Human Capital & Careers

Cost-Sharing and Tiered-Pricing: Shift or Shaft?

Cost transfers nudge employees to ponder costs.
Jennifer CaplanNovember 1, 2002

As health-care benefit costs rise, most plan sponsors have been left with little choice but to pass on some of their expenses to employees. Usually, that passing on comes in the form of higher premiums, co-payments, and deductibles. Others employers are introducing or extending tiered-pricing arrangements. Those plans are intended to get employees to think twice about choosing the most expensive form of available care.

Even more traditional plans are getting more expensive for employees. Co-payments appear to be increasing across the board. Leslie Schneider, a consultant with HayGroup, says the percentage of medical plans with office visit co-pays of $15 or more has jumped to 47 percent. Last year, that figure was 33 percent. What’s more, the number of companies whose primary plans include a general deductible increased from 38 to 41 percent over the last year. The number of plans with deductibles on hospital coverage increased from 48 percent to 53 percent.

But that’s not the end of the current co-pay mania. The typical co-payment for a 30-day supply of generic drugs doubled in the last year, from $5 to $10. Co-pays for name-brand drugs increased from $10 to $15, according to HayGroup estimates.

What’s more, some companies are extending co-pays to medical services that never before required employee kick-ins. Southern Mills, a textile manufacturer based in Georgia, for example, is adding a $100 co-pay for hospitals visits per admission (in addition to the plan deductible). Says Jean Harris, HR & Benefits manager at Southern Mills: “The last two years hospital bills have been a major hit for us.” To curb emergency room visits, Southern Mills has also added a $50 co-pay per ER admission.

Employers who have seen sizable out-of-network cost increases are trying to persuade employees to stay in-network. How? By raising the deductibles for out-of network-visits. “We have seen a number of clients increase out-of-network deductibles and decrease co-insurance to drive people in network,” says HayGroup’s Schneider. “If an employee wants to go to the most expensive doctor out there, they can do so. They’ll just have to take a larger part of the charge themselves.”

Seems fair enough. In addition, many plan sponsors are implementing tiered pricing schemes. Those plans not only shift costs to employees, they get workers thinking about their health-care choices. “Tiered pricing makes employees more accountable from a financial point of view,” says Richard Ostuw, a senior consultant at Towers Perrin.

Currently, most companies offer two-tiered plans, which provide a choice between generic and brand-name drugs (employees pay a higher co-pay when they opt to purchase brand-name drugs over generics). Under a typical tiered-pricing plan, an employee makes a co-payment of $5 when purchasing a generic drug, $25 for a name-brand drug if a generic is available. The out-of-pocket difference is designed to get employees to think twice before choosing a brand-name drug.

But some companies are now moving toward three-tiered pricing plans. Those plans offer brand-name drugs, generics, and formulary and non-formulary medicines. Brand-name drugs on the formulary are generally less expensive than those not included in the formulary. In most cases, the health-plan provider decides the drugs that go on the formulary.

Many employers are also beginning to apply tiered-pricing schemes to hospital stays and doctor’s visits. Under such a plan, an employee might pay $15 to see a primary care physician and $20 for a specialist. “This will really get people to stop and think whether going to a specialist is actually necessary,” Ostuw notes.

They may stop and think. But that doesn’t mean they won’t ultimately chose to see a $300-an-hour specialist rather than a $100 GP. People are funny about their health.