994 for
                                                                           employees
                                                                           electing to
                                                                           join an HMO.

Safeway          PPO,\b POS,   21 (1992)     37 (1995),    Replacing PPO   First
                 and HMO                     63 (1996,     with POS in     introduced
                                             projected)    benefit year    cost-sharing
                                                           1997. PPO       in 1994.
                                                           enrollment      Starting in
                                                           dropped by 50%  1996, will pay
                                                           between 1994    90% of
                                                           and 1996.       average-cost
                                                                           plan.

U S WEST total                 12 (1991)     42 (1996)

U S WEST union   POS and HMO   Unavailable.  45 (1996)     Indemnity no    Limited
                                                           longer          incentive--
                                                           offered.        POS and
                                                                           lowest-cost
                                                                           HMO are free;
                                                                           employee pays
                                                                           difference for
                                                                           higher-cost
                                                                           HMOs.

U S WEST         POS and HMO   Unavailable.  33 (1996)     Indemnity no    Limited
nonunion                                                   longer          incentive--
                                                           offered.        POS and
                                                                           lowest-cost
                                                                           HMO are free;
                                                                           employee pays
                                                                           difference for
                                                                           higher-cost
                                                                           HMOs.

Xerox total                    40 (1990)     80 (1997)



Xerox union      Indemnity     Unavailable.  Unavailable.  Unavailable.    No incentive-
                 and HMO                                                   -
                                                                           indemnity
                                                                           option is free
                                                                           to employee.

Xerox nonunion   Indemnity     Unavailable.  Unavailable.  $201            Benchmark plan
                 and HMO                                                   (low-cost) is
                                                                           free and, in
                                                                           addition,
                                                                           employee gets
                                                                           cash back.
-----------------------------------------------------------------------------------------
Note:  If the state contribution exceeds the Medicare risk premium,
the retiree can use the difference to pay the part B premium. 

\a Only if no POS option is available. 

\b PPO option no longer available in 1997. 


MAJOR CONTRIBUTORS TO THIS REPORT
============================================================ Chapter 1

Michael Gutowski, Assistant Director, (202) 512-7128
Walter Ochinko, Senior Health Policy Analyst, (202) 512-7157
Mark Ulanowicz, Senior Health Policy Analyst


*** End of document. ***