Stephen T. Parente, Ph.D.*, Jon B. Christianson, Ph.D.*,

1. Do Internet Auctions Increase Employer-Provided Health Insurance Price Competition and Reduce Cost?Early Results from an Experiment Stephen T. Parente, Ph.D.*, Jon B. Christianson, Ph.D.*, Alok Gupta, Ph.D.*, Tonya Keusseyan**, Ken Sperling** Presented at the Academy of Health Services Research and Policy June 23, 2002 *Carlson School of Management,University of Minnesota **Hewitt Associates LLC

2. Presentation Objectives • Describe an auction experiment to set health insurance premium prices. • Explain how the auction worked. • Provide descriptive results of the auction experience. • Outline next steps of the analysis to inform the health financing and auction literatures.

3. Introducing the Hewitt HMO Auction(1999-2001)

4. Auction Actors • Health Plans (Bidders) • Place bids as per member per month (PMPM) prices. • Bid on different contract types (single, 2-person, family). • Employers (Client) • Elicit Request for Proposals (RFPs) from plans. • Identify required health benefits. • Hewitt (3rd party benefits negotiator) • Act as employer’s agent in developing and soliciting RFPs. • Obtaining PEPM bid prices from plans. • Establishing final contracted health benefits

5. Hewitt’s Auction Goals • Streamline premium bid process: • Existing process requires intense resources for benefit design and premium negotiation. • Premium negotiation could be considerably streamlined and time period shortened. • Create new markets: • Process could become a standard and Hewitt would have first mover advantage. • Could be applied to other benefits, such as dental, disability and long term care benefits. • Enhance brand reputation: • Be seen as market innovator. • Advances identity as firm providing more and better information about the healthcare marketplace. (e.g., health quality profiles for employers)

6. Incentives to Participate • For Health Plans + Compare prices to competition. + Opportunity to retain existing contracts and obtain new ones. - Could lose critical employer contract (e.g., GE). - Lose ability to negotiate prices. • For Employers + Obtain more competitive premium bids. + Identify new health plans options. - Lose ability to negotiate prices with desired plan. - Lose plan options if desirable plans do not participate.

7. Pre-Auction Mechanics • Hewitt/employers send RFPs to Plans • Interested plans respond to RFPs • Employers select plans to proceed into the auction, based on RFQ review criteria. • Plans are informed/educated regarding auction mechanism. • Dates for week long auctions are set. • Auctions are set to be client and location-specific. Note: Health plans bid in multiple auctions.

8. Health Plan Auction ‘Dashboard’

9. Auction Terms • Auction number—the specific number assigned to the client and market. • Client—the company that is soliciting the bids in the market (i.e. IBM). • Market— the regional market for which the auction is being held. The name of the market roughly correlates to a metropolitan statistical area. In some cases, the market name refers to combined geographic regions or states, depending upon how the client has defined the market for the auction. • Your Position—an indicator of where your current bid falls if the auction were to end, or has ended. • Current lowest bid—This indicates the lowest bid (most competitively priced plan). • Current number of plans competing—This will indicate how many bids have been placed within a market. Since each health plan participating in the auction will have placed at least one bid (initial rates) you can use this number to quickly gauge the level of activity within an auction. • Auction end date—when the one-week (M-F) auction closes. When the auction ends, your rates will be finalized. No bids will be allowed on-line or off-line after the auction closes.

10. Knowing Where you Stand-Auction Cost Tiers • The bids are ranked in order of composite cost per employee. • Low Tier: Plan with lowest average bid price. • High Tier: Plan with highest average bid price. • Middle Tier: The rest of the pack.

12. Additional Parameters • Current Bid—this lists the rates by coverage tier which plans submitted to Hewitt Associates under separate cover. If this information is not accurate, contact HHR help. After you change your bid, your new bids will appear here. • Composite Cost Per Employee—this is the key to the auction, as this determines your rank within an auction. The average cost per employee is calculated by taking a weighted average of each tier (employee, employee plus one, family) rate across a uniform enrollment distribution for the company (company seeking the bids) in the market. • Plan Performance Score (HHVI)—This is your quality score calculated through last year’s Hewitt Health Value Initiative (HHVI). It is a single number based on your reported quality data, including items such as HEDIS prevention performance (immunization, mammogram rates), member services (telephone response times), quality improvement programs, medical loss ratio, etc.

