State Health Care Purchasing Practices

Grant Description: What are the implications of state employers’ purchasing practices for employees and future purchasing? This study continued earlier HCFO-funded work looking at purchasing among Fortune 500 employers and built on earlier HCFO work conducted by Bryan Dowd. Specifically the researchers pursued five objectives. They: 1) documented the health care purchasing practices among state employers; 2) explored the relationship between health care purchasing and procurement for other goods and services; 3) studied the effects of public sector unions and collective bargaining on health benefits; 4) compared the results from this study to the findings from the Fortune 500 study; and 5) examined innovation in purchasing among state employers. This study provides state executives and other decision makers with more information about the purchasing behavior of state employers.

Policy Summary: State employers are in the midst of the worst budgetary and health care cost crisis since the Depression. This budget crisis may force states to align their health care purchasing practices with the private sector and consider radical changes in health benefits offered to their employees. Since states purchase health care for more than four million employees and retirees and millions more dependents, the effects of this crisis are far reaching. In a recent survey of senior benefits managers, we found that states have adopted a standard approach to health care purchasing used in the private sector. However, while private employers have used tough negotiating tactics such as competitive bidding to discipline their carriers on price, states have been unable to execute the same leverage in their relationship with carriers. Unlike the private sector, the majority of states continue to offer a wide choice of health carriers to their employees, which diminishes their purchasing leverage. Large private employers have adjusted premium contribution levels in order to steer their employees into the most cost-effective carriers. States have been unable to pursue this strategy as aggressively as the private sector due to constraints imposed by strong unions, regulations and politics. They have traditionally maintained higher contribution levels for individual coverage than large private employers, but this strategy is unlikely to be sustained. The current budget crisis has forced a reevaluation of health care purchasing practices among state employers. Some state employers are considering private sector practices that would not have been considered before. These practices include increasing employee cost-sharing through lower employers contribution levels, and higher co-payments for drugs. However, these cost-sharing strategies, in the context of rising health care costs and declining state budgets, have resulted in a loss of real wages for state employees. This has a particularly strong impact on low wage state employees. The size and influence of states employers places them in a unique position to not only be more innovative in their health care purchasing, but also play a leadership role in market reform. Yet, health care purchasing remains a relatively undeveloped area of research despite the importance of large employers in health system reform. Research to date has largely focused on rates of coverage and benefits offered, rather than purchasing practices and organizational arrangements. Studies of the public sector typically examine the purchasing practices of a few innovative states rather than focusing on state employers as a group. Our previous work on corporate health care purchasing, as well as this study of state employers groups aim to fill this gap in knowledge, and contribute to the development of a new area of research on the health care purchasing of large employers in the public and private sectors. Such research is important not only because large employers’ purchasing practices determine the type and intensity of pressures exerted on the health care system, but also for state employers that seek to play an influential role in the larger public policy debate about the future of health care in this country.