What is Benefit Design?
Benefit designs are rules that structure health insurance plans and dictate how consumers can gain access to health care services and providers. In particular, they determine which services will be covered by the health plan, from which providers a consumer can seek care, and the cost-sharing amounts (e.g. deductible, co-payments, co-insurance) for which the consumer is responsible. Almost all benefit designs leverage cost-sharing to shift a portion of the financial responsibility for care onto consumers through out-of-pocket costs—costs that the consumer is subject to at the point-of-service. In theory, cost-sharing can influence consumer behavior and drive them to seek higher-value care, assuming they possess adequate information to distinguish between high- and low-value care and necessary and unnecessary services.
Why Should Employers and Other Health Care Purchasers Care About It?
In the commercial insurance market, the employer and their employees jointly cover the cost of health insurance through premium contributions. However, since the employer often contributes more than the employee, this leads to “moral hazard” where the employee consumes more health care services than s/he would if s/he paid for the full cost of care out-of-pocket. Therefore, recent benefit designs have created financial incentives (differential out-of-pocket costs) for consumers to be more cost sensitive and to steer them toward appropriate use of lower-cost, higher-quality care.
What Are Examples of Benefit Designs that Leverage Cost-Sharing?
Employers are increasingly using benefit designs with cost-sharing to encourage the use of high-value services and providers. The most common benefit designs that use cost-sharing to incentivize consumer care-seeking behavior are:
- Value-based insurance design (V-BID) aligns a consumer’s out-of-pocket costs with a service based on its “relative value” for a consumer or population, meaning that a service is beneficial for one patient but not for another. Therefore, a consumer would have lower out-of-pocket costs (co-pay, co-insurance) for a service that is considered clinically beneficial to her (such as an annual primary care visit) and vice versa.
- High deductible health plans (HDHPs) require consumers to cover 100% of their health care costs up to a certain amount—the deductible—at which point other cost-sharing arrangements, such as co-pays and co-insurance, begin.
- Tiered networks designate groups of network providers into levels, or tiers, based on the value of the care they provide. Consumers’ out-of-pocket costs vary so that they pay less out-of-pocket if they receive care from a higher-value (higher tier) provider.
- Narrow networks use cost and quality criteria to select health care providers from a broader network and then establish strong incentives for consumers to seek care from that more limited set of providers (the narrow network). These incentives can include lower out-of-pocket costs for in-network care, and higher out-of-pocket costs for care received from the broader network.
- Reference pricing establishes a standard price for any drug, procedure, service or bundle of services and requires that the consumer pay out-of-pocket any allowable charges above this price for the specified drug, procedure, service or bundle of services (e.g., CalPERS set a $30,000 reference price for hip and knee replacements).
- Centers of excellence (COEs) are designated groups of providers that meet high standards for both the quality and cost of care for a particular service or set of services. Consumers that seek care from COEs typically have lower out-of-pocket costs than if they receive care from a non-designated COE (e.g., the COE Wal-Mart Stores Inc. has with Virginia Mason Medical Center for hip and knee replacements).
- Benefit designs for alternative sites of care are consumer incentives to seek care from locations where care is offered at a lower cost than at traditional venues, such as the hospital. For instance, consumers would have lower out-of-pocket costs for care received via telehealth or from an onsite clinic.
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