Editor’s Note: This is the fourth in a five-part Health Affairs Blog series, produced in conjunction with the Bipartisan Policy Center, examining current issues and care models in the delivery system reform effort. Each post will be jointly authored by Democratic and Republican leaders in health policy. Check back for more posts in the series.

Employers and other private purchasers of medical services have played an important role in spurring health care delivery system and payment reform. The development of managed care has been accelerated by federal and state policies over the years but originated with private sector purchasers. Other models, such as accountable care organizations and bundled payments, were initially designed by employers seeking to improve value in the coverage they offered to their employees. These models are now being used to improve quality and lower costs in Medicare and Medicaid.

Today, more than half (56 percent, or nearly 156 million) of all Americans receive their health care insurance through employer-sponsored plans. They have an important stake in how delivery system and payment reforms affect out-of-pocket costs and the quality of care. The alignment of interests between employers and employees could be a potent force to encourage changes that benefit both as well as the broader health care market. In addition, the private sector has the ability to move quickly to test new approaches because it faces fewer political constraints than the federal government. Notwithstanding the potential to build on its success, employers as a whole have not maximized their role due to current federal policies and overall risk-aversion.

Health Care Costs are Rising Across the Board and Pinching Employers and Employees

In 2016, annual premiums for employer-sponsored family health coverage averaged $18,142, with workers paying an average of $5,277 towards the cost of their coverage. Big employers expect health costs to rise by about 6 percent in 2017, nearly three times the estimated 2.1 percent overall projected rate of growth for the economy. And survey data show that employee monthly premiums and out-of-pocket costs continue to grow while wages remain relatively flat. And, as has been frequently documented, the high cost of health care is not correlated with increased value — Americans spend more on a per capita basis than other developed nations while having poorer health outcomes.

Private Sector Leadership

The Drive Health Initiative, led by Pacific Business Group on Health and The ERISA Industry Committee, is an effort to drive value-based care by providing financial incentives for interventions which lower costs while maintaining or improving quality. The initiative defines the requirements necessary for effective value-based care: transparent information, meaningful outcome measures, and meaningful choices for consumers, and appropriate financial incentives, and freedom to practice and be rewarded for providers.

Applying these principles, the California Public Employees Retirement System (CalPERS) established reference-based limits for hospital outpatient departments based on the prices charged by ambulatory centers for colonoscopies, cataract surgery, or arthroscopies. If a member chose to receive care at an ambulatory surgery center, care was reimbursed at the negotiated price, but hospital-based outpatient departments were capped at the reference-based limits. Consumers who chose an ambulatory surgery center would not pay any cost sharing, while consumers who selected a hospital out-patient department would have a co-pay equal to the amount above the reference price limit.

Most consumers selected the lower-priced providers. In the case of colonoscopies, the use of low-cost facilities increased from 68.6 percent in 2009 to 90.5 percent in 2013. The use of reference pricing for joint replacement surgery caused substantial reductions in prices charged by many hospitals. Between 2011 and 2015, the number of California hospitals charging prices below the CalPERS reference limit ($30,000) rose from 46 to 72 facilities. In 2011, reference pricing saved CalPERS $2.8 million for joint replacement surgery, and saved $1.3 million for cataract surgery, $7.0 million for colonoscopy, and $2.3 million for arthroscopy two years after implementation without any measurable reduction in the quality of care.

The use of reference pricing has great potential for such shoppable services as ambulatory surgical procedures, lab tests, imaging, and drugs. As much as 43 percent of the $524.2 billion spent on health care by individuals with employee sponsored private insurance in 2011 was spent on shoppable services.

Innovating to Better Serve High-Need, High-Cost Patients

Private sector health systems have often proved to be more nimble in harnessing their administrative data to improve care. Geisinger Health System (GHS) is known for a number of value-driven initiatives including a bundled payment system that it calls ProvenCare and ProvenHealth Navigator℠, an advanced Medical home model designed to address the needs of patients with multiple chronic conditions. GHS’s embrace of innovation is rooted in a concept articulated by the Commonwealth Fund’s Commission on a High Performing Health System that is more directly related to their core business such as industry regulation, corporate taxes, and trade policy. Third, the easiest way to constrain costs in recent years have been through the deployment of higher deductibles and cost sharing, a blunt instrument that does not directly translate into higher quality care because of the possibility of under-use of services. And finally, our current and evolving health care tax policy is flawed and conflicting, providing a regressive subsidization of employer plans; the more expensive the coverage and the higher the income, the greater the subsidy. Moreover, the Cadillac Tax, which was designed to address this issue, and becomes effective in 2020, is poorly designed in a number of ways, including the fact that the tax penalty does not vary based on income.

To address these challenges, there are many promising private-sector approaches to lowering costs and improving health care quality. This includes employers calling on the federal government to provide more Medicare patient encounter data, outcomes-based quality measures, and more aggressive movement toward two-sided risk models by health systems that accelerate movement toward outcomes-based care. Employers can also more aggressively embrace the development and diffusion of so-called value-based insurance design models, which are designed to eliminate or decrease cost-sharing for benefits deemed to provide particular value based on strong clinical evidence and outcomes and increase cost sharing for those services or goods that provide little or no value. And finally, there should be a review and reform of our existing tax policies to better and more rationally incent our employer based health care system to provide more valuable and affordable coverage in a less regressive fashion. Taken together, these policy prescriptions would go a long way to securing more affordable, higher quality care for employers, employees, and taxpayers.