STANFORD GRADUATE SCHOOL OF BUSINESS—Stanford University is saving nearly $44 million per year on the cost of employee health benefits by using a managed competition system that encourages competition between insurance providers and helps employees consider the cost of their insurance coverage, according to a report in the publication Health Affairs.

"Under this health care purchasing model, Stanford employees get what they want and are willing to pay for, and the arrangement maximizes competition to provide value for money," say the authors, Stanford Business School Professor Emeritus Alain Enthoven and Brian Talbott, finance manager for the university's human resources department.

Enthoven, who was chairman of the university's committee on health benefits at the time the plan was adopted, has long been a proponent of managed competition. Under the system the consumer is encouraged to pay attention to the cost of insurance coverage. In Stanford's case, consumers pay the difference between the cost of the lowest-priced plan offered by the employer and the level of coverage they select. Managed competition also creates an incentive for insurance providers to be competitive in cost and services offered.

Enthoven and Talbott argue that while the system has worked well since it was adopted by Stanford in 1992, the university is not getting the maximum benefit because the majority of employers in the San Francisco Bay Area continue to offer only the most costly insurance option, a preferred provider organization (PPO) plan, thus reducing pressure on insurance providers to offer competitive rates. At present the University of California, Wells Fargo Bank, Hewlett-Packard Co., and federal and state governments are among the minority of employers in the area with managed competition insurance systems. "As long as many employers continue to offer only a PPO plan or to contribute in a manner that favors the more costly versus the less costly plans, price-elastic demand and true competition among insurance providers will remain elusive," Enthoven and Talbott write.

Under the Stanford plan, employees have a choice among several different types of health insurance plans, ranging from the lowest cost offered by Kaiser Permanente to the most costly preferred provider organization plan. The university gives each employee the equivalent of 100 percent of the premium of the lowest priced plan for individual coverage and 82 percent of the lowest priced dependent coverage. Employees use these dollars to "buy" coverage of their choice among the plans offered.

An employee covered under a spouse's policy, the military, or some other source may swear an affidavit declining coverage and receive an additional $50 taxable benefit each month. At present, say Enthoven and Talbott, only 13 percent of the university's employees pay the top premium to purchase the PPO option. "It would be a great waste of money if Stanford were to follow the widespread practice of offering only the PPO," the authors say, since the majority of employees apparently are satisfied with less costly plans. Offering only a PPO would cost the university an additional $44 million per year, or 74 percent more than it pays now.

Under the managed competition system, the university created standardized contracts for firms offering coverage and required health maintenance organizations (HMOs) to offer virtually identical coverage. This made it easier for employees to compare plans and made switching from one HMO to another easier.

"In the first few years after the introduction of managed competition, some of Stanford's premiums actually went down as aggressive competition among managed care organizations intensified in the mid-1990s," the authors write. "Stanford's top management at the time understood that this was just the tip of the iceberg. The prize of a reformed health care system seriously competing to improve value for money would elude the university until it could get most of the employers in its market area to do the same thing."

Related Information

"Market Watch: Stanford University's Experience with Managed Competition," Alain Enthoven and Brian Talbott, Health Affairs, November/December 2004

Toward a Twenty-First Century Health System," Alain Enthoven and L.A. Tollen, Eds., Jossey-Bass, 2004

"Managed Competition vs. Industrial Purchasing of Health Care Among the Fortune 500," J. Maxwell and P. Temin, Policy and Law (Vol. 27, No. 1), 2002