High Prices Spur Innovation and Policy Engagement from Employers

Rising health care costs are steadily devouring America from within – threatening patient health, triggering personal bankruptcy and, for employers, robbing dollars from critical business investment and employee compensation needs. These health care cost increases, now approaching double digits, are primarily the result of high health care prices. These high prices originate from the unchecked market power of hospitals, health systems, physician groups and drug manufacturers.

High prices have set into motion new legislative and regulatory requirements on employers to address the affordability crisis. In turn, employers are reacting to their heightened responsibility not just with compliance in mind, but with an innovative mindset geared toward neutralizing out-of-control health care prices through private action and engagement in public policy.

The Pressure High Prices Place on Employers and Employees

Health care prices that are set according to the rules of market power rather than the constraints of market competition are unsustainable. We can see this unsustainability playing out in the strain on employers, who largely feel they do not have any more cost-shifting left to do in their benefit design. Employers faced an average 5.4 – 8.5% increase on their health care costs for 2024 in an environment where the cost of capital is much higher than at any time since before the 2008 financial crisis. The confluence of these factors has surely aggravated long-existing trends of wage displacement and reduced business investment, indirectly if not directly.

The problem of increased costs compounds itself. Employers in supply sectors of the economy, hit with substantial increases in their costs of providing health benefits, sometimes pass part of that increase on to the prices of their goods and services. This, in turn, amplifies the strain on other downstream employers who purchase from them and must also grapple with their own health benefit cost increases. In this way, high health care prices are themselves an inflationary factor for the economy.

High Health Care Prices Have Dawned a New Legislative and Regulatory Era

The rampant pricing issues, which are especially acute in the commercial market, have been so widely reported on and discussed in academic and policy expert circles that it even spurred Congress to notice and act.

At the end of 2020, the government passed into law several market-based reforms in health care price transparency as part of the Consolidated Appropriations Act of 2021 (“CAA”). These laws build upon and emphasize the preexisting fiduciary responsibilities employers have, requiring them to seek, understand and use newly disclosed health care pricing and fee information to ultimately lower their health care costs. In this way, high prices have catalyzed a new legislative and regulatory environment in which employers are expected to use unprecedented transparency to contest historically unbridled health care pricing.

Under the first transparency section of the CAA, for instance, employers are required to eliminate any and all gag clauses from their agreements with health insurance companies or third-party administrators that would prevent them from accessing their own health care cost and quality data. With these clauses now removed, employers have clear access to their data sets informing them of the cost and quality of the services they are purchasing.

In addition, with the CAA’s re-emphasis on the fiduciary duty of prudence to “pay only reasonable plan expenses,” employers must put to use novel health care pricing data sets made public under the Hospital Price Transparency Rule and the Transparency in Coverage Rule. Although these datasets are imperfect and hospitals and health insurers have demonstrated defiance to both the letter and the spirit of these compliance requirements, employers now have an independent source of pricing information to which they can compare their own data for the first time in history.

Employers are Innovating to Meet Their Changing Fiduciary Duties

To combat the affordability crisis that confronts them, employers are taking bold steps to address their total cost of care by holding their health care partners accountable. Employers are using their insight into the health care purchasing process to pull new levers, exerting a greater amount of control over the expenses they incur and pay.

Here are just a few examples of employers using the opening created by the CAA to innovate new initiatives that fight back against high and unwieldy health care prices:

• One employer is bypassing insurance intermediaries as well as the traditional fee-for-service payment model to form direct, at-risk contracts with high-performing specialists and primary care practices. The initiative has produced a double-digit drop in employee emergency room utilization rates as well as a significant reduction in specialist use. Cutting down in these areas, which are well-documented to be a source for egregious provider pricing, has led to a 14% decrease in the employer’s total health care spend across the key test markets.
• Another employer has taken an active role in the financial management of its health care claims to meet its fiduciary responsibility. First, the company requires its health care partners (the health insurance company and contracted health care providers) to share all of the employer’s claims data with them. Then, the employer audits the information for potential errors, fraud, waste and upcharges with a well-staffed internal team. Lastly, the company identifies and fights back against claims with outlier pricing by referencing publicly available Hospital Price Transparency data in its price negotiations.
• The result of this has been twofold. First, the organization has clawed back over $1 million in its first year on errors, fraud, and waste (representing a 3:1 ROI on the staffing costs for running the program). Second, the insight into egregious provider pricing has led to an internal company policy, wherein high-dollar outlier claims are not authorized for payment until the provider has either (1) provided sufficient justification for the pricing, or (2) lowered the price to an amount that is fair and reasonable.
• A group of half a dozen jumbo employers and public purchasers has embarked on a joint project to use data under the Hospital Price Transparency and Transparency in Coverage rules. The goal of this project is to combine the purchasers’ own health care claims data with aggregated pricing information from the public datasets to provide each purchaser with insights into how their networks and plan design compares with alternatives in their respective markets. Armed with these insights, participating purchasers can use the information to favor high-value (fairly priced) providers and avoid low-value (high-cost) ones.

Unreasonably High Prices are Pushing Employers to Engage in Policy

Employers have shown that cost containment initiatives are difficult yet possible and have promising potential. As employers have embarked on an array of innovative measures to reduce the prices they pay for health care, their journey has shown them there are limits to what can be achieved in the absence of supportive policy. This has led employers to engage more forcefully in advocating for policies that resist high prices, reestablish competition in the health care marketplace and enable them to fulfill their fiduciary responsibilities.

During a recent Health Policy Summit held jointly between PBGH and the National Alliance of Healthcare Purchaser Coalitions in Washington, D.C., policymakers had the opportunity to hear directly from a panel of employers and public purchasers. After discussing their remarkable work and challenges in achieving health care affordability, the purchasers closed the panel session by expressing their top policy needs:

1. Increased commitment to making price transparency initiatives work for employers, including hospital price transparency, transparency in coverage, improvements for data access/audit rights and PBM reform.
2. Greater investment in primary care services and value-based payment models for primary care as well as policies that enable employers to provide first dollar coverage for primary care to plan members on high-deductible health plans. These changes would support employers’ efforts to keep their plan members out of downstream care settings (emergency department, hospital, etc.) where the price of care is predictably high and difficult to mitigate.
3. Support for policies that take direct action against egregious health care pricing when market forces no longer prove effective (primarily due to consolidation).
4. Banning egregious health care industry business practices like spread pricing, rebate retention and copay clawbacks, which undermine employers’ ability to have the line-of-sight into health care prices they need to be prudent fiduciaries.

Because the health care affordability crisis has reached a tipping point, employers now recognize their voice is sorely needed in the policy environment. Otherwise, there is little chance of policy reform favoring the interests of employers and employees (who finance our private health care system) over the interests of the health care industry.

Employers Can Seize the Moment

Employers are on the front lines of the health care affordability crisis, which is testing their ability to provide affordable health benefits and their fiduciary responsibility to pay reasonable prices. These employers are responding with a mixture of innovative private action and public policy advocacy to fight back against persistently high prices in the commercial health care market.

Employers who wield and represent the purchasing power of thousands of patients are uniquely poised to take advantage of new price transparency laws on their employee’s behalf to lower health care costs. The convergence of new opportunities and new legal duties set against an intensifying affordability crisis will test employers’ mettle. Employers are demonstrating they are prepared to meet this challenge and go further by charting a path toward a more affordable health care system.