13. Health Plan Differentiation through Hewitt Questionnaires • Administrative Measures “are industry service performance measures along with Hewitt’s standard for each of those measures. These measured are based on utilization and demographic data.” • Patient Safety Measures “is a tool we are using to begin collecting information on how health plans measure, try to influence or document the level of unnecessary medical errors in their networks. The enhancement of patient safety and the reduction in medical errors is a goal for many large employers and Hewitt Associates is committed to helping our clients achieve that goal. This questionnaire is a first step towards addressing that goal. We realize that there are no formal standards for health plans around capturing and reporting this information as of yet, (e.g. HEDIS) but ask that you fill out the questionnaire to the best of your ability. We ask that you begin the process of raising awareness within your health plan for the need gauge your plan’s performance in this area.”

14. Post-Auction Process • Final bid prices are considered by employers. • Employers choose health plans to offer using auction prices. The lowest price does not guarantee the plan will be selected. • Hewitt arranges benefit contract information for open enrollment of employer. • Employer conducts open enrollment. • Hewitt provides support to finalize contracts between employers and health plans selected.

15. Auction Market Locations in 2001

16. Who Came to the Auction? • Fortune 10 to Fortune 500 Firms • Top 10 National Health Plans • National insurers • Regional variant of national chain • Regional Insurers • Plans bidding per auction (2001): • Auctions: 45 • Average: 4.5 • Minimum: 1 • Maximum: 8

17. 2000 Auction Results • 9 employers • 47,000 employees • 93 health plans • 28 U.S. markets • 672 auction visits by health plan • Average ~7 visits per health plan • Reductions from initial bids estimated to be $3.57M • Final premium bid prices were 2 to 21 percent lower than initial bids.

18. 2001 Auction Results • 11 employers • 108,888 employees • 136 health plans • 53 U.S. markets • 311 bids recorded during auction. • Average ~2.5 price revisions per health plan. • Average reduction in premium bid: 2% • 17% of market-health plans made no change in bid. • Range in premium reduction: 0 to 22 percent lower than initial bids.

19. Final Premium Bid Comparisons (2001)All bids are per employee per month • Single Person Contract • Low $123 • Average $203 • High $424 • 2-Person • Low $123 • Average$424 • High $890 • Family • Low $123 • Average $545 • High $1378

20. Going Once, Going Twice, Gone - After Three Years • At the end of the 2001 auction, a decision was made by Hewitt to not continue the auction process. • Major Issue – Plans Were Not Aggressive Enough • Some health plans did not take the bid process seriously. Did not realize that there was not a second time to bid and they could lose contracts. • Hewitt designed the auctions for aggressive bidding. • Hewitt found face to face and/or telephonic on going were more if at least as effective as auctions. • Other Issues: • Health plans had little room to lower bids with resurgent health care cost inflation. • Limited streamlining could be accomplished. Many ‘manual’ RFQ preparation mechanics remain.

21. Summary • An HMO Auction of national scale is technically possible to administer. • Early results showed decrease in initial bids was achieved with yielded a ‘cost savings’ for the employer. • The rules of the auction were too binding for a few participants. Unfortunately, this threatens to damage the credibility of the auction for all participants.

22. Future Research Questions • Market Level: • What was the impact of auction competition? • Does more competition yield lower final bids? • Impact of external forces on bids (e.g., high health cost inflation). • Firm Level: • How did bidding strategy change over time? • Impact of lurking • Learning from auctions during one year • Learning from auctions over two years

23. Research Relevance for Healthcare • Experience informs ventures in other auctions: • Government • Medicaid contracts • CHAMPUS contracts • FEHBP contracts • Health Plan • Provider fee schedules • Benefits carve-outs (e.g., mental health , prescription drugs) • Disease management contracts • Consumer • Personal RFQs for services in defined benefits

24. Thank YouFor more information, contact: sparente@csom.umn.edu