© 2003 A. Milstein MD Arnie Milstein MD, MPH Mercer Human Resource Consulting Pacific Business Group on Health The Consumer-Driven Employer Agenda: 2004 and Beyond December 9, 2003

Mercer Human Resource Consulting © 2003 A. Milstein MD 2 Why Do Large Employers Support Consumerism? Health benefit plans are rated the “#1 cost problem” in CEO surveys (BRT 2003) Large public sector employers and Taft-Hartley purchasers face a similar challenge Health benefit plans are rated “the #1 compensation/ benefits objective” in surveys of American employees Tighter managed care and government regulation of cost are regarded as not viable

Mercer Human Resource Consulting © 2003 A. Milstein MD 3 Three Employer Cost Sharing Approaches To Induce Greater Consumerism ArchetypeProblem DefinitionPreferred Tool Restorers “restore higher beneficiary share of health benefits cost” Unintended and/or imprudent purchaser cost share creep over prior 30 years Hollow out benefit coverage within all health plan options Skin-grafters “get more beneficiary skin in the game” Moral hazardOffset hollowed out benefits with portable spending account Calibrators “calibrate beneficiary cost-share to incremental cost of inefficient beneficiary selection” Beneficiary selection of inefficient options Incentivize selection of efficient (and, perhaps, higher quality) options before and after plan enrollment

Mercer Human Resource Consulting © 2003 A. Milstein MD 4 Forecasted Private Sector Trajectory & Its Yield Availability, precision, and consumer grasp of health care performance measures will be steadily nurtured ’02’05’08 Higher Calibrators Predominate Skin-grafters Predominate Restorers Predominate Value of Health Benefits (“health gain per dollar”) Lower

Mercer Human Resource Consulting © 2003 A. Milstein MD 5 To Whom Might the 5-Year Forecast Not Apply? Many small employers Large employers with mostly unskilled labor forces Large desperate employers without labor agreements

Mercer Human Resource Consulting © 2003 A. Milstein MD 6 Question 1: How will a beneficiary’s amount and percentage cost share be linked to individual beneficiary distinctions? A:More will be paid by (1) service users; (2) those with dependents; (3) the more affluent; and (4) those making certain types of buying decisions that increase spending.

Mercer Human Resource Consulting © 2003 A. Milstein MD 7 Question 2: Which beneficiary buying decisions will carry a higher cost sharing burden? A:(Pre-2004 – focused on bundled, annual beneficiary buying decisions) Beneficiaries selecting – A richer plan of benefits; – A less efficient health plan (premium divided by enrollees’ predicted cost risk); – Not to complete an annual health risk appraisal*. *rare, but increasing

Mercer Human Resource Consulting © 2003 A. Milstein MD 8 Question 2 (continued): Which beneficiary buying decisions will carry a higher cost sharing burden? A:(Post-2004 – focused on unbundled, continuous beneficiary buying decisions) Beneficiaries selecting – Not to participate in personalized program(s) to reduce risk of illness and/or cost; – A less longitudinally efficient (a/o lower quality) provider; – A less longitudinally efficient (a/o lower quality) treatment option. (These are where biggest unharvested efficiencies lie)

Mercer Human Resource Consulting © 2003 A. Milstein MD ABCDE Unit PriceLongitudinal Efficiency (average adjusted total cost per acute episode and/or per year of chronic illness) Observation A: Unit Prices are Poor Proxies for Longitudinal Efficiency Tomorrow’s Preferred Providers Today’s Preferred Providers Adapted from Premera Blue Cross

Mercer Human Resource Consulting © 2003 A. Milstein MD 10 Question 3: Will employers transfer to beneficiaries the estimated incremental cost of sub-optimal buying decisions in a bundled fashion via annual (or multi-annual) selection of plans (or “sub-plans”); or in an unbundled fashion via continuous beneficiary selections after plan enrollment? A:Both. Unbundled (AKA “point-of-care”) opportunities to select more efficient options will receive more emphasis because (1) they have been previously underused and (2) their easier “trialability” by beneficiaries is likely to improve consumer acceptance. Purchaser emphasis on unbundled cost-sharing is reflected in early purchaser choices of “consumer- directed plans.” Most purchasers are opting for HRA plans or tiered plans which emphasize variable cost- sharing at the point-of-care.

Mercer Human Resource Consulting © 2003 A. Milstein MD 11 Question 4: Will higher quality be subsidized by employers? A:Yes, until the inflection point where higher quality unavoidably incurs higher longitudinal net costs, after netting out indirect illness cost savings accruing to the employer. Beyond the inflection point, the implications of higher quality options will be transparent to beneficiaries, but higher quality is unlikely to be subsidized.

Mercer Human Resource Consulting © 2003 A. Milstein MD 12 Key Takeaways Large employers and insurers are shifting toward new consumer-directed plans The benefit designs of these new plans will increasingly incentivize beneficiaries to select providers, care management, and treatment options that rank highest on longitudinal efficiency and quality In urban areas, better performing providers will increase their share of private sector health benefits spending