De-Mystifying Choice in Employee Benefits
In the world of employer-sponsored health plans, choice is highly valued by various stakeholders. According to Mercer’s National Survey of Employer-Sponsored Health Plans, the majority of employers offer two or more types of plans (PPO, CDHP, or HMO), and many of them also offer more than one plan of each type. In some cases, the choices are between methods of care delivery – national PPO network, narrow network, ACO, or HMO. More often, however, the conversation is on different cost-sharing structures. Popular combinations include a PPO with a CDHP, high-medium-low value options, and the ACA-defined platinum-to-bronze spectrum. The conventional wisdom suggests that employees are better off when offered more choices. That begs a couple of questions – why, and how.
When I shop for a camera, I spend time pondering the tradeoff in functionality, weight, reliability, and price. There is arguably no “right” answer, and what works for me may not be right for a similarly situated friend. On the other hand, when I shop for healthcare coverage (assuming the same care delivery system), all I want is the plan that minimizes my total out-of-pocket cost – which includes paycheck contributions, deductible, coinsurance, and copays, offset by any plan-provided account funding, and adjusted for pre- and post-tax differentials. I can calculate my financial burden under each plan option. There is always a “right” answer for any given level of healthcare needs – it’s the plan that takes the least money out of my pocket.
When presented with multiple plan options, we can calculate the total out-of-pocket cost for each plan at every possible level of healthcare need. People expecting to see no doctor will prefer the plan with the lowest paycheck contribution, while those who have serious chronic conditions will want to look for the lowest combination of contribution and out-of-pocket limit. We define a “crossover point” as a level of healthcare need at which a person is indifferent between two plans – below that point one plan is better, while above it the other plan wins. Any two plans may have one or more crossover points, or they may have none at all.
Over the years as an actuarial consultant, I see many employers who offer plan options with no crossover points at all. This means that one plan always costs its participants more money than other options. The phenomenon often results from the employer disproportionally increasing paycheck contributions for the rich PPO with a less healthy membership, or promoting a CDHP with an artificially low-price tag. Because not everyone does the math at annual enrollment, the plan that makes no financial sense can still be popular. These participants end up spending more out-of-pocket than they would otherwise, implicitly subsidizing their employers’ programs.
It can be awkward for an employer to offer a definitively bad choice to its employees. Additionally, there is a financial risk in such arrangement. Many benefit managers do not realize how much of their budget is at stake when it relies heavily on people making bad choices. Imagine the day when all participants in the most expensive plan wake up and migrate to an alternative. From the lowest to the highest utilizers, everyone will see a drop in total out-of-pocket costs. Who will now shoulder the difference? The employer. In some scenarios, such selection risk can cause a double-digit increase in the benefits budget – worth several years of cost trend.
In order to promote a healthy portfolio of healthcare plans, we recommend employers (1) consider plan design and contributions as the same strategic bundle, rather than separate topics, (2) offer multiple benefit options if, and only if, they are meaningfully differentiated, and (3) estimate the cost of worst-case adverse selection, and include appropriate margin in the budget. These are all things your actuary can help with. Benefit design requires non-financial considerations, such as delivery system differences, but it is also important to understand the math behind choices.