Employer-sponsored health insurance covers more than half of the U.S. population. Employers with at least 50 full-time workers are required by the Affordable Care Act to provide workers with health insurance. Are employers doing a good job?
Two recent class action lawsuits filed by workers made many employers nervous. In February, Johnson & Johnson was sued for overpaying for prescription drugs and mismanaging health benefits. In April, Mayo Clinic and its plan administrator were sued for underpaying claims and lacking transparency.
Both cases cited the breaching of fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA), which requires employers to administer their plans “solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.” The fiduciary duties arise from the fact that employers use worker wages to finance health benefits.
More lawsuits will likely emerge to apply ERISA to employers’ management of health benefits. The Consolidated Appropriation Act of 2021 opened even more channels for litigation against employers for breaching fiduciary duties under ERISA.
The heightened legal risks are forcing many employers to reconsider their hands-off approach to purchasing healthcare—delegating the management of plan assets to insurers or third-party administrators owned by insurers. While employers and workers benefit from lower healthcare spending, insurers and administrators usually do the opposite.
The misalignment of incentives, compounded by the challenges for employers to ensure the accountability and integrity of insurers and administrators, exposes health plans to the risk of mismanagement and leaves employers vulnerable to legal challenges for breaching their fiduciary duties.
It’s time for employers, especially those with geographically concentrated workforce, to consider circumventing insurers and directly contracting with providers. Cash prices are often cheaper than insurer negotiated prices. Why? Providers face price-sensitive purchasers and no insurance complexities.
Large employers like Boeing and Walmart are directly contracting with hospitals and health systems. Platform companies like Mishe have launched cash-price based networks for employers. Direct primary care clinicians, many ambulatory surgical centers, and other innovative providers are welcoming direct contracting opportunities.
The prescription drug market is also ripe for cash-based transactions. Generic drugs purchased through direct-pay channels, such as Mark Cuban Cost Plus Drug Company and Costco, are often cheaper than insurer negotiated prices and the out-of-pocket costs of patients using insurance.
Even for newly available weight-loss drugs, Eli Lilly’s direct-pay pharmacy LillyDirect offers steep discounts; weight-loss programs that include medications are also provided by Costco and Sesame through cash transactions.
Congress should codify price transparency legislation, particularly concerning cash prices for hospitals, clinical labs, imaging centers, and ambulatory surgical centers, as written in the Senate bill S3548. Price transparency will facilitate employer-provider direct contracting and stimulate price competition.
Policymakers should also remove roadblocks preventing employers and workers from fully enjoying the benefit of cheaper cash prices. Eligible cash payments should be allowed to count toward deductibles. Employers should have the option to exclude low-cost routine services, such as generic drugs, from insurance coverage to reduce premiums. Restrictions on health savings accounts (HSAs) should be relaxed to enable workers to receive tax benefits of paying cash. The policy-induced uneven playing field in the hospital market should be leveled to foster competition to contain prices.
Innovative efforts from employers and legislative actions from lawmakers are both needed for employers to fulfill their fiduciary duties and mitigate litigation risks, with the ultimate goal of benefiting American workers. Employers, as the dynamos of U.S. economy, have a historic mission to bring dynamism to U.S. healthcare. As Shawn Gremminger, CEO of the National Alliance of Healthcare Purchaser Coalitions, said recently citing Winston Churchill, “Give us the tools, we will finish the job.”
