It’s about the employer insurance market: 5 ways to lower health care costs for the majority of Americans

November 11th, 2020 / By Matt Gallivan

Political leaders have spent the last decade furiously debating the future of the health care system, while ignoring the elephant in the room: the employer insurance market. The U.S. population is more than 330 million people,[1] yet the policy debates surrounding the Affordable Care Act have focused almost entirely on the individual market, which only accounts for 6 percent of the population. In contrast, the employer marketplace insures almost 50 percent of the U.S. population—nearly 160 million people.[2]

Not only is the employer market the largest by enrollment, but it also has the highest prices. According to a report from the Health Care Cost Institute, the commercial prices for professional services in 2017 were on average 122 percent of Medicare prices nationally, with several providers and markets being significantly higher than that.[3] In Figure 1, you can see that high prices and other cost drivers have resulted in the average annual premium for employer sponsored insurance more than doubling over the last two decades, putting significantly more financial pressure on employees.

Figure 1: Growth in Average Annual Premium for Employer Sponsored Insurance (1999-2020)

For policymakers and patients rightfully concerned about the cost of health care in the U.S., it’s clear that directing solutions toward the employer market will have the greatest impact on the system and patients’ pocketbooks.

So where do we begin in coming up with solutions? In Figure 2, you can see the largest contributors to wasteful spending in the American health care system include unnecessary services, excessive administrative costs, inefficiently delivered services, prices that are too high and missed prevention opportunities.

Here are five policy proposals that address these areas of waste and drive lower costs in the employer health insurance marketplace.

Figure 2: Institute of Medicine Report on Annual Expenditures Attributed to Waste in the U.S. Health Care System by Source of Waste
  1. Empower employees and employers with information about high-quality, low cost providers and unnecessary services – Many patients believe that higher cost means higher quality in health care. This couldn’t be further from the truth. The reality is providers vary greatly in their quality and in many cases more expensive providers provide worse quality.[4] Patients need real quality comparisons that make it easy to understand who the low-cost,high quality providers are. Examples of easy to understand measures that actually relate to health outcomes include: higher levels of complications or readmissions, the number of times a provider has performed a procedure, and how often a provider orders unnecessary tests in comparison to their peers. We should give employers information on the performance of their provider network and empower them to tier their network and its cost-sharing around the quality of care provided. This information should be shared with employees, allowing them to be better informed about the quality of care they can expect to receive. States should similarly tier their networks by quality and publicly list the highest quality providers for their Medicaid and state employee benefits populations.
  1. Target Provider Monopolies – In some geographic areas, health care providers act as monopolies and set whatever price they want for a service. According to the Health Care Cost Institute, nearly 75 percent of U.S. hospital markets are highly concentrated, meaning that there is very little competition.[5] Health plans have no choice but to add those providers to their network in order to meet network adequacy requirements and the needs of employees living in a specific region. Monopolies are not free market and they significantly increase the variation in health care prices (see Figure 3 below for an example of that price variation). States should identify provider monopolies and cap their prices based on an established free-market rate (such as the average negotiated rate in the region/state for similar services). This would reduce price outliers and lower the prices in the employer sponsored marketplace. Similarly, other policies could be pursued that increase competition to monopolistic providers—licensure reform, certificate of need reform, and less variation in prices between different outpatient settings of care.
Figure 3: MN APCD Price Variation in Average Charges for Total Knee Replacement
  1. Enact a Health Care Price Gouging Law – To reduce costs, we not only need to address prices that are already outside the norm, but prevent health care stakeholders from continuously increasing prices at outrageous rates going forward. Health care is unique in that patients often don’t have a choice whether or not they receive a procedure or service—too often the choice is life or death. As a result, health care stakeholders have a moral duty to avoid patient price gouging. States and the federal government have enacted anti-price gouging laws for necessary goods during emergencies; we should enact a similar law for health care services. This could include capping price increases on an annual basis at a set percentage (i.e. 5 percent) or tie it to an economic metric (the consumer price index).
  1. Middlemen Oversight – Pharmacy Benefit Managers (PBMs) and Group Purchasing Organizations (GPOs) have important roles to play in negotiating better prices. They should be compensated for that work. However, they have also increased administrative costs by pocketing much of the savings they negotiated. Health insurance companies are already limited in how much of their revenue can go towards administrative costs or profit (medical loss ratio). A similar limitation should be applied to middlemen, like PBMs and GPOs. States or the federal government could adopt caps on how much of rebates PBMs and GPOs could keep at 5 percent or 10 percent and require that the rest must be passed on to the patient. This would reduce costs to patients and reduce premiums being diverted to middlemen administrative costs.
  1. Greater investment in prevention, mental health and substance abuse treatment, and wellness – The U.S. adult obesity rate is now greater than 40 percent.[6] Obesity is the root cause of many chronic diseases plaguing Americans and driving up health care costs. More than 50 percent of Americans will be diagnosed with a mental illness or substance use disorder at some point in their lifetime.[7] However, more than 40 percent of those individuals have an unmet need for mental health or substance abuse treatment.[8] Untreated mental health and substance abuse results in higher health care costs due to preventable admissions to hospitals or visits to the emergency department, development of preventable co-morbid conditions, and unnecessary complications and readmissions. Investment in prevention and wellness lowers health care costs by improving health outcomes and reducing unnecessary spending.

Reducing health care costs is a complicated endeavor with difficult tradeoffs. In order to have the greatest positive impact on the system, we should focus on the employer sponsored market. Hopefully, these ideas can serve as a starting point for the difficult discussion policymakers will need to engage in to improve the system for patients.

Matt Gallivan is the Director of State and Federal Regulatory Affairs for 3M Health Information Systems.


[1] https://www.census.gov/popclock/

[2] https://www.healthaffairs.org/doi/abs/10.1377/hlthaff.2020.01569

[3] https://healthcostinstitute.org/hcci-research/comparing-commercial-and-medicare-professional-service-prices

[4] https://www.consumerreports.org/cro/magazine/2012/10/when-costlier-medical-care-isn-t-better/index.htm

[5] https://www.ajmc.com/view/nearly-75-of-us-hospital-markets-highly-concentrated-hcci-report-shows

[6] https://www.tfah.org/article/u-s-adult-obesity-rate-tops-42-percent-highest-ever-recorded/

[7] https://www.cdc.gov/mentalhealth/learn/index.htm

[8] https://www.statista.com/statistics/252393/total-us-expenditure-for-mental-health-services/