Custom Benefit Design

How using a three-tiered network strategy can contain health care costs

Traditionally, health insurance employee benefits have two tiers - in-network and out-of-network. But in self-funded solutions, in particular, you may have the ability to set up a three-tier benefit design.

This network strategy can help you contain cost by incentivizing and channeling your employees to lower cost facilities and doctors, says Abbe Mitze, account executive II at HealthLink.

"By influencing your employees' behavior in a non-disruptive way, you're using the carrot approach versus some type of punitive measure," Mitze says. "And I've seen an example where a 30 percent shift occurred in where the employees were seeking care when this type of arrangement was introduced to them over the course of a year."

Why is it so important to try to contain health care costs?

Health care premiums continue to increase for the 55 percent of firms that offer health benefits to at least some of their employees. The annual survey of employers by the Kaiser Family Foundation found that annual premiums for employer-sponsored family health coverage reached $16,834 in 2014, which is up 3 percent from the year prior. Of that amount, workers paid $4,823 on average toward that cost.

If employers want to continue to offer health plans - which can be used as a recruiting tool - they must find ways to better manage their costs.

How does a three-tier benefit design work?

A three-tier option introduces in a third tier of benefits that is based upon the cost of care with the facility or provider. A facility and provider is placed into tier I if it is a lower cost option, tier II if it costs a little bit more, and then tier III is out-of-network.

Then you take the benefit design and pair that with the cost. The richest benefit option - where the employee is going to pay the least out of their pocket - is applied to tier I.

If you want to introduce this type of design typically you're coming from a two-tier benefit network design, so tier I becomes a better benefit than employees currently have today. Tier II is the current in-network benefit level, and tier III remains out-of-network.

People can be attached to their doctors, so that's why you let them keep their current benefit. Employees still have a choice and have access to the full network, but you reward them for going to the most cost effective providers.

In what situations does this kind of benefit design work best?

A three-tier design is important in a self-funded solution because the dollars that are being paid out for claims are the employer's dollars. However, your third-party administrator or carrier needs to be able to administer a three-tier benefit design, and not all claims payment systems can accommodate that.

This also works better in an area where you have at least two hospitals and multiple health care providers. If you live a rural town with only one hospital, there won't be as much engagement because people don't have as many choices.

What best practices would you recommend health plan sponsors follow when implementing a three-tier benefit design?

Quality and cost are not correlated in the health care industry, and your employees need to be educated about that. Overall, you want to be very clear in the employee communication and education. It's all about the education of who falls into what tier, and making sure employees are aware of that.

You can even add an online tool, like a treatment cost calculator, so they can make a more educated decision. The tier is calculating some of the cost for them already, but the right technology can further enhance their selection.

In 2014, 19 percent of employers offering health benefit had tiered networks in their largest health plan, according to Kaiser's survey. Tiered networks continue to be a compelling tool to channel your employees' choices, which you should take time to research and consider implementing.

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