Health Care Plan Design and Cost Trends - 1988 through 1998
II. Methodology
The Hay Benefits Report collects data on the typical design of health care benefits provided by medium and large employers in the United States. The data in the 1998 Hay Benefits Report were collected from 1,017 US employers representing a broad industry and geographic mix.
Common Cost Approach
Benefit values, in this report, are based on the average cost of providing the benefits to employees in a typical medium to large U.S. company. Valuations take into account the expected frequency and duration of use of a benefit. Benefit plans are complex and multi-faceted. Consequently, any comparison of several, almost invariably dissimilar, benefits plans is extremely difficult without a single common denominator or yardstick on which all plans can be measured.
Cost is clearly the most direct common denominator. All benefits cost somebody something, and if a dollar value could be assigned to each plan in a survey, almost limitless comparisons are possible. Actual cost is clearly of vital concern to an employer, although it has the following disadvantages that render it unsuitable for most benefit plan comparison studies.
- Actual costs are very often not available from participants. This can be true either because of the difficulty in developing the desired figures, or because of a conscious decision not to share such data.
- Funding, financing, and accounting techniques differ widely among firms. Consequently, the actual cost of two identical benefit programs can differ significantly for a host of reasons in no way related to the benefit itself.
- The employee "mix" can vary substantially from one employer to another. That is, the distribution of employees by age, sex, service, salary level, and relative health is rarely similar from one firm to another. Therefore, even if the same benefit and the same financing method were used, the actual cost could, and probably would, be different.
- A firm’s bargaining power and skill as a benefits buyer is yet another variable making actual cost unreliable as a tool for measuring relative value of benefits. Because of differences in negotiating abilities, a poor plan in one environment can cost more than a superior plan in another.
For these reasons, Hay does not use actual cost in studies comparing benefits values. The Hay Group has, however, developed a technique of common costs that permits the assignment of dollar values, a common yardstick, without the aforementioned problems associated with actual costs.
The key to the Hay "common cost" approach is the use of a single, realistic method for all plans being valued. All plans in the study are, in effect, "purchased" for the same group of employees from the same source using the same financing technique and the same economic and actuarial assumptions. The "employees" used are a typical mix of employees as might be found in a large industrial environment. The "providers" are a hypothetical group of insurance companies and/or trustees who are "selling" coverage using the same average group rates, actuarial assumptions, and experience ratings for all the plans in the study. The result is an actuarially derived "common cost" for each plan, expressed as an annual dollar value. For health benefits, the value is adjusted to reflect the type of delivery system; that is, traditional fee-for-service (FFS), Preferred Provider Organization (PPO), Point of Service (POS) plan, or Health Maintenance Organization (HMO).
Benefits Value Comparison Model
Plan design information for 1988 through 1998 was extracted from the Hay Benefits Report for each year. The benefits for each year were coded into Hay’s Mental Health Benefit Value Comparison (MHBVC) model. MHBVC was developed by the Hay Group for the National Institute of Mental Health (NIMH) to provide estimates of the costs of mental health parity.
The MHBVC produces a standardized benefits value based on the input of over 125 items describing the benefit design of a health plan. These include deductibles, coinsurance, maximum out-of-pocket and coverage limitations. In behavioral health care, in particular, the model includes over 25 items including day, visit, and dollar limits. The standardized benefits value is equivalent to the average premium for health care per single employee for medium and large employers in the United States in 1998.
The BVC approach and the Hay Benefits report have been used extensively by the private sector, NIMH, and the Congressional Research Service (CRS) to analyze the cost and prevalence of benefits in the United States.
